Which stock investment to choose?

[nioka]

Today I read an article that reinforces my investment strategy. The article showed that ,in the last year, only one of the stocks in the ASX200 doubled its value. More than half the stocks in my portfolio have at least doubled in that time. I also do not have one stock that is in the ASX200 either. I have a couple that are knocking at the door so I take this as a signal that they should be sold once they get that rating.

On checking some stocks history I find that they do get an initial boost as they are included there so I also take it as a signal to wait until they are included then sell and find new pastures.

Interesting. I had never linked these facts together before.

Thoughts anyone.

 

[Trembling Hand]

Re: Which stock investment to choose.

Its an old game Hedge funds play. They front run the index re-weightings and flip them on the days after they are included in the index as the funds are forced to buy in by their investment mandates to being index weighted.

 

[pixel]

Re: Which stock investment to choose.

Today I read an article that reinforces my investment strategy. The article showed that ,in the last year, only one of the stocks in the ASX200 doubled its value. More than half the stocks in my portfolio have at least doubled in that time. I also do not have one stock that is in the ASX200 either. I have a couple that are knocking at the door so I take this as a signal that they should be sold once they get that rating.

On checking some stocks history I find that they do get an initial boost as they are included there so I also take it as a signal to wait until they are included then sell and find new pastures.

Interesting. I had never linked these facts together before.

Thoughts anyone.

Onya nioka;

You have, it seems, a strategy that works well for you - and a knack to find stocks that are destined for greatness.
Proviso, of course: The other half of your portfolio must not, at the same time, drop by 90% or more. Which mandates strict discipline in your trading behaviour and you sell non-performers as soon as they fail to vindicate your decision to buy them.

Your strategy, however, proves the old saw: "Forget percentages. Go for multiples." :

 

[motorway]

Can “Illiquidity” Explain the Equity Premium Puzzle?
The Value of Endogenous Market Trading
Peter L. Swan*
School of Banking and Finance, Faculty of Commerce
University of New South Wales
Version Dated September 16, 2002
JEL Classification: G120, G110, G200
Australia; email: peter.swan@unsw.edu.au.

Investors seem to have a significant desire for liquidity and appear willing to pay more for
an asset which is both easy to acquire and dispose of. This is a natural consequence of people’s
desire to trade and is related to Black’s (1986) description of “noise” traders.2 I take up Black’s
challenge when he concludes: “we may need to introduce direct utility of trading to explain the
existence of speculative markets”

Trading is a buzz and people are attracted to it... Stocks that have liquidity see traders flock to participate.. Volume attracts volume.. And any excessive risk premium evaporates

My empirical evidence demonstrates that illiquidity is priced.

He is saying the more illiquid,, the less volume... The more potential reward .

The bold is a key point... He is saying many people participate in markets just to trade . Markets are more like a Casino full of gamblers seeking action (liquidity ) and willing to pay for it.

It is based on 30 years of monthly NYSE data on
security returns and turnover for 880 stocks. After controlling for stock size, book to market
ratio and CAPM beta, annualized returns diminish at the rate of 0.54% per 1% increase in stock
turnover.

For every 1% increase in liquidity the return from holding a security as an investment
declined by .54% PA

Liquidity in the form of signed order flow is intimately associated with information content in
security prices and hence the driving of security prices closer to fundamentals. This link
between liquidity and information content needs to be explored further so as to provide a fuller explanation for why liquidity is so valuable.

prices disperse information.. significant volume and liquidity.then. Information Known by everbody...Fully priced... quick transition with new information fast dispersal .

Low Volume low liquidity,then information disperses slowly . Real news has a delayed effect and will be miss priced


(His conclusion)
BLUE-chip stocks may be unsuitable holdings for personal investors, says a Sydney professor who has produced a theory explaining the differences in returns produced by various assets.

UNSW's Peter Swan argues patient investors should consider buying "illiquid" stocks – those which trade less frequently – as these stocks produce better returns.

By JOHN ROLFE, Business Editor

Daily Telegraph, 5 January 2006

BLUE-chip stocks may be unsuitable holdings for personal investors, says a Sydney professor who has produced a theory explaining the differences in returns produced by various assets.

UNSW's Peter Swan argues patient investors should consider buying "illiquid" stocks – those which trade less frequently – as these stocks produce better returns.

After examining decades of data from the New York and Australian stock exchanges, as well as international bond markets, Professor Swan found that the more difficult it was to buy or sell an investment, the better its return. A company with shares that did not turn over frequently tended to deliver better returns than big blue-chips.

Illiquid stocks could be appropriate investments for "mums and dads", Prof Swan said, because they do not need to trade regularly. It was mainly big investment firms that needed liquid portfolios.

"If you don't want to trade much then you may be better off with such a portfolio," he said yesterday.



"People think the higher returns we've seen on the stockmarket (than the bond market) are due to risk, but that only explains about half a percentage point of the higher returns enjoyed by equity.

"In my theory, the remaining 5.5 per cent to 7.5 per cent represents compensation for lack of liquidity," he said.

This was borne out by the superior historical returns "small cap" managed funds produced when compared to funds filled with share- market heavyweights.

Over the three years to the end of September, the S&P/ASX Small Ordinaries Accumulation index returned 25.3 per cent a year, versus 20.8 per cent a year for the S&P/ASX 100 Accumulation index.

Prof Swan said he had yet to find an asset class which did not fit his theory.

Cash was the easiest asset to buy or sell, yet its return was almost always negative – with the purchasing power of a dollar declining whenever prices were on the rise.

Bonds came next on the scale and they delivered a return of barely better than zero.

Within equity investments, Prof Swan found that "letter stock" – that which cannot be bought on the open sharemarket and then cannot be on-sold for a specified minimum period of time – outdid other classes of shares.

The theory even applied to the stellar investment returns from real estate in Sydney's Eastern Suburbs, including his own clifftop home at Tamarama.

Such properties were harder to buy and sell, due to scarcity and relatively high transaction costs.

Shorter Term Traders need Liquidity and faster moves
Longer term traders ( Investors ) have other opportunities
in that they can consider the more smaller and illiquid
and make use of time in a different way..


Motorway

 

[nioka]

Liquidity is something that I look for as I like to easily enter and exit. I also like to trade the swings if possible to free carry the stock as soon as possible.I then hold the free carried portion in an investment account longer term. So the notion that non liquid stocks could have better long term returns does not appeal to me at all. Stocks like LYC, NTU and SDL have had good volume and great gains in recent times. AUT and EKA don't trade with great volume but they do trade with sufficient daily volume and have made great gains.

Stocks like BUL continue to have my interest. They are not popular so that means potentially good value if they are successful in their development program. Sufficient daily volume to enter and exit, relative stable SP so there is not a great chance of losing all. Sufficient liquidity to trade for freebies.

CER and VPG have liquidity and the potential to give good capital returns. A little risk but with NTA well above market cap. Not a lot of risk in the sense of losing all. They could fall 60% and I'd still be in front with them.

I exited CNP with a good profit after seeing the recent accounts that showed they have serious negative equity and nervous lenders. The liquidity there allowed me to do that instantly.

The few stocks that I have that are not winning eg EDE have sufficient liquidity to enable me to trade them and hold long term freecarried.

So liquidity is an absolute necessity for me to see in a stock before I am even the slightest bit interested.

 

[noirua]

For me getting the money together to invest was always a hard task. The emotional & market pressure to invest badly is massive. To invest well, with limited capital, against the herd, is incredibly hard. Get over that hump & the opportunities in the junior space are amazing.
Paul Johnson CEO Power Metal PLC UK