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O. Young Kwon
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O. Young Kwon, NYU Ph.D. in Economics had worked in securities industry for ten years as a Registered Investment Adviser. He taught Macroeconomics and Statistics. Prior to his academic career, he was an Economist/Bank Supervisor at the Bank of Korea (the Fed's counterpart). In 2009 he set up the... More
  • Learn TANER: A Winning Strategy 0 comments
    Jun 13, 2011 5:14 AM
    There are three major investment markets: (a) equity (including ETF, option, equity mutual fund), (b) fixed-income security (corporate bond, treasury, and their mutual fund), and foreign exchange. This article, as the title clearly point to, focuses exclusively on the equity market with three stocks among the 60 equities in the TANER System, which was introduced in the previous article, TANER (part one). The major difficulty of this writing is threefold. The first is I have quite a wide spectrum of readers in terms of their trading experience, trading preference (long, short, or both), trading knowledge (about information, technique, or data), degree of independence, and computer skill (internet). The second is I have a broad range of professional readers in different areas such as brokerage, hedge fund, mutual fund, rating agency, insurer, bank, regulator, etc. I assume that I am reaching you not only within the U.S. but also, perhaps, globally. The third difficulty is how much I disclose my trading records without misleading you, but also without unintended over-disclosure, or without showing its limitations in my discussion.
     
    As a result, I decided to proceed as follows. (a) My three extra activities (“Riding Tigers,” “Day-Trading’” and “Long Shorts”) are divided into three separate articles. (b) For somewhat less sophisticated readers, I allocate the first part (of each article) for basic theory-oriented introduction. The subjects are Equity Price Theory, Machine vs. Human Being, and Auto-Pilot Portfolio. And (c) Only trading records of non-holdings (without purchase costs and their proceeds) is presented
     
    (1)     Equity Price Theory
     
    Price theory in Microeconomics teaches us that an equilibrium price of any commodity (in this case, equity) is determined by supply and demand schedules. Most of us do not know how markets bring that equilibrium price precisely, because we do not care about it. For my presentation, however, I have to touch briefly on the precise interaction process of supply and demand forces toward an equilibrium. That is the only way for me to explain (a) why high-beta equities such as BIDU (1.79), compared to low-beta equities such as MCD (0.53), are acting differently, (b) why “equity price theory” has not been developed at the first place, (c) what kind of information and data we should search and compile, and how to analyze and how to use them for our trading, (d) why this kind of research does not produce, quite often, the intended results, compared to more “simple” technical approach with some charts, (e) why I shy away from all available reports, recommendations, forecast, charts, brokerage services as a main ground for my investment decision, (f) why I invented the TANER System, which allows only the closing prices of members to enter, and (g) why the products of TANER are worth reviewing. (I will give you my answers in the next articles piecemeal.)
     
    The first step to understand the equilibrium process is that we must distinguish movements along the curve and movements due to shift of curves. Is this distinction too abstract? Let us proceed with a simple mental exercise. Imagine a supply curve, sloping upward to the right, and a demand curve sloping downward. The vertical axis is price and the horizontal axis is quantity. Let us assume that the current price is above the equilibrium price, and that the market develops an excess supply, which brings price down along the supply schedule to the left (meaning reducing supply due to competition among sellers), and along the demand schedule to the right (meaning increasing demand through competition among buyers). When you watch the MCD quote, you feel this process in some degree. How about BIDU or NFLX? It looks like a tiny airplane through storm at a certain moment.
     
    Think about why these are so different. The short answer is that BIDU is a tiger (high beta), while MCD is a turtle (low beta). The curves of turtles are relatively flat and stable. The curves of tigers are stiff (BIDU has almost vertical curves, which are twisted and disconnected in some portion). The stiffer the curve the more the price change. What are possible reactions of investors? They are chasing only tigers in the short run, ignoring good turtles which are adding substantial steady gains over a longer run. The final question is what causes shifts of curves. Earning surprises, new equity issues, dividend changes, M&A, regulation changes, buy-back plans, inside trading, brokerage (or rating agency) recommendations, and all local and global news are the main causes. Can you reasonably believe that you can cover all relevant information for only one tiger, say NFLX? I am afraid of hearing the answer “yes.” Last week (Dec.13-17) I witnessed many articles, reports, comments, views, predictions, and curses, related to NFLX. All investors of NFLX cannot be winners simultaneously. The market rule is that an investor can win only by beating the other guy. That is why everybody is chasing the best information to edge up to others.

     
    I propose the following conclusion: “The Tiger Rule.”
                        
                              The Tiger Rule
     
    Rule 1 : Each Bet is Strictly Independent. 
     
    Rule 2 : 2 or 3 Tigers Only . 
     
    Rule 3 : Maximum Commitment : 5% of Capital    
     
     
    DISCLAIMER : The Tiger Rule is my own rule, which may not necessarily be suitable for you. Some adjustments based on your situation are required in case you want to adopt it.
     
    Some clarifications of the Rule : Rules 2 and 3 are straightforward. Rule 1, however, needs further clarification. The betting size and term depend on (a) the shape of supply and demand curves and (b) human judgment. Supply and demand curves are not directly observable.
     
    Riding Tigers is just one of my three extra activities (“Riding Tigers,” “Day-Trading’” and “Long Shorts”), and is still in the process of development. So far, my experience dictates the following.
     
    "The stiffer the curves of the supply/demand schedule, and or, the swifter the shift of the schedule, the smaller the betting and/or the shorter the term."
     
    The second issue (b) is a question of an optimal contribution level of human beings (and its justification) to successfully implement the pure unbiased outputs of a machine,(TANER in this discussion), You can capture my views in the forthcoming series...
     
    Baidu, Inc (NASDAQ:BIDU), Netflix (NASDAQ:NFLX), and Chipotle Mexican Grill have been quite volatile through the entire year OF 2010.
     
    The following table is a list of actual consolidated tiger trades this year. The columns of cost ($) and sale proceed ($) are hidden.
     
     

     
      
     
    SYMB
    B DATE
    B PRICE
    S DATE
    S PRICE
    COMM
    G/(NYSE:L) %
    #DAY
    NFLX
    6/3/2010
    $112.78
    6/10/2010
    $119.02
    $0.00
    5.5%
    7
    NFLX
    7/8/2010
    $116.78
    7/12/2010
    $119.64
    $0.00
    2.4%
    4
    NFLX
    7/20/2010
    $117.13
    7/21/2010
    $123.25
    $5.90
    3.5%
    1
    NFLX
    7/23/2010
    $103.08
    7/23/2010
    $108.64
    $5.90
    4.2%
    0
    NFLX
    7/26/2010
    $102.40
    7/27/2010
    $104.67
    $5.90
    1.6%
    1
    NFLX
    7/28/2010
    $102.59
    7/30/2010
    $101.65
    $0.00
    (0.9%)
    2
    NFLX
    7/29/2010
    $96.66
    7/30/2010
    $101.65
    $0.00
    5.2%
    1
    NFLX
    8/2/2010
    $101.46
    8/4/2010
    $106.85
    $0.00
    5.3%
    2
    NFLX
    8/5/2010
    $106.58
    8/5/2010
    $108.52
    $0.00
    1.8%
    0
    NFLX
    8/6/2010
    $108.90
    8/10/2010
    $124.25
    $0.00
    14.1%
    4
    NFLX
    8/17/2010
    $134.94
    11/22/2010
    $183.85
    $5.90
    36.0%
    97
    NFLX
    8/18/2010
    $129.00
    11/29/2010
    $194.93
    $5.90
    50.9%
    103
    NFLX
    8/23/2010
    $128.56
    9/1/2010
    $130.78
    $0.00
    1.7%
    9
    NFLX
    8/31/2010
    $122.60
    9/1/2010
    $130.78
    $0.00
    6.7%
    1
    NFLX
    9/10/2010
    $146.70
    9/13/2010
    $148.71
    $0.00
    1.4%
    3
    NFLX
    9/14/2010
    $146.87
    9/22/2010
    $152.60
    $2.95
    3.7%
    8
    NFLX
    9/28/2010
    $161.81
    9/29/2010
    $164.21
    $5.90
    1.2%
    1
    NFLX
    9/30/2010
    $167.68
    10/21/2010
    $173.06
    $5.90
    2.9%
    21
    NFLX
    9/30/2010
    $163.03
    10/26/2010
    $173.99
    $5.90
    6.3%
    26
    NFLX
    10/1/2010
    $159.99
    10/21/2010
    $170.97
    $4.95
    6.6%
    20
    NFLX
    10/28/2010
    $174.41
    11/10/2010
    $175.84
    $5.90
    0.5%
    13
    CMG
    2/2/2010
    $99.99
    3/1/2010
    $107.39
    $0.00
    7.4%
    27
    CMG
    9/9/2010
    $163.19
    9/10/2010
    $164.44
    $0.00
    0.8%
    1
    CMG
    9/29/2010
    $176.07
    10/5/2010
    $177.50
    $5.90
    0.5%
    6
    CMG
    10/28/2010
    $210.50
    11/4/2010
    $222.29
    $5.90
    5.3%
    7
    CMG
    12/6/2010
    $235.53
    12/7/2010
    $241.52
    $0.00
    2.5%
    1
    BIDU
    2/9/2010
    $439.90
    3/8/2010
    $534.50
    $0.00
    21.5%
    27
    BIDU
    7/12/2010
    $71.06
    7/13/2010
    $73.31
    $0.00
    3.2%
    1
    BIDU
    8/5/2010
    $85.73
    8/10/2010
    $87.89
    $0.00
    2.5%
    5
    BIDU
    10/6/2010
    $102.30
    10/18/2010
    $102.55
    $3.84
    0.1%
    12
    BIDU
    10/6/2010
    $102.30
    10/18/2010
    $104.68
    $3.84
    2.2%
    12
    BIDU
    10/6/2010
    $102.30
    10/22/2010
    $107.75
    $3.54
    5.2%
    16
    BIDU
    10/6/2010
    $102.30
    10/25/2010
    $109.62
    $3.54
    7.0%
    19
     
     
     
     
     
     
     
     
    33
    P/(L)
    TRADINGS
     
    MEAN
    $2.65
    6.6%
    14
     
     
     
     
     
     
     
     
     
    NOTE:   
     
    • Loss (-0.9% on 7/30/2010)                     
    • Day-trading (8/5/2010 & 7/23/2010)         
    • Longest Holding : 103 days         
    • COMM : two-way commissions                      
    Tiger in The Tiger Rule has no relation with Tiger Woods.
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