Marcus Padley, of stockbroking firm Paterson Securities, in his regular column in The Age wrote a knowledgeable piece that every active and passive investor should read. The title of the article “Where brokers dare, we should tread carefully” is a two part editorial in which Marcus conveys the 10 lessons learnt by Mr Harry Hindsight.
What’s unusual in this article and several others over the past week is the ground breaking mind shift from those within the industry. Finally the unspoken truths of the financial industry are becoming exposed, highlighting the fact that the industry needs a reset.
To quote Marcus: “… the finance industry is a marketing machine… ” and “… there is uncertainty about just whose purpose half the advisory world is attempting to serve”. I whole heartedly support these statements. I have said and written similar statements in the past.
Marcus goes on to state “buy and hold is dead” (refer to my past journal posting “Death of the Buy and Hold investor”) and “… we need mechanisms outside the ramblings of the brain to protect equity investments. Unemotional triggers. We need systems and we play in markets without them at our peril”.
This is why I am so passionate about mechanical active investment and believe that the road to successful active investment is found through the mechanical way. In terms of probabilities those that follow a system that is derived from market price action have a much higher probability of success.
I have to question what is suddenly causing this rational discussion from inside the industry? A crushing bear market? Is that all it took? How fickle? For many years I felt somewhat alone in voicing my opinions about the weaknesses of the financial advisor and broking industry.
The second article written by Deirdre Macken, “Money: why we can’t handle it” conveys how we are psychologically crippled for investment, whether it is stock market, real-estate or general finance related. Deirdre points out, “More polite people will describe these dim decisions as ‘bounded rationality’ or ‘inherent biases’ but whatever you call them, science is proving the brain is not well equipped for modern finance and people who don’t realise how their humanity undermines their rationality are vulnerable to making poor decisions”. These phrases, which have been locked away in the annals of psychology books for decades (Kahneman & Tversky completed their initial research in the late 70’s), are now appearing in the daily financial press!
I can only agree with this article adding that human beings are woefully flawed, particularly when it comes to managing portfolios in the financial markets (btw, fund managers fall into the category of human beings too!).
I simply believe that the highest probability way of achieving success in the market (for an individual investor or professional money manager) is by deploying a mechanical trading system, based on price action, that has a well researched and well defined edge. The rigour, rules, structure and processes of a mechanical approach are required to overcome the human flaws and industry flaws discussed in these articles. The rules of the system need to cover market and stock timing, risk management and position sizing. Don’t leave home without one!!
As a new trader and in the state of bewilderment, having tried to read as much as I can about trading plans, strategies and systems etc. could you explain please your belief that we need a mechanical system based on price action? I thought that most of these “u-beaut” mechanical systems were all built on price action and supported by indicators. I have your introduction DVD and am interested in Share Finder.
Thank-you.
Dennis
Several things recently have entrenched my already very favourable view of SPA. Firstly, amid all the continuing economic gloom and bad news stories my SPA portfolio is now back to where it was at the beginning of March 2008. By comparison the All Ords index is about 30% below its early March 2008 level. Secondly its been interesting but sad to see a friend who used “fundamental analysis”, gut feel and margin loans to generate significant profits during the bull market give all that profit back. He is now too nervous and unsure to ever get back in to the market. And thirdly there are now all the media stories along the lines of “Is now the right time to get back into stocks?” – many people are out there agonising over whether to get back in.
How good is it to use the mechanically based SPA system to free you from so much mental torment and generate returns significantly better than the market? How much is that worth over 5, 10 or more years? Because of our emotional makeup following SPA or any mechanical system is hard but the rewards in terms of dollars and freedom from mental torment speak for themselves in my humble opinion.
Padley has lots of words of wisdom unfortunately he works for a stockbroking firm. I was a broker at 4 firms between 1984 and 2009 and I have heard all these words of wisdom before. Unfortunately they are not matched by their actions or systems. For example, an employee of a broking firm is not allowed to have accounts with rival internet brokers who can offer instant execution, lower brokerage and most important – STOP LOSS FACILITIES. Instead, the clients or mug punters pay full brokerage of $100 or 1.0% whichever is greater, have to monitor the stocks themselves and as we all know in the past 16 months, experienced drastic shrinkage of their fortunes.
I heard my ex-colleagues try to soothe their clients all of the last 16 months – it’s a good stock, I can’t belive it’s fallen 50% – it’s a minor correction – it’s a value stock, etc. I have never heard them say “We’re wrong in our timing, let’s cut our losses.”
Brokers are simply salespeople. In 2007 I’ve come across brokers in their mid 20’s earning $250 – $300,000 a year after just 3 years in the industry! Last year their income might have dropped back to $70-80,000 – still a nice income for most adult Australians. Don’t get me wrong – I do not mind anyone earning a lot of money. However, it should be matched by a higher level of competency, which is sadly lacking.
Padley suggested albeit belatedly (I think Oct2008) that investors should use stop losses. However, his employer or my ex-employers still do not offer those facilities. Stop losses are not new – there was a chapter on in in “How to Stop worrying and start living” by Dale Carnegie, published in 1953, more than 50 years ago.
After all those years in the market and in the industry, I believe I have at last learnt a few lessons:
1. There is no such thing as a good stock or a bad one. There are only rising stocks and falling stocks. Your task is to be in the former and out of the latter.
2. Have a trading plan. Plan your exit before your entry. If you’re wrong and picked a falling stock, determine when you’re going to get out and stick to it.
3. Don’t use a mental stop loss unless you’re really disciplined. Always place one in the market as soon as you buy. As your trade begin to show a paper profit, you should consider moving your stop loss in the direction of the trend. You may be stopped out in 2 hours or 2 years.
4. If you cannot exercise the same tough mental discipline of George Soros, use a mechanical system. (I couldn’t, so I purchased SPA3. Gary didn’t pay me to write this!)
My only experience with a broker was also negative. Some years ago, after following a recommendation from my grandmother I bought some companies (around $30 000 worth) from her broker based on his recommendation. The alarm bells started to go off when two of them started dropping significantly. When the broker could not explain why they were dropping, or more importantly at what point one would sell them I told him to close out everything and I then started to learn myself about the market. Some years later I was able to hold a large cash position through the recent crash and have my own mechanical system – although it has taken hundreds of hours and a bit of money to get to this stage!
My recommendation – avoid brokers and remember nobody cares about your money more than you! Learn about how to manage it!
I did, many years ago, use financial advisers and each of them had a way of losing money for me. I took over my financial accounts and started using SPA3. Lo and behold, I found that I could make money using their mechanical system of share trading. An article recently stated that 50% of financial advisers get it wrong and 50% get it right. Inspires confidence doesn’t it.
Response to Comment by Dennis McKensie:
“… could you explain please your belief that we need a mechanical system based on price action?”
Dennis, may I suggest that you watch the Discovery Session DVD that you have been sent and read other postings on this blog page (in particular “Trust your Edge” and “Re-training the mind for Active Investment Success – Parts 1 & 2”). That should take you a long way to understanding what a mechanical system is and why one is needed.
“I thought that most of these “u-beaut” mechanical systems were all built on price action and supported by indicators.”
The SPA3 mechanical system was first released in 1998. Back then a mechanical system was a dirty word in Australia even though mechanical systems had been used in the USA since the 1980’s but seemed to be isolated to the futures markets. Over the last 4 – 5 years I have heard the phrases “non-discretionary”, “rules-based” and others in Australia that mean much the same thing.
There are vendors/educators in Australia now claiming that they have a ‘system’ and have been brave enough to even use the word ‘mechanical’ on the odd occasion. I know from direct feedback from a few long standing customers who are always on the look out for a good mechanical system that there are no other truly mechanical systems for trading stocks and / or CFDs in Australia. All those that claim so have lots of discretion in whether to trade or not and even in the entry and exit criteria despite there being ‘rules’ to follow.
Since FX hit the retail investor scene there are plenty of ‘automated’ FX systems that have become available.
In conclusion, when evaluating a ‘system’ ensure that:
1. the system provider can provide historical research on their edge and specifically state their edge in terms of win rate and profit ratio.
2. you can view the trades from a historically traded portfolio(s), fully inclusive of brokerage, that has been going for at least 3 years and idealy been traded through up and down markets that have risen / fallen by 20%.
By definition, if the entry and exit rules are not truly mechanical, then showing a historical portfolio is meaningless.
Regards
Gary
Hi Gary,
As this topic is on brokers, I noticed recently that the Commodity Broking Services Fund Management SPA3 Australian fund performance is published as a graph showing performance results from Sep’08 to May’09 on a monthly basis, compared to the ASX200 index.
http://www.cbsfm.com.au/funds_performance.php.
The consistent out-performance of this fund compared to the ASX200 is impressive!
How does the ShareFinder public portfolio monthly performance compare to CBSFM’s SPA3 Aust fund monthly performance. Are these two ‘portfolios’ being traded using the same SPA3 system and methodology?
I’m unable to find monthly performance results of the SPA3 public portfolio in order to make the comparison.
i.e. Could I judge the monthly performance of the SPA3 public portfolio using the CBSFM’s SPA3 fund monthly performance ?
Regards,
BG.
Hi Gary, Thanks for keeping the this forum open.
When I was a child, my mum told me not to play with the sneaky kids, because they would hurt me. Looks like she was right?
Funny how those sneaky kids grew up and got jobs running banks and other large businesses. I’ll get out of whatever bank ran investments I’m in, now.
It’s SPA 3 for me. Be in contact with your people next week.
can SPA3 be used to trade options
and what are the payment optionsfor teh software
I am not a journalist not economist or degree on mylife, but 1000% guranties,wrong decision been made by USA about current crisis and next problem will be much serious and would leading to defenitely into W.W.III.,
Now USA only trying to steering gold; U$;Oil; religion and Pakistan,China,Palestine,Japan and Korea are the main their Puppet screen.
This world becoming more unstable sorry to myself for being unable to really
controle trough the United Nation or True World Crime.
The comment made by Wills resonates so fully with me.
I am very cautious with my money and knew nothing about the stock market until 3 years ago when I decided to start trying to learn something. I now realise that the more I learnt the more I found out how little I was EVER going to know i.e. I became very confused and suspicious of everything (brokers,fund managers and the myriad of other so called experts). In my business if I stuffed up with my clients money…for ANY reason (eg not managing risk properly…or providing poor advice) it cost me….NOT MY CLIENT!
Wills comments have summarised the situation very nicely and I believe him because he has been there for 25 years. All my mates and family who were in the market,with advice from brokers….(I mean, for heavens sake tell your client.. AT LEAST PUT A STOP LOSS in place) are, to put it mildly, stunned and hurting badly.
I think I am now ready to use Gary’s system.
Hello, Over the past few years I’ve been an intermittent share investor with poor results. I’m now considering the purchase of SPA3. However, I have a couple of questions.
1. Do you select your own broker or is buy/sell conducted via Sharefinder?
2. If brokered through Sharefinder who holds the funds before/after trades.
3. If trading is conducted through Sharefinder can the initial purchase of SPA3 (or other recommended software) be paid for via future trading profits?
4. Is SPA3 suitable for an initial investment of say $50K?
Thank you
B
Response to Comment by BG:
“How does the ShareFinder public portfolio monthly performance compare to CBSFM’s SPA3 Aust fund monthly performance. Are these two ‘portfolios’ being traded using the same SPA3 system and methodology?”
Yes, both portfolios are being traded using the same SPA3 system and methodology. The SPA3 public portfolio will definitely outperform CBSFM’s SPA3 Fund as will the majority of individually managed SPA3 portfolios. I say majority and not ‘all’ as individuals do make trading errors and individuals do have varying amounts of capital. With not too small a capital base and minimal trading errors (i.e following the rules) all SPA3 individual portfolios should outperform the CBSFM SPA3 Fund.
The reasons are:
1. The Fund has an annual management fee.
2. The Fund also has performance fees.
3. The Fund also has to issue distributions each year.
Whenever capital is withdrawn, besides obviously reducing the value of the portfolio by a small amount, it also reduces the ability for the portfolio to compound which will reduce performance compared to portfolios that do not withdraw capital. The compounding opportunity cost is the big difference.
It comes down to whether individuals want to do it themselves and hence have the inclination, desire to learn and time to do so, or not.
“I’m unable to find monthly performance results of the SPA3 public portfolio in order to make the comparison. i.e. Could I judge the monthly performance of the SPA3 public portfolio using the CBSFM’s SPA3 fund monthly performance ?”
No, you cannot use the CBSFM Fund performance to measure the SPA3 public portfolio’s monthly performance. Our website shows the SPA3 public portfolio performance.
Regards
Gary
In reply to a comment from: ken windley [Visitor]
“Can SPA3 be used to trade options and what are the payment options for the software.”
SPA is used to trade equities on the ASX only, not options. If you would like to use leverage then SPA-CFD may be a more suitable product. The pricing is available on our website store but feel free to ring and discuss the options.
Regards,
David
Hi Bernard, I have answered your questions in detail below.
1. Do you select your own broker or is buy/sell conducted via ShareFinder?
You can use which ever broker you choose. Our customers are spread across the online broking space, Commsec, ETRADE, NAB and the like. We simply ask that you find the most competitive online broking rates.
2. If brokered through ShareFinder who holds the funds before/after trades.
Not applicable. The broker holds the funds.
3. If trading is conducted through ShareFinder can the initial purchase of SPA3 (or other recommended software) be paid for via future trading profits?
Unfortunately not. One of the benefits of ShareFinder is that we do not take a percentage of the client’s money under management like a fund would do (this is if you purchase SPA3 to manage your money yourself). This allows the client to manage as much capital as they choose (we have customers trading large sums of capital) and only pay the ongoing month maintenance fee.
4. Is SPA3 suitable for an initial investment of say $50K?
We suggest on our website and in our training material that $80-$100K should be the minimum starting capital. Saying that, we have a number of customers who manage smaller portfolios that make the decision to move into cash upon high market risk periods. The fact is that the minimum starting capital is not SPA3 specific but rather medium term specific.
I hope this helps, feel free to call ShareFinder if you have additional questions. 1300 786 257