For Many, Trading Dreams Turn Into Frustrations

Many people get interested in trading after hearing about rich hedge fund managers, or getting a slick sales brochure from a "trading guru" trying to sell his latest system.

They see the well-chosen examples from the sales literature, understand how the system works, and then day-dream about the fortune they will make.

Then, they start trading and either under-perform the markets (if involved with un-leveraged stocks / funds), or else lose a substantial portion of their principal (through futures and options).

I know this, because it also happened to me. When I first started trading, I read all the gurus' literature, and decided that making a living from trading would be easy. I started day dreaming about what I would spend the money on.

Of course, I since learned that it's not that easy to get rich quick trading.

On the other hand, many frustrated would-be traders then completely quit trading and investing. This is a mistake because everyone needs some exposure to stocks and the stock market - otherwise your retirement savings will suffer "losses" through not keeping up with inflation.

I found the middle-ground between aggressive and conservative investing: I created the Stock Trading Riches system.

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Aon Insurance's Move to London: An Example of How Shareholder's Votes Aren't Always Simple Decisions

A month or so ago, Aon Corp. (one of the world's largest insurance brokers) announced that they would move their headquarters from Chicago to London. Even though only a few jobs would be affected, it was considered a blow to Chicago's prestige as an international financial capital.

Aon's board said the decision was made to lower their corporate tax rate and allow them to access $300 million of cash they have outside of the U.S. They made it seem like a simple, cut-and-dry issue.

On the eve of the shareholder vote, however, they had to comply with SEC regulations, and disclose the risks of the move:

1. Some shareholders might get taxed during the switch from a U.S. to U.K. company.

2. The IRS might fight the U.S. to U.K. switch. If Aon lost, the projected cost savings may not occur.

3. The litigation might take so long that, if Aon lost and the U.S. to U.K. move was undone, it might be too late for investors to file an amended 2012 tax return to claim a refund of the taxes from risk #1.

4. Shareholders like companies to buy back stock, but English companies face more restrictions than Delaware corporations for stock buy-backs. For example, they may have to get 75% of shareholders to vote in favor of it.

5. They may not be allowed to continue to pay their dividend until they built up "distributable reserves".

6. Finally, there is the risk that Aon may get removed from the S&P 500.

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The Fuggerei - Really Long, Long Term Investing

The Wall Street Journal had an interesting article about people living in the Fuggerei - a Roman Catholic housing settlement for the poor in Augsberg, Germany. People who live here still pay the same rent that was set when the Fuggerei was first opened - in 1520!  Then, the rent was 1 Rhein Guilder a year and 3 daily prayers for the well being of the Fugger banking family (make up your own jokes about "Fugg"ing bankers ;-) ). Today, the equivalent to 1 Rhein Guilder/year is 0.88 euros ($1.23) per year. The founder of the Fuggerei was Jakob Fugger "The Rich": Jakob the Rich was Wall Street long before it existed. He minted coins for the Vatican, bankrolled the Holy Roman Empire and helped steer Europe's spice trade in the early 16th century to become one of the wealthiest and most powerful financiers in history. He left more than seven tons of gold to his successors -- and a good deed. Much of the Fugger business empire crumbled over the next 150 years, battered by wars and soured credits. But the walled Fuggerei, with its picturesque lanes and seven gates in the heart of this onetime European banking capital, still stands. The Fuggerei is a good testament to the power of long term investing - even at conservative rates of return. In the late 17th century, after losing money in riskier investments, the bulk of the trust was invested conservatively - in old forest holdings.  Since then, over the last 200 years, the trust has never lost money.  The returns have ranged from 0.5% - 2%.

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Who Really Benefits From Hedge Funds? - Review of Simon Lack's "The Hedge Fund Mirage"

The wealth of top hedge fund managers is the stuff of legend, but how about their clients - the "sophisticated" investors such as pension funds and wealthy individuals?

As Wall Street veteran Simon Lack says in his new book The Hedge Fund Mirage, "Who can name even one hedge fund investor whose fortune is based on the hedge funds he successfully picked?"

According to Lack, only a handful of superstar hedge fund managers made most of the industry's profits. As a broad investment class, he finds hedge funds to have been a terrible place to keep your money:

"If all the money that's ever been invested in hedge funds had been put in Treasury bills instead, the results would have been twice as good."

An even more shocking conclusion from the book is about the fees that hedge funds collect - which really kill any hope of a good return.

After crunching the data, Lack found that, from 1998 - 2010, investors made $70 billion, while hedge funds pocketed $379 billion in fees!

In conclusion, Lack feels that the fault doesn't lie with the hedge fund managers, but with the "sophisticated investors".

I agree, because one thing I have found during my almost 20 years of trading experience is that, in finance, people believe the complex and exotic is superior. They feel sophisticated and intelligent when, at cocktail parties, they can brag about investing in sexy things like hedge funds.

Every time I tried to trade sophisticated, leveraged instruments like futures or options or on margin, I underperformed or lost money. Instead, when I switched to trading plain old stocks using the Stock Trading Riches formula - which is simple, dull, and boring - I started doing very well.

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Ground Hog Day, Stock Trading, and Probability

Today is Ground Hog Day, and ABC News had an article on Punxsutawney Phil (the famous groundhog from Pennsvlvania).

The legend is that, if the groundhog sees his shadow, then winter will be 6 weeks longer. If it is cloudy, and he doesn't see his shadow, then spring will arrive early.

The ABC New article states that "It turns out the ultimate prognosticator- and his copycat counterparts- are wrong more often than they are right."

It then also states that "An analysis by the National Climatic Data Center found there is no correlation between Phil's predictions and the actual weather."

What's interesting is that, technically, these 2 statements contradict themselves. Being "wrong more often than right" is not the same as "no correlation" - and this has implications for developing a trading system.

If you develop a system for predicting the weather or for trading stocks, if your system does terribly, then you haven't failed. You would simply reverse the interpretation.

The worst thing that can happen when testing a trading system is not losing all your money - it's getting random results.

For example, if you tested a system of buying stocks on the first Tuesday of the month and selling 3 days later (this is a made up example), and you lost money 84% of the time, then this might not be a failure.

Why? Because this means you could short stocks on the first Tuesday of the month, and buy to cover 3 days later - which would win 84% of the time. (Of course, you would have to confirm that the total amount of money made on the winning trades exceeds the total amount lost over the 16% of the time where the rule failed).

The result you would not want would be to find that the rule broke even and gave no meaningful advantage. This would mean that, no matter which side you took, you would not expect to make enough to cover your trading costs (commissions, slippage, etc.)

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Akorn is the Second Best Performing Chicago Area Stock of 2011

In a previous post, I described Ulta, which was the best performing Chicago-based stock in 2011.

The second best stock was Akorn, Inc (AKRX), which is based in Lake Forest, IL. Akorn sells ophthalmic antibiotics, dry-eye treatments, and injectable drugs for hospitals.

This is another growth stock. Akorn's CEO, Raj Rai, took over in 2009 (when the stock was below $1) and led a remarkable turnaround - the stock increased 239% in 2010 to $6.07/share, and increased 83% in 2011, to $11.12/share.

Rai turned the company around by focusing on its profitable eye treatments and injectable drugs, selling its money-losing divisions like vaccines, investing in sales, marketing, and R&D, and acquiring factories in India to serve that country's fast growing markets.

Akorn has a lot of room to grow, so it could make a good growth stock purchase, especially at a lower price.

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Ulta is the Top Performing Chicago-Area Stock for 2011

The Chicago Tribune recently had an article listing the best-performing 2011 stocks among Chicago area-based companies.

The number 1 performing stock was Ulta Salon, Cosmetics, and Fragrance, Inc. (ULTA). The stock was up 91% in 2011.

Ulta has been called the "Best Buy" of the beauty market. It offers one-stop shopping for cosmetics at every price range, as well as a full-service hair salon.

It is a classic example of a growth stock.

On one hand, some analysts feel it could sell off this year because it trades at 32 times estimated earnings. Also, they may face competition as Walgreens and CVS increase their beauty product offerings, and from women shopping online.

On the other hand, the reason for their success is the fundamental shift of women going from malls to strip malls. Most high-end beauty products used to be bought from department stores. Now, women like the convenience of being able to drive up to an Ulta in a strip mall and find all products in one place.

As a result, Ulta is growing at a fast pace. They currently have 449 stores, and have room to expand - especially on the East Coast and Northwest. They plan to increase their number of stores by 15 - 20% a year until they reach 1,000 stores.

At the same time, they recently experienced a 12.6% increase in sales open at least one year.

In addition, since their stores average 10,000 square feet, they are experimenting with launching 300 square foot stores inside devoted to men's skin care and grooming products.

You can look to buy it on a drop for a GAARP play (Growth at a reasonable price) or buy it now as a growth play. Either way, you could then manage it with the "Stock Trading Riches" system to play the fluctuations, and pump money out to enhance your return, while reducing your risk/cost basis.

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