Stockradar: Aristocrat Leisure (ALL)
October 8, 2009
What is it we are buying when we buy a stock? Are we buying a stock, a company, a fundamental, an expectation, or a price? The bottom line is that we are buying an opportunity to make money.
This question highlights the importance of education and setting an objective of what we are trying to achieve when trading on the stock market.
Fundamental analysts talk about a company with long term prospects and then we go out and buy the share and find the price swings up to $100, down to $15.00 and back up to $50.00 all in the space of 2 years? Which blue chip stock is that? This is not an unusual event on a percentage basis so is there a valid correlation between the fundamentals and price movement, and is it of use? For the most part no as traders and investors buy an opportunity of making money, and the dreams of a better lifestyle that go with that, and a stock such as MQG who mapped out this trading pattern from a long term perspective has delivered little over the last six years but from a trend trading position using price as the guiding tool to capitalise on those wild swings it has been a very profitable exercise. It is important to have a simple measure of “cheap” and “expensive” so we can respond and take advantage of the inevitable price changes so we can not only buy the opportunity of rising prices, but more often than not get them.
How do we do that? We love big price swings because we can take advantage of them by using price and trends and simply jumping on and off them. Sure a company can be soundly based from a fundamental point of view to underpin a trend so why not just go out and buy the top 20 stocks? They are all good stocks aren’t they? Then along comes an event like an unforeseen financial crisis and suddenly we are floundering for help and stock fundamentals seem a distant and uncorrelated perspective. It only takes one little bear market every 10 years to cause serious capital decimation to the long term holder and it is that bear state that’s hard to pick before it happens. Then of course it’s too late but the necessity of picking bull and bear turns, which most can’t, is not necessary if we are to make money. Far from it.
For the bulls its easy because that’s what the market spends the majority of its time doing – going up – but where are they when we really need them? These experts are just as influenced by greed and fear as anyone. The top 20 stocks are all good companies and any “model” portfolio will have about 60% of its value in the same stocks, you know the old candidates like the banks, BHP, TLS, WDC, QBE, SHL, WOW, LEI, CSL, and a WPL. So why aren’t we getting what we want – consistently outperforming profits? Firstly because the fund managers with the model portfolios don’t sell when they should (a moving average is often worth more than 10 business of mathematical degrees when analysing stocks) and TLS provides a clear example of one that has been going down for years and destroying shareholder wealth, but it still retains a big weighting (drag) on any fund managers portfolio. Why hold a falling stock?
Yes I know the income is a big thing as any TLS investor will quickly point out to justify their exposure but when balanced with the capital decimation it is hardly worth it so they are really peeing in the wind! There are simply better bets that will sate our desire for making money as even the leaders come and go on a trend basis. Part of the trick in generating consistent returns and outperformance is capital preservation and that means don’t hold falling stocks. The research offered by fundamental analysis if it is positive suggests you can buy the stock and it will endlessly go higher because they have no other way of assessing price movement but the reality is for many other reasons than fundamentals, good fundamental stocks can swing wildly. So rather than fight and dislike that behaviour, let’s use it to our advantage, but you need a method.
So that provides one reason why we aren’t getting what we want because we hold such stocks that have share prices going down and despite great fundamentals many of those stocks have simply not performed (nor been in our sights) take TLS, CSL and WOW for example since March. Great stocks but where is the price trend and why buy them if our aim is to make money? No their trends aren’t up, although WOW may have finally turned the corner. Still when we see the trends delivered by SFH DJS PBG etc who needs a WOW?
This is not a difficult exercise. To win you not only buy the expectation of making money but you need to fight the prevailing wisdom and drop underperforming stocks, or simply stocks that are not going up, so your chances of making that money is far greater. So we all buy to win and make money and that means buying smart and there are many simple measures out there to use whether in conjunction with fundamental analysis or not. The only problem with using them together is what happens when they make different statements as happened in 2007– What do you do and why did so many get caught? And a simple measure, well that could be the simple higher highs and higher lows trend definition, or simply a moving average, one of the best trending tools available.
Let’s take the example of Aristocrat Leisure (ALL) as its share price recently hit our stock radar back in July as it began to rise on solid volume. Now that is of interest and we can now buy that opportunity on the development of some well founded price evidence as not only is the price rising again but we have able support from history and a resurgently bullish demand / supply profile. The odds now favour the fact that the impasse has been broken and the price is mapping out a classic return to a demand dominated share price. In the time frame we work with (weekly) the price has returned to a higher high and higher low structure with new and increased participation supporting the continuation of this trading action.
Then let’s look at a 28 day exponential moving average which is the one I use all the time. This shows the price moving above the average for the first time in 2 ½ years after breaking broke below it at $16.00 issuing a sell signal on that basis alone but you will note you don’t get the highs of $18.00 nor the lows of $3.30 we just escape a big chunk of capital decimation so we can invest our sales dollars from $16.00 back in at $4.30. Now to really boost those returns by stealing some chunks on the way up! Yes the simple measures can work and work very well and then we can more confidently buy that opportunity of making money and make it consistently!
This question highlights the importance of education and setting an objective of what we are trying to achieve when trading on the stock market.
Fundamental analysts talk about a company with long term prospects and then we go out and buy the share and find the price swings up to $100, down to $15.00 and back up to $50.00 all in the space of 2 years? Which blue chip stock is that? This is not an unusual event on a percentage basis so is there a valid correlation between the fundamentals and price movement, and is it of use? For the most part no as traders and investors buy an opportunity of making money, and the dreams of a better lifestyle that go with that, and a stock such as MQG who mapped out this trading pattern from a long term perspective has delivered little over the last six years but from a trend trading position using price as the guiding tool to capitalise on those wild swings it has been a very profitable exercise. It is important to have a simple measure of “cheap” and “expensive” so we can respond and take advantage of the inevitable price changes so we can not only buy the opportunity of rising prices, but more often than not get them.
How do we do that? We love big price swings because we can take advantage of them by using price and trends and simply jumping on and off them. Sure a company can be soundly based from a fundamental point of view to underpin a trend so why not just go out and buy the top 20 stocks? They are all good stocks aren’t they? Then along comes an event like an unforeseen financial crisis and suddenly we are floundering for help and stock fundamentals seem a distant and uncorrelated perspective. It only takes one little bear market every 10 years to cause serious capital decimation to the long term holder and it is that bear state that’s hard to pick before it happens. Then of course it’s too late but the necessity of picking bull and bear turns, which most can’t, is not necessary if we are to make money. Far from it.
For the bulls its easy because that’s what the market spends the majority of its time doing – going up – but where are they when we really need them? These experts are just as influenced by greed and fear as anyone. The top 20 stocks are all good companies and any “model” portfolio will have about 60% of its value in the same stocks, you know the old candidates like the banks, BHP, TLS, WDC, QBE, SHL, WOW, LEI, CSL, and a WPL. So why aren’t we getting what we want – consistently outperforming profits? Firstly because the fund managers with the model portfolios don’t sell when they should (a moving average is often worth more than 10 business of mathematical degrees when analysing stocks) and TLS provides a clear example of one that has been going down for years and destroying shareholder wealth, but it still retains a big weighting (drag) on any fund managers portfolio. Why hold a falling stock?
Yes I know the income is a big thing as any TLS investor will quickly point out to justify their exposure but when balanced with the capital decimation it is hardly worth it so they are really peeing in the wind! There are simply better bets that will sate our desire for making money as even the leaders come and go on a trend basis. Part of the trick in generating consistent returns and outperformance is capital preservation and that means don’t hold falling stocks. The research offered by fundamental analysis if it is positive suggests you can buy the stock and it will endlessly go higher because they have no other way of assessing price movement but the reality is for many other reasons than fundamentals, good fundamental stocks can swing wildly. So rather than fight and dislike that behaviour, let’s use it to our advantage, but you need a method.
So that provides one reason why we aren’t getting what we want because we hold such stocks that have share prices going down and despite great fundamentals many of those stocks have simply not performed (nor been in our sights) take TLS, CSL and WOW for example since March. Great stocks but where is the price trend and why buy them if our aim is to make money? No their trends aren’t up, although WOW may have finally turned the corner. Still when we see the trends delivered by SFH DJS PBG etc who needs a WOW?
This is not a difficult exercise. To win you not only buy the expectation of making money but you need to fight the prevailing wisdom and drop underperforming stocks, or simply stocks that are not going up, so your chances of making that money is far greater. So we all buy to win and make money and that means buying smart and there are many simple measures out there to use whether in conjunction with fundamental analysis or not. The only problem with using them together is what happens when they make different statements as happened in 2007– What do you do and why did so many get caught? And a simple measure, well that could be the simple higher highs and higher lows trend definition, or simply a moving average, one of the best trending tools available.
Let’s take the example of Aristocrat Leisure (ALL) as its share price recently hit our stock radar back in July as it began to rise on solid volume. Now that is of interest and we can now buy that opportunity on the development of some well founded price evidence as not only is the price rising again but we have able support from history and a resurgently bullish demand / supply profile. The odds now favour the fact that the impasse has been broken and the price is mapping out a classic return to a demand dominated share price. In the time frame we work with (weekly) the price has returned to a higher high and higher low structure with new and increased participation supporting the continuation of this trading action.
Then let’s look at a 28 day exponential moving average which is the one I use all the time. This shows the price moving above the average for the first time in 2 ½ years after breaking broke below it at $16.00 issuing a sell signal on that basis alone but you will note you don’t get the highs of $18.00 nor the lows of $3.30 we just escape a big chunk of capital decimation so we can invest our sales dollars from $16.00 back in at $4.30. Now to really boost those returns by stealing some chunks on the way up! Yes the simple measures can work and work very well and then we can more confidently buy that opportunity of making money and make it consistently!
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