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What are your views on technical analysis (TA) and your use of it in investing?
TA is by far, the most important part of my stock selection.
I use a mixture of TA and Fundamental analysis.
I don't understand TA, but would like to. I make occasional decisions based on TA
TA is total nonsense, similar to an 8 ball or Ouija board. To use it at all is total absurdity.
None of the above.

Click here to see results so far.

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BGM,

If you go back to the CFA materials or any academic Ivory Tower info in finance you can find, you will find that TA is a subset of FA. You dont get to choose that fact or not. But You can choose to ignore info or data. You can go all chart. Or you can look at book value with or without some of the numbers....etc....you can or cant do it all.....

Dave
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I voted for total nonsense. I think that trying to trade major indexes or widely traded stocks (e.g. Apple) on the basis of technical analysis is a fool's game for the small investor. There is no way you can beat supercomputers.

The only trading that I have done successfully based upon a type of technical analysis is for very thinly traded, illiquid stocks where there is clear market inefficiency. In this case a totally different type of pattern recognition is needed. I traded Genlye thirteen times in a row once using this type of pattern. And had good success with a few other thinly traded issues over the years. In these cases the small nimble investor has a distinct advantage vs. the elephants.

sw
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If you go back to the CFA materials or any academic Ivory Tower info in finance you can find, you will find that TA is a subset of FA. You dont get to choose that fact or not.


This is not the usual definition of fundamental analysis (FA), which would more appropriately be called business analysis, involves looking at properties of a business (profits, debt, future value of assets, competitive forces, etc.), with an eye to estimating the value of the business.

Technical analysis (TA), a term whose meaning is impossible to guess (since it doesn't specify which technique will be used), is traditionally used to refer to techniques where the nature of the business is not examined, but rather the patterns of price movements.

This is a standard description of the two definitions: http://www.investopedia.com/ask/answers/131.asp . The CFA Institute says you can combine the two, but not that one is part of the other: http://www.cfainstitute.org/learning/products/publications/c....

It doesn't seem logical to think of TA as a subset of FA, in my opinion, and I have never seen any credible source where it is thought of this way. Can anyone find one? You get to choose which you do, or you can do both, but you don't get to choose what the words mean.

Regards, DTM
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I voted for total nonsense. I think that trying to trade major indexes or widely traded stocks (e.g. Apple) on the basis of technical analysis is a fool's game for the small investor. There is no way you can beat supercomputers.

This reveals a fundamental misunderstanding of what most technical analysis is based on. Traditional technical analysts/chartists are not competing with supercomputers. Supercomputers are used for HFT trading at ultra-short time frames. Most traditional TA is focused on longer-term time frames that have nothing to do with supercomputers running algorithms to trade over milliseconds. All that said, some respected technical analysts with phenonemal long-term track records of making money (like Peter Brandt) have indicated they believe computers have made patterns much more unreliable at daily time frames, especially because the computers probably are programmed to take out key technical levels to trigger human action, and then reverse. So although something like a head and shoulders top might still provide a great tradable signal at a longer-term time frame like the Japanese Yen over the past few years, looking for head and shoulders patterns on a daily or weekly chart is unlikely to yield good results.

In any case, as a wise man says, just make money with whatever technique you believe works and is consistent with your personality. For me, technical analysis is primarily a risk mitigation technique just in case I am horribly off in my fundamental analysis. For example, based on the fundamentals as I understand them, I am bullish on gold. Yet presently, the chart on gold looks horrendous at all time frames. Whatever I believe, the overall action of the chart is telling me I am very wrong on something, so for now, I have no position in gold.
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It doesn't seem logical to think of TA as a subset of FA, in my opinion, and I have never seen any credible source where it is thought of this way. Can anyone find one? You get to choose which you do, or you can do both, but you don't get to choose what the words mean.

You are correct DTM. TA is not a subset of FA. It makes no sense to think of it that way. TA is about analyzing the supply/demand FOR THE SECURITY, not analyzing the valuation of the business or fundamental factors like sales, margins, cash flows

That said, a more nuanced and IMO often accurate view is that TA is a LEADING indicator of fundamentals. The thought process is that the price action reflects all markets participants of the fundamentals and includes people who know things/have better information than you. Here is a good example

http://chartsetcetera.blogspot.com/2013/05/tesla-continues-t...

I wrote about Tesla (TSLA) on April 4th, the blog post was entitled, "Tesla: Earnings, Smernings!" At the time, the stock was up 31% YTD and was hitting a new high. It had bullish cup-with-handle and inverse head-and-shoulders formations, a powerful duo. I wrote then, "Tesla is expected to earn a profit in FY2013, so as per usual price is likely discounting the future, moving on expectations as opposed to past history."

The price action and specifically the breakout on 4/1 after the mother of all bases for the past 2 years was broadcasting loud and clear that something positive was coming on the fundamental front. Breakouts out of long bases are probably one of the most reliable patterns that something material has changed in the business fundamentals. Unfortunately, I missed this move as I have yet to figure out how to develop a system to catch breakouts on the exact day they occur or within a few days short of simply looking at hundreds of charts each day which unfortunately I presently do not have time for.
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The price action and specifically the breakout on 4/1 after the mother of all bases for the past 2 years was broadcasting loud and clear that something positive was coming on the fundamental front. Breakouts out of long bases are probably one of the most reliable patterns that something material has changed in the business fundamentals. Unfortunately, I missed this move as I have yet to figure out how to develop a system to catch breakouts on the exact day they occur or within a few days short of simply looking at hundreds of charts each day which unfortunately I presently do not have time for.


It looks obvious after it happens, but I bet if I took 50 cases of breakouts out of long bases, however you want to define that, and 50 cases that looked the same, but didn't break out, most people wouldn't score better than randomly on identifying which is which, if you just removed the actual breakout.

This would be perfectly easy to test, in the same way that it is possible to test the reading of mammogram films, for instance. You know how they all turn out! So a TA expert should be able to consistently distinguish between the ones that will break out and the ones that won't. If he can only do it after the fact, it's not worth much.

Regards, DTM
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It looks obvious after it happens, but I bet if I took 50 cases of breakouts out of long bases, however you want to define that, and 50 cases that looked the same, but didn't break out, most people wouldn't score better than randomly on identifying which is which, if you just removed the actual breakout.

This would be perfectly easy to test, in the same way that it is possible to test the reading of mammogram films, for instance. You know how they all turn out! So a TA expert should be able to consistently distinguish between the ones that will break out and the ones that won't. If he can only do it after the fact, it's not worth much.


DTM, I'm feeling deja vu here with you :) Didn't you learn anything from our ongoing convo with the technicals on NFLX back in 2011? :)

Either I'm not understanding what you are saying here, or you are not understanding my point. Not sure which is which? Did you read the link discussing TSLA?

Of course, one cannot in advance forecast which bases will breakout or breakdown when or continue to stay in the base. TA is NOT a crystal ball!!!

It is the recognition that it happening SIGNIFIES SOMETHING. When did TSLA breakout? 4/1. When was the quarterly results announced? TSLA was 45 on 4/1. Buying the breakout would have had you doubling your money in about a month. So I don't get the point about identifying it after the fact. Of course, this is an extreme example. There are not too many breakouts that double in less than a month. But yeah, the window of opportunity to buy a breakout is pretty narrow.
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All that said, some respected technical analysts with phenonemal long-term track records of making money (like Peter Brandt)...

I was curious and looked him and up and viewed his performance which as you note is very impressive. Still, I can't help but get this odd feeling in my stomach that personal portfolio returns have little to do with returns associated with OPM. I know this because I've experienced this issue myself, esp. as AUM grows. Perhaps this is why I remain skeptical of TA MDC cause I don't know of anyone who actually manages AUM for others who points to TA as a primary source of their technique.

My problem, NOT THAT IT MATTERS, is I couldn't ever find someone with a verifiable track record who could teach it in terms where I could apply it. I'm looking for BOOKS of course. I can find that with FA (course, there aren't as many good ones as you think and creating a technique is a very personal thing) though realize that FA is so a broad term as to mean little of anything at all, but there is only so much time in the day so if you've got a pretty idea that working a certain way (not including this market where EVERY SELL has been wrong) it is hard to justify going anywhere else.

For me, technical analysis is primarily a risk mitigation technique just in case I am horribly off in my fundamental analysis. For example, based on the fundamentals as I understand them, I am bullish on gold. Yet presently, the chart on gold looks horrendous at all time frames. Whatever I believe, the overall action of the chart is telling me I am very wrong on something, so for now, I have no position in gold.

I'm glad you posted this - makes a lot more sense though I have to admit that if I thought I was horribly off in my fundamental analysis of something I'm not going to go there. You know I've written this a million times but you clearly write well, express yourself well, and get so many things that I can't help but think your talents are completely wasted on anything to do with TA. As a analytical person, I bet your ability to analyze business models - the easy ones, the ones I get - wouldn't be much of a stretch. Whether it would keep you interested is another matter entirely.


as usual, just 2c
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Didn't you learn anything from our ongoing convo with the technicals on NFLX back in 2011? :)

Either I'm not understanding what you are saying here, or you are not understanding my point. Not sure which is which? Did you read the link discussing TSLA?

Of course, one cannot in advance forecast which bases will breakout or breakdown when or continue to stay in the base. TA is NOT a crystal ball!!!



I'm not sure I understand what you mean. It may not be a crystal ball (I understand those things are infallible), but does it have predictive power? If you really can't tell which ones will break out and which ones will stay in the base, then I'm not getting why this would be useful to do.

As for not learning anything from NFLX, I was very happy to get out of that one with my skin, but I eventually closed my short position with a manageable loss, largely because it seemed crazy betting against a solid company, even if it was overvalued. I can't give much credit to TA for that one. I guess I'm probably a hopeless case.

But I do sense a pattern in your posts: I should have seen this thing, but I'm too busy. OK, say I send you the thing that you were too busy to see, so you get a second chance, but I remove the info about whether it eventually went up or stayed the same for a while or went down. Say I send you a hundred of these things. Are you really saying there would be no way to judge whether you get these right or not? For someone with an engineering background, that seems mysterious.

DTM
Trying to keep an open mind, but the biblical figure I always sympathized with most was Doubting Thomas
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From my point of view there are no fundamentals for gold:

- no revenues
- no earnings
- no cash flow

sw
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From my point of view there are no fundamentals for gold:

- no revenues
- no earnings
- no cash flow

sw


Well there is SOME cash flow, unfortunately it is negative, since you have to pay to store it.

But for something like gold, you could conceivably look at factors like inventory, monetary policy, cost of extraction, intention of central banks to sell reserves, etc. I still agree with you that the analysis will ultimately be pretty limited, since it is impossible to talk about the intrinsic value of something which will always produce only expenses and no income. But you might still call it fundamental in that it has to do with the business case for gold, whereas TA would look only at price patterns.

So for instance, when I have to decide whether to hold my cash in CAD or USD, I look at purchase power parity, and I figure that all other things being equal, I will tend to hold more USD because at least by one measure, the CAD is overvalued compared to USD. It's certainly not technical analysis. (Not that there's...)

dtm
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From my point of view there are no fundamentals for gold:

- no revenues
- no earnings
- no cash flow


Be fair.

What are the fundamentals for a Monet Haystack painting? Or a 1995 Mercedes Benz 300SL Gullwing? No revenue, no earnings, no cash flow. Certainly a Gullwing's value is not the imputed rental value of the Benz.

Supply and demand. The same factor that determines the worth of a 20 pack of McD Chicken Nuggets affects the value of gold nuggets.

The fundamental value of gold is that it is a precious metal, limited in supply, whose value cannot be easily destroyed by government intervention. The same cannot be said for stocks, bonds, or currency.

Gold has fundamental value to Cypriots, Greeks, Venezuelans, Argentinians, Syrians, etc. Is it a barbarous relic? Of course it is, until and unless you world is filled with unpleasantness. At that point, it's the most fundamentals-based investment of all.

ET
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"At that point, it's the most fundamentals-based investment of all."

In my view gold largely trades on fear, and mostly irrational fear. Fear that spikes at unpredictable times and than recedes. You can eat god it or shave with it.

The real fundamental things in life are food, drink, soap, personal care products etc. I learned that lesson from Buffett.

sw
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From my point of view there are no fundamentals for gold:

- no revenues
- no earnings
- no cash flow

sw


I will committ to this memory....so you don't have to remind me again. FWIW, I only used gold as an example of where my fundamental opinion diverges from the technicals. I wasn't interested in debating the fundamentals of gold nor was I interested in opinions on gold fundamentals as it was irrelevant to the point I was making.

Now since you brought it up, I will address it. I think there is a world of difference between an asset (something that has cash flows) and money. Obviously, gold is not an asset like a stock or a corporate bond as it doesn't have cash flows. Only a moron would claim otherwise. What gold is...is just an alternative form of money/currency. Now it lacks the medium of exchange function so it has to be converted back to dollars or yen or loonies but it has the store of value function. Currencies don't have revenues or earnings or cash flow, but only an ignorant person would say that means there are not fundamental factors that drive currency values such as things like economic growth rates and PPP (purchasing power parity). Now there are some various fundamental models out there for gold. Interestingly, one suggests gold should trade around $800 while another suggests gold is undervalued after the recent decline. The difficulty is which model has greater analytical validity. Which one conceptually makes more sense? And which one fits the actual price action better since Nixon de-linked gold in 1971.

Even if one completely rejected the view of gold as an alternative currency as simply viewed it as a commodity used in jewelry there still would be fundamental factors such as jewelry demand and the marginal cost of new supply. All commodities from silver to oil to corn to coffee don't have revenues, earnings, or cash flows, but have fundamental factors that drive their pricing.
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I'm not sure I understand what you mean. It may not be a crystal ball (I understand those things are infallible), but does it have predictive power? If you really can't tell which ones will break out and which ones will stay in the base, then I'm not getting why this would be useful to do.

DTM, here is your homework assignment. I'm not going to take the time now to find it, but there is a study that was done that does show some predictive ability for certain pattern formations. I believe it was Andrew Lo (off the top of my head) and I believe there have been some additional studies that reinforce his work.

As for not learning anything from NFLX, I was very happy to get out of that one with my skin, but I eventually closed my short position with a manageable loss, largely because it seemed crazy betting against a solid company, even if it was overvalued. I can't give much credit to TA for that one. I guess I'm probably a hopeless case.

I'd have to revisit my e-mails and charts I marked up for you, but to the best of my recollection, I think the ongoing TA I was sending you indicated to you that technicall you should NOT be short during the time you were.

In any case, I am kind of an idiot for even debating this. One would think the umpteenth time I do it, I'd learn it is a pretty stupid debate. Honestly, anyone who is consistently compounding money at decent rates without chart analysis shouldn't even take a second look.
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In my view gold largely trades on fear, and mostly irrational fear ... The real fundamental things in life are food, drink, soap, personal care products etc. I learned that lesson from Buffett.

Someday I hope to meet you. A man who includes personal care products in a list of real fundamentals things which include food and drink and Buffettphilia must be an impressive combination of Adonis and Athena. I bet your breath smells like a million bucks (700 troy ounces, if you're feeling a bit irrational this evening).

Buffett has always labeled himself fortunate for being born an American male, hence it is entirely understandable for him to shun gold. Certainly his ability to buy and sell stocks at extraordinary rates of return helps make that decision a no-branier.

A number of years ago I took a cab ride to the airport in Istanbul, Turkey. The cost was 25,500,000 Liras. I gave a 4 million tip.

May I suggest EightTrack's Exception to Buffett's Rule of Gold Aversion? If your currency is named Lira, make sure you own some Gold. That rule applies for any and all Liras in the world.

The same gentleman who led you to your personal care products, the Oracle of Omaha, invested in silver which shares some of the qualities of gold (but has additional industrial applications, admittedly). Indeed, he also owned Handy & Harmon stock back in the day. And Buffett is the first to point out that not all people are afforded the comforts and securities that Americans take for granted (cue patriotic music and large American flag glistening in sunlight).

So how much financial insurance is appropriate? Of course, the answer is, it depends ... on personal risk preferences, personal circumstances, and the cost of insurance (gold). But isn't that the same questions potential investors in stocks have to ask themselves?

ET
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I was curious and looked him and up and viewed his performance which as you note is very impressive. Still, I can't help but get this odd feeling in my stomach that personal portfolio returns have little to do with returns associated with OPM. I know this because I've experienced this issue myself, esp. as AUM grows.

I'd have to double check but I think at one time Peter was managing OPM. I absolutely agree there is a difference between managing personal money and OPM both in terms of the mentality, concerns you have to think about, and at some point scalability of the approach. That said, I don't think the robustness or validity of a particular analytical technique or method is either increased or decreased depending on whether the money is personal money or OPM.

Perhaps this is why I remain skeptical of TA MDC cause I don't know of anyone who actually manages AUM for others who points to TA as a primary source of their technique.

I'm going to respectfully suggest there is some element of selection/confirmation basis at work here. You've probably made no effort to find or research individuals who fit that bill. If I could say just one thing, it would be read the Marty Schwartz interview in Market Wizards. All that said, just because technique A works for one person doesn't mean it will work for someone else. Some people make their money reading charts (Brandt), some people make their money trading global macro (Soros), and some people make their money focusing on individual businesses (Lynch).

Perhaps it is my background in weight training and bodybuilding where I've been exposed to various training protocols and know that various systems can "WORK" that I simply find perplexing the view that says I made my money using analytical system A therefore that means that systems B, C, and D CANNOT POSSIBLY WORK.

My problem, NOT THAT IT MATTERS, is I couldn't ever find someone with a verifiable track record who could teach it in terms where I could apply it. I'm looking for BOOKS of course.

FWIW, Brandt's track record has been verified. I have his book, and for me personally I thought it was useful. Maybe pick it up, and save it for toilet reading. You can always flush it away once you are done, but maybe you will find it an interesting read.

I'm glad you posted this - makes a lot more sense though I have to admit that if I thought I was horribly off in my fundamental analysis of something I'm not going to go there. You know I've written this a million times but you clearly write well, express yourself well, and get so many things that I can't help but think your talents are completely wasted on anything to do with TA. As a analytical person, I bet your ability to analyze business models - the easy ones, the ones I get - wouldn't be much of a stretch. Whether it would keep you interested is another matter entirely.

Thank you. I genuinely appreciate this. I don't see it as either/or or mutually exclusive. In fact I believe the most powerful combination would be both kind of like an MMA fighter who has both extreme skill and extreme strength (instead of just one) or both a great stand-up fighting and great ground fighting. Unfortunately, right now I have a corporate day job that has nothing to do with financial markets so right there is 50+ hours I could be doing mucho business model analysis. Hopefully, some day in the not too distant future I can ditch it and focus all my time and efforts on the markets.


as usual, just 2c
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I'm going to respectfully suggest there is some element of selection/confirmation basis at work here. You've probably made no effort to find or research individuals who fit that bill. If I could say just one thing, it would be read the Marty Schwartz interview in Market Wizards. All that said, just because technique A works for one person doesn't mean it will work for someone else. Some people make their money reading charts (Brandt), some people make their money trading global macro (Soros), and some people make their money focusing on individual businesses (Lynch).

I hope this didn't come across negatively...NOT my intent. In your case, there was never any reason to seek out other methodologies. My understanding is you came across Lynch and his method for selecting stocks, and then you had tremendous success right off the bat. Logically, there would be no reason to spend too much time investigating anything else. It would be like a guy who started weight training under some experienced weight trainer and then gained 30-40 pounds of muscle the first 3 years under his training, nutrition, and supplementation protocol. There would be no reason to mess around with other regimens.
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Late to this thread but I have seen technical analysis reveal things that made me stand up and take notice.

I began using TA in the 1970s in connection with the commodities markets. I remember a great potato market one year. I was in a tiny partnership with some other investors and we were long spuds in a big way. We were all taking a graduate course at George Mason relating to futures markets and the teacher was a huge point and figure chart guy. The market in spuds had more than doubled in a fairly short time and we had made a lot of money.

A major crop report was due the next day and the buzz in class the night before was all about where the market was going. The chart had put up an island reversal which is a big fat sell sign.

Long story short, the chart was right and the market was limit down for something like eight days in a row. After it was over our partnership, which had tripled it's money was down something like $40. I told the other guys "For $40, that was the most fun you can have with your clothes on!"

Good TA got you in silver at $5.21 before it went to $50.

Good TA predicted a treaty which changed the sugar markets.

Good TA tells you what the people who know already know.... sometimes.

Good TA is very good at defining bottoms and not so much at tops.

Good TA is very useful in dealing with overall market indexes; not so much with individual stocks.

Good TA is very useful in assessing markets being driven mainly by animal spirits; not very good at telling you when fundamentals are about to change.

That's been my experience. Your milage may vary.
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What gold is...is just an alternative form of money/currency. Now it lacks the medium of exchange function so it has to be converted back to dollars or yen or loonies but it has the store of value function.

MDCigan - Do you think defining gold as an alternative form of currency might cloud one's ability to interpret the TA? Wouldn't it be less of an intellectual burden to treat it as simply another commodity?

Also, along these same lines, did the charts leading up to the yen's drop in recent months show the same sort of thing as the charts ahead of gold's drop from 1800 - 1400?

I would love to be able to make money off of this stuff but there's so much other stuff to make money off of (says guy who missed out on move from $300 to $1000). More and more I think Buffett's anti-gold stance is about eliminating potential investment categories in order to simplify one's life, rather than a judgement on its merits as an investment.

Thanks,

G
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Gold is valuable, but it is not money. You cannot efficiently go into a store and buy a loaf of bread with a gold doubloon. It is, however a compact way to store value which is recognized world-wide (while individual currencies can - and occasionally do -implode).

So I keep a moderate (say 1%) amount of my assets in physical gold (and bite the bullet when it comes to storage/security/lost opportunity costs).

There is not even a line item on my asset evaluation spreadsheet indicating its value. Since it is not "for sale" and accrues no income, it's basically a dead item. If, on the other hand, the situation gets so bad that it is REQUIRED to be sold, then it is likely that its value will be astronomical.

Jeff
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dtm,

17 very intelligent folks including your self and the reccers cant be wrong.

But I stand my ground. It was clearly taught as such to me. But then again if you had the lesson you chose to ignore it.

And ignore it again when seeing it in my writings. oh well.

Why would it matter to you that they be separate? So you can call one wrong and dismiss it as limited?

Of course TA is limited. That might in fact make it more powerful. But it is a subset of FA. The efficient market theory even broadens out such a definition quite clearly. I will hunt and peck in wiki land to see what I can find. cya

Dave
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http://en.wikipedia.org/wiki/Efficient-market_hypothesis

weak info is TA, while stronger info is FA.

You guys come on. Stop pulling my leg. Y'all are far smarter and took far more business courses than I did.

As for gold? What gold? The gold that keeps falling in price?

Dave
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ah it is all called information.

Dave
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I'll keep this brief but wanted to reply:

*one corner we have Peter Lynch with a 29% annualized return over a 13 year period with huge fluctuations in AUM, restrictions on what he could buy, and a massive public profile.

*On the other corner we have Brandt with a nice audit letter on his website attesting to the performance of his personal accounts. I did look at the Market Wizards profile on Marty Schwartz in Market Wizards and there is little there beyond mention of winning investment contests and mentions of how well he did in specific years.

*back to Lynch corner, we know he was the head of RESEACH at Fidelity for several years. With Brandt I really don't know who he was and Schwartz apparently was a failed analyst (obviously his take is different).

More importantly is this:

*Lynch wrote two (technically 3 but Learn to Earn isn't for application) EXTREMELY detailed books about his investment technique, 30 or so different articles about investing, and has been interviewed in great detail in various places, including the Train interview in his books. I mean, come on - Schwager's books - the ones I have - are interesting but they tend to all fluff with little that you can learn from. This profile on Schwartz contains nothing you can learn from*.

That's what I want to do - I want to learn.

Perhaps it is my background in weight training and bodybuilding where I've been exposed to various training protocols and know that various systems can "WORK" that I simply find perplexing the view that says I made my money using analytical system A therefore that means that systems B, C, and D CANNOT POSSIBLY WORK.

I didn't say this. What I said it there is a world of material on system A. There ain't zilch on B, C, and D. You don't NEED two ways to make money. Making money can be hard - you just want to be good at one thing, and the thing to do is use the method that:

*you know works (verifiable public records)
*where you can identify people who worked it
*and where you can find DETAILED books by those who worked it filled to the brim with more than detail than you can adequately absord in 100 readings, much less one.
*oh, and if he was head of research that helps too.

Course, I'm biased (and in a slump too).

Just make money.

------------------------------------------

*in the Schwartz profile:

How did he do it? There were two essential elements. First, he found a methodology that worked for him. Throughout his losing years, Schwartz used fundamental analysis to determine his trades. It was not until he immersed himself in TA that he became successful.....The second element behind Schwartz' transition to success was a change in attitude. As he describes it, he became successful when he desire to win took precedence over his desire to be right.

compare to Train's profile

Lynch's endless quest, his endless searching among companies, is directed above all toward the obvious winner, based on changes to the key variable. As he goes back repeatedly to a given company or industry, he spots changes. Business has been dreadful for a year. Then it's not quite so bad. 'Even when a company just moves up from doing mediocre business to doing fair business, you can make money.'

One is generic and completely useless. The other is specific and absolutely applicable. I mean, let's be honest - if I want to be inspired to do great things, then maybe I'll read Schwager (but you have to giggle a bit at the change in attitude thing and how badly - 10 years! - the guy sucked at fundamental analysis - not that it can't be true but how insipid the author makes it sound) but if I want to DO great things, I'll read Train. And Lynch.

It isn't a fair fight.

I ought to know. I'm living proof...you can learn from Train and Lynch.
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MDCigan - Do you think defining gold as an alternative form of currency might cloud one's ability to interpret the TA? Wouldn't it be less of an intellectual burden to treat it as simply another commodity?

Garranova,

Great questions, and actually something I've been pondering recently but a bit more broadly than just gold as a currency or commodity. The broader question is to what extent does one conviction in fundamentals interfere with an unbiased interpretation of the chart. To give you an example, and I missed her comments in real-time because they were not posted on her website, but Louise Yamada turned very cautious to bearish on gold many weeks before that critical support at 1525-1535 was taken out. She was sticking 100% with interpreting the price action whereas I can say I think I was giving gold the "benefit of the doubt" on a few key days because of my view as an alternative currency and all that implied IMO. I'm not sure there is a magical solution here. I've had stocks in the past where I ignored the chart based on what I thought I knew fundamentally and it has worked and not worked. Going back to gold as a specific example, on this most recent run to 1800 in October 2012, as it pulled back, there came a point when it started to not "act right". Ironically, I even mentioned this in a post on Liquid Lounge but I still wanted to give the chart every benefit of the doubt. There were 2 days in particular that were negative. The first was 2/11/13 where the trend line off the spring 2012 lows failed to hold and also happened to be a symmetrical triangle downside break. The second day was 4/2/13 where the short-term uptrend failed to hold. On a shorter-term trading basis, obviously shorting on either of those signals would have resulted in gains. So, yeah, I think might interpretation was "clouded" by my view as an alternative currency and my perception of central bank policies.

All that said, bottom line, I exited the last of my long-term positions in gold at around 1500-1505 on the break of that critical support line, and I sold roughly half my longer-term position back in fall 2011 near the top (one of my cardinal rules is you always sell/reduce into parabolic spikes). I made substantial cumulative profits being long gold at various times the last several years. Presently, in my shorter-term trading account I am short gold. Revisiting DTM's point, I have absolutely no idea whatsoever if gold will actually bottom at around 1300-1320, or whether or not another breakdown is in the cards. That really isn't important to making a profitable trade. If the previous bottom doesn't hold, that will provide another solid short signal for further significant downside.

Also, along these same lines, did the charts leading up to the yen's drop in recent months show the same sort of thing as the charts ahead of gold's drop from 1800 - 1400?

No. Gold put in a triple top at 1800. Until the days I mentioned above (2/11 and 4/2) there was no reason technically to tilt one way or the other that the range would break up or down. It looked like a sideways consolidation. At some point the evidence mounts that the sideways consolidation is building the topping process. In contrast, the yen put in a multi-year head and shoulders top with the left shoulder going all the way back to October 2010, but IMO and according to standard chart theory it is that right shoulder and lower top which reveals the weakness and likely major trend reversal.
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Unfortunately, right now I have a corporate day job that has nothing to do with financial markets so right there is 50+ hours I could be doing mucho business model analysis.

Hey, one last thing - I HATE it when you write this, really do. Using Value Line or VIC or other things, you can find a good idea pretty quick and the analysis - if the idea is obvious - is a matter of reading the 10K, reading a call, looking at a presentation or any number of other things. I'll admit this:

*most of what I do is pure busy work*

seriously - I'll do spreadsheets for all my companies, read all the calls, and review this or that, but for truly GOOD ideas - GREAT ones - you get it pretty quick and then the rest of your work reinforces or denies that initial impression.

And you only need one. MOST things in most environments are MARGINAL type ideas. If you are using other ways to manage money, this is just a way to supercharge your return.

If you have 10 extra hours a week to any sort of analysis, you can follow 10 companies....or ONE issue of Value Line...or ONE industry group. Maximize your time by looking at similar things. Don't let lack of time be a reason not to do this. Get ONE 2 or three or 5 bagger and you'll get it. I KNOW you can do this - you have all the technical tools.

Preacher Paul
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But then again if you had the lesson you chose to ignore it.

And ignore it again when seeing it in my writings. oh well.

Why would it matter to you that they be separate? So you can call one wrong and dismiss it as limited?



No, because you very bluntly stated your opinion that TA was part of FA, whereas it not only makes no logical sense to me, but does not seem to be considered so according to any of the standard definitions, including the one used by the organisation (CFA Institute) that you cited. So I have the choice of listening to all the other sources I have found, and ignoring your statement - well, not ignoring, but rejecting - or ignoring what makes sense to me and what everyone else seems to think, and accepting your unsupported claim.

You're allowed to admit you were wrong - it happens to all of us. What I try to do, when I'm advancing a proposition that I'm not completely sure about, is add some word or phrase that indicates that this is a possibility, not a certainty. It makes it a bit easier to back out of a claim that turns out to be erroneous.

Regards, DTM
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Gold is valuable, is not money, costs money to store and insure, is significantly more common and slightly overpriced compared to platinum which has more usefulness both industrial and jewelry, and has *not* been a store of value the past 30 years.

Gold bugs merely assert it is a store of value. Over the past 3 decades you'd have been better off in stocks, long Treasuries, or corporates, or high-yield, or even money markets. Gold lost 85% in real terms from top to bottom.

Not long enough? Ok, I take your criticism and raise you 80 years of data. The S+P 500 is up 796% in real terms. Gold is up about 130%.

But gold sure is yellow and shiny! However, inflation is better for stocks than commodities. [You can calculate your own returns for Coke, IBM, P&G, JPM, HSY, TR, CL, Bell, GE, Lorillard, DD, Cigna, MO which will crush the S+P].


If events occur such that your only hope is that people are requiring gold instead of currency, you will have most definitely have wished you instead invested in food, water, rifles, ammo, and farmland instead.
Not gold.




Source: S+P, BLS, The Economist.
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najdorf- great post.

Gold is sterile and produces nothing. That is not what life is about.

Gold is not really like other commodities from what I see in that it has limited uses (jewelry, dentistry) and its price is not correlated with these uses. I do not invest in commodities either. I invest in great businesses with real revenues, earnings and cash flow and protectable moats when they are selling at prices that are cheap compared to likely future prospects.



sw
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dtm,

efficient market theory is in the CFA program and many a business class. I dont subscribe to the conclusions. I do think that logic involved with the theory, the constructs of what constitutes information and how it effects markets has plenty of merit.

You are wrong here.

I am blunt here.

Dave
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I KNOW you can do this - you have all the technical tools.

it wasn't until I read this twice (I typically submit a note and AFTER it has been posted read for typos - a not so good quirk) that I notice the bit'o'irony there with the "technical tools" and a post about technical analysis....it wasn't intentional...
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Okay, last time around the Gold Merry-Go-Round. I think what I find so infuriating about this thread is the total lack of conditional statements, which I believe is central to superior investing.

Gold is valuable, is not money, costs money to store and insure, is significantly more common and slightly overpriced compared to platinum which has more usefulness both industrial and jewelry, and has *not* been a store of value the past 30 years.

For the 313 million Americans, yes. There are 6,919 million (7 billion) in the world. Gold is going to under-perform long-term priced in local currency in locations with superior monetary policy, strong property rights, stable governments, free markets, and the rule of law.

There are billions of people who live in conditions without these rights, which is why Chinese brides and Indian brides and Islamic brides demand gold, not stock certificates.

Even in many first world countries, gold is a respectable choice. Think of gold priced in yen. Has gold been a bad investment versus Japanese stocks in recent decades? Given the massive government debts in Japan, poor demographics, and unknown effects of quantitative easing, would you feel free to recommend AGAINST gold in Japan?

I own term life insurance ... even if I don't use doesn't make it a bad investment. It pays off under certain circumstances, as does gold.

Not long enough? Ok, I take your criticism and raise you 80 years of data. The S+P 500 is up 796% in real terms. Gold is up about 130%.

I can't find a quote for the Vanguard S&P 500 index from 80 years ago. Index funds didn't exist 80 years ago. Gold coins did. And that is part of the problem underlying your thinking, Naj. Gold serves a different master than stocks, especially 80 years ago.

Gold historically is not a tool of an "upper class." Even today, American stock market ownership is dominated by high income or high wealth families and individuals. Gold, similar to real estate (which demands decent property rights) is a tool for what Marx would refer to as the "proletariat."

Why is it so hard for educated, intelligent financial advisers that dominate this board to understand this point? Why is it so hard to view gold as a hybrid security? Why is so hard to view gold (after all, an internationally traded commodity) through a wider, worldly viewpoint?

The same phenomenon drives the American $100 bill. Roughly 2/3 of all $100 bills are outside the USA. There is a tremendous demand for respectable stores of value. If and when America cleans up her balance sheet (which may be occurring right now) the dollar should strengthen and modest wealth foreigners will trade - on the margin - their gold for American dollars.

If events occur such that your only hope is that people are requiring gold instead of currency, you will have most definitely have wished you instead invested in food, water, rifles, ammo, and farmland instead.
Not gold.


In large part because of my background, I know people (or know people who know people) who survived the horrors of WWII. Some of them were saved because of their small gold holdings. You can trade it easily and quickly. Not food, not water, not ammo, not farmland.

Other relatives of mine, Japanese-Americans, were removed from their homes and locked up for many years during WWII. All their food, water, rifles, ammo and farmland did them no good. California Governor Earl Warren, later the "great" liberal Supreme Court Justice, was supportive of internment.

That was only 70 years ago. In America. Gold does not protect against Armageddon. It protects against selective bouts of human insanity and tyranny. These bouts sadly occur too often in South America, Africa, and many countries in Asia and the Middle East.

Benjamin Franklin said, If you want to convince, appeal to interest not morals. In difficult times, gold is appealing.

*******

I am very confident that this country and indeed the world is moving in the right direction. But I think gold is a great investment for many people in the world over their realistic alternatives. As such, when gold insurance is cheap it may be worth buying, even for Americans.

ET
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. As such, when gold insurance is cheap it may be worth buying, even for Americans.

Gold as extended warranty. Conventional wisdom is that these warranties are a bad deal. Sure is nice when you have one when you need one. Though if things got bad enough the ammo case carries greater weight with me, personally. But I see the bleak future more as Mad Max style, where guns and gasoline are what saves you.

'Course if you are escaping from somewhere nasty to somewhere less nasty then I can see gold being your best friend. In this case my paradigm might be gold = flight, ammo = fight.

Not sure if gold would've helped the Japanese-Americans 70 years ago, though I think you were giving an example of a con farmland et al and not a pro gold.

Sometimes you are just unlucky and you will get singled out and taken around back and jailed or shot. One day it may happen to us. In the meantime let us play with our pixels and try to make them grow, be they golden or paper.
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In large part because of my background, I know people (or know people who know people) who survived the horrors of WWII. Some of them were saved because of their small gold holdings. You can trade it easily and quickly. Not food, not water, not ammo, not farmland.

Other relatives of mine, Japanese-Americans, were removed from their homes and locked up for many years during WWII. All their food, water, rifles, ammo and farmland did them no good. California Governor Earl Warren, later the "great" liberal Supreme Court Justice, was supportive of internment.

That was only 70 years ago. In America. Gold does not protect against Armageddon. It protects against selective bouts of human insanity and tyranny. These bouts sadly occur too often in South America, Africa, and many countries in Asia and the Middle East.


The gold-as-safety plan worked out a bit differently in my own family.

While I also have Japanese relatives (in-laws) who suffered in WWII and escaped the firebombings with minutes to spare, I also have a grandfather who was rounded up and placed in 4 US interment camps over the span of the war, the last place being Camp Lincoln in N. Dakota. Unfortunately, because he was a German citizen living in the US at the time, his family's gold & silver (they were literally silversmiths in Hanover back home) ended up frozen as assets and later plundered by the Nazis. The family's land holdings were confiscated and not returned at the war's end. One might say that he'd have been well-warned to keep the gold on his person instead of entrusting it to banks & vaults in a secure location, but who knew that was wise in 1926 when he made his way to US shores? By 1933 that same hypothetical gold ownership would have made him a no good criminal...as well as an out of work architect in the depths of the depression.

For those anticipating a future where we pawn gold bars for food, remember that keeping your gold in a safe deposit box may not help you. When the US government made ownership "illegal" I recall that one could not sneak over to one's local bank and just pull gold out of one's box. Federal marshals would be there to take the stuff and arrest you. http://en.wikipedia.org/wiki/Executive_Order_6102

So anyhow, I just thought I'd +1 the notion that should the sh*t hit the fan, mere ownership of gold bars may not solve one's immediate problems. Things don't unfold in ways that we in the here and now can reasonably predict.



-the other et
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The great thing about gold is, if you have enough of it, in the right form, you can roll around in it an throw it up in the air like Scrooge McDuck!
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There are billions of people who live in conditions without these rights


What kind of strawman is this? We're on an American investing board, talking mainly -- almost solely -- about investments for Americans and Canadians that trade in the US and Canada. We haven't had good discussions about even 4 European stocks that I can remember [maybe we have but I sure don't remember them].

We've been talking about the USD price of gold, consistently.
Not about what my friends Tik Suanpong and Nusara Leelaporn can buy gold at in local fx in case of another military revolution, or the rule of law in Zimbabwe, or what Islamic child brides in Pakistan prefer on their wedding day.

Given the massive government debts in Japan, poor demographics

I specifically said gold had been a poor inflationary hedge, esp compared to stocks, which is how it has been marketed to investors.

Has Japan had high inflation the past 24 years? Or deflation??

Index funds didn't exist 80 years ago. Gold coins did

But you ignored my specific mention of Coke, GE, IBM, Hershey, banks, insurers as if they didn't exist. GE was pretty well known back then, as were cigarette makers, and JPM or Chase or BONY or State Street or Wells and Cigna and Tootsie Roll and Wrigley's.

If you bought an ounce of gold in 1919, that would cost you $19.39 based on the London fixing. Today it's worth $1383. A 72x return.

If you bought a share of Coca-Cola in 1919, that would have cost you $40. Today that share of KO with reinvested dividends would be worth $9.8 MILLION DOLLARS. A 245,000x return!

Feel free to substitute GE or AT+T or Vanguard Wellington or MFS Fund or Putnam Investors Fund or CGM Fund or Fidelity Fund if you want to start in 1925 or 1930 or 1935.

I own term life insurance ... even if I don't use doesn't make it a bad investment.

So if it goes up it's a good investment, but if it doesn't then it's another thing entirely? Ok.

Japanese-Americans, were removed from their homes and locked up for many years during WWII.

I'm so confused. Clearly any gold they held didn't help either. I don't see what Earl Warren's idiocy has to do w/r/t this topic.

In difficult times, gold is appealing.

And the Merry-Go-Round spins again: Your side can assert this all you want, it doesn't make it true [as an investment or insurance]. The plural of your anecdotes is not data.

Over the past 80 years there have been plenty of 'difficult times,' and yet gold has underperformed stocks by a VERY WIDE margin in the US. [And the UK. And I'm pretty sure in Switzerland and Canada also.]

I cannot speak for Botswana and Peru. Yes, I suppose if I ever get kidnapped by the Shining Path I'll wish I had some ready gold.

But I'll probably wish I had a bigger brokerage account full of US stocks that can be liquidated in microseconds and wired to their offshore bank accounts to pay my ransom.

As such, when gold insurance is cheap it may be worth buying, even for Americans.

Well, I couldn't agree more!

If gold was back at $250 as it was during the Bubble 1.0 days, I would [and did, ftr] absolutely suggest it could have some use in your portfolio at those sub-$300 prices. Central banks always get their massive sales wrong.

6x higher, it's a much, much tougher argument. But, as always, just make money!
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Final, final, final post on gold.

http://www.youtube.com/watch?v=j0qm0KUPeD8

ET
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Bloomberg/BW astutely points out today that the long-term cap gains rate on gold and metals ETFs is 28%, or 40% higher than on regular stocks at 20%.

Ouch.
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Bloomberg/BW astutely points out today that the long-term cap gains rate on gold and metals ETFs is 28%, or 40% higher than on regular stocks at 20%.

Ouch.



Good point...of course this is irrelevant for retirement accounts like rollover IRAs, and Roth IRAs.

It would be very interesting to see a breakdown of taxable investment assets versus tax-free investment assets broken out by total assets and income.

In my case, my limited client base has no "really wealthy" people, but one guy who I'd say fits the bill of very high upper middle class to lower upper class. His investment assets in tax-free accounts - his 401(k), his rollover IRA, his wife's rollover IRA, his Roth IRA, her Roth IRA is quite substantial. I actually don't know what he has in outside taxable investment assets but I doubt it is even half or even one third of his tax-free assets.

My Dad's investment assets are almost entirely in a rollover IRAs from his 25 years of saving in a 401(k).

I only point this out because I read and see a ton of stuff on tax consequences, and my instincts tell me it is a moot point for the middle class diligent saver who probably has most if not all his accumulation going on in tax-sheltered plans. Even the small business owner can direct a ton into SEP-IRAs. I think the ultra-wealthy probably need to be aware of various tax differences in different types of investmetns for probably a large segment of investors it is a moot point.
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Bloomberg/BW astutely points out today that the long-term cap gains rate on gold and metals ETFs is 28%, or 40% higher than on regular stocks at 20%.

Ouch.


Did Congress overturn Obamacare this afternoon?

If not, the real top rate capital gains tax rate on regular stock is 20 + 3.8 (Medicare investment tax) = 23.8 percent of Pay Your Fair Share.

ET

P.S. IRS, please don't audit me for the above comment.
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You are correct. 31.8 vs 23.8%.
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