Speed Resistance Lines

Speed resistance lines (SRLs) are also known as support and resistance lines. The lines can help a chartist determine where prices may go. The lines can show areas where prices could stop going up or down.
The story goes back to Charles Dow who said corrections usually correct 1/3 to 2/3 of their previous move. Corrections usually stop between 1/3 and ½ of the previous move. If a price goes more than 2/3 of the previous move, the trend is probably over.
Edson Gould apparently agreed with Dow and added a visual to the story.
The SRLs can be useful in judging when to buy or sell a stock. The lines can help estimate trade gains or losses and could help improve buying points, which in turn, can eliminate losses that may have occurred.
The lines can be used for both indices to see the trend and your favorite stocks and their possible moves.
Gould thought investors could make more money in longer-term holds than in shorter trade


Downtrend Line Calculations
First Line: Connecting High to Low • Middle Line: High to 2/3 point
Upper Line: High to ½ point • 2/3 point: High – (High – Low) x .667
1/3 point: High – (High – Low) x .333

The charts and explanation to the right are courtesy of StockCharts.com. They were in their ChartSchool. We recommend StockCharts.com as a website for your charting needs.
If you are a member of StockCharts.com, You can press the annotate button and the SRLs will drawn for you.

Concepts from “My Most Import Discovery” by Edson Gould

“… Here was the essential ingredient, the missing link, for which I had been searching. An apparently irrational stock market became comprehensible. Order emerged from chaos. Effect was finally linked to cause. I came to the initial realization, since reinforced, that the action of the stock market is nothing more than a manifestation of mass crowd psychology in action.

According to LeBon, “In its ordinary sense the word ‘crowd’ means a gathering of individuals of what-ever nationality, profession or sex, and the chances that brought them together. From a psychological point of view the term ‘crowd’ takes on a different significance. Under certain given circumstances, and only under those circumstances, a group of men presents new characteristics very different from those of each individual. The sentiments and ideas of people in the group take the same direction and their own personality vanishes. A collective mind is formed, doubtless transitory, and presents very clearly defined characteristics. The group has now become (in the absence of a better term), an organized crowd, or, if preferable, a psychological crowd. It forms a single being, and is subjected to the law of the mental unity of crowds.”

“The most striking peculiarity presented by a psychological crowd is the following: Whoever the individuals are that compose it (regardless of lifestyle, occupation, character, or their intelligence) the fact that they have been transformed into a group puts them in possession of a sort of collective mind which makes them feel, think, and act in a manner quite different from that in which each individual of them would feel, think and act were he in a state of isolation.”

The psychological crowd” has temporary heterogeneous elements, which for a moment are combined….
The fact that crowds possess common ordinary qualities explains why they can never accomplish acts demanding a high degree of intelligence. In crowds, it is stupidity and not mother-wit that is accumulated.

Presumably LeBon knew nothing about the stock market, and probably could not have cared less. But it so happened that shortly after I “discovered” LeBon, an edition of Charles Mackay’s “Extraordinary Popular Delusions and the Madness Crowds” (originally published in 1841) appeared with a forward by Bernard M. Baruch, who said:
All economic movements, by their very nature,
are motivated by crowd psychology. Graph and
business ratio are, of course, indispensable in
our groping efforts to find dependable rules to
guide us in our present world of alarms. Yet I
never see a brilliant economic thesis expounding,
as though they were geometrical theorems, the
mathematics of price movements, that I do not
recall Schiller’s dictum: ‘Anyone taken as an
individual, is tolerably sensible and reasonable
 — as a member of a crowd, he at once becomes
a blockhead. Without due recognition of crowd-
thinking (which often seems crowd-madness)
our theories of economics leave much to be
desired.”

“I have always thought that if, in the lamentable era of the ‘New Economics,’ culminating in 1929, even in the very presence of dizzily spiraling prices, we had all
continuously repeated, “two and two still make four,” much of the evil might have been averted. Similarly, even in the general moment of gloom in which this
forward is written, when many begin to wonder if declines will never halt, the appropriate abracadabra may be: “They always did.” This had to be it. The stock market was essentially nothing more than a manifestation of mass or crowd psychology in action. This contention is one I have repeated time and again, in my writing and speeches. In short, the stock market reflects the changing moods, emotions and feelings of the mass of investors.

As such it leads a life of its own, albeit a vicarious life, which mirrors and reflects the changing sentiments of the crowd of investors.

A crowd, as I define it, is any group with a common purpose or interest. The intelligence of the crowd is not the average intelligence of the individuals. The individual sinks to the level of the crowd, which is quite separate from, and below the intelligence of the individuals.
Crowds do not think. The do not reason. They simply react emotionally. As a near-perfect example of what I mean, and something to which almost anyone can relate, the following example is cited: You’re alone in an empty movie theater and hear the cry of “fire.” You look around, see no flames, smell no smoke. You calmly walk to the nearest exit. Repeat the same cry of “fire” (again without flames visible or the smell of smoke) in a crowded theater and once the crowd starts running for an exit, you’ll find yourself running too. That’s crowd psychology.

All subsequent experience has confirmed that the stock market is essentially a manifestation of crowd psychology in action— the result of the changing moods, feelings, sentiments and emotions of the “crowd” of investors. So, I concluded the stock market is essentially the result of three sets of factors that may be grouped under the headings: economic, monetary and psychological, the latter relating to crowd psychology.”

Nikola Tesla

Nikola Tesla
Even if we aren’t familiar with Nikola Tesla’s inventions and discoveries in the areas of electricity, many of us are familiar with the Tesla automobile. The car company borrowed its name from Nikola Tesla (1856 – 1943), an inventor, electrical engineer, mechanical engineer, physicist and futurist who is best known for his influence on alternating current and the electricity supply system.

The Early Years
Nikola Tesla was born in what is now known as Croatia, into a family of five children; he had three sisters and one older brother who was killed in a horse-riding accident when Nikola was five. Nikola’s father was an Eastern
Orthodox priest. He was raised in what was then Austrian Empire’s Croatian Military Frontier.

Tesla’s education includes courses at Graz University of Technology. In his first year, he worked tirelessly and was an excellent student; his efforts were rewarded with a commendation from the dean of the technical faculty. At the end of his second year, Tesla became addicted to gambling and lost his scholarship. In his third year he gambled away his allowance and tuition money. He later gambled back his family’s funds and repaid his parents. Gambling took up so much of his time that when it was time for examinations, Nikola was unprepared and asked for an extension. It was denied and he left school during the second semester of his third year. He never graduated from school.

1879- Tesla was 23 years old.

After he left school in 1878, he cut all ties with his family and in December 1878, without telling anyone, he moved to Maribor. His friends thought he had drowned in the nearby Mur River. Tesla took a job as a draftsman and spent time playing cards with local men. A few months later, in March 1879, his father traveled to Maribor to beg his son to return home. Nikola refused and about this same time suffered his first of several nervous breakdowns. That same month the police removed Nikola from Maribor for not having a residence permit and he moved back home. On April 17, 1879, Tesla’s 60-year old father died.

Two years later Tesla moved to Budapest, Hungary and took a job at the Budapest Telephone Exchange where he became chief electrician. He made many improvements in central station equipment and claimed to have perfected a telephone amplifier (which was never patented or publicly described).

In 1882, Tesla moved to Paris and began working at the Continental Edison Company, where he installed indoor incandescent lighting throughout the city. He gained a lot of practical experience in electrical engineering and began designing and building improved versions of generating dynamos and motors.

Tesla was charged with resolving engineering problems at other Edison utilities in France and Germany.

Tesla’s Arrival in America
Tesla immigrated to the US in June 1884 when he took a position at Edison Machine Works, the manufacturing division of Edison Electric, located in Manhattan’s Lower East Side. The building was overcrowded with several hundred machinists, laborers, managing staff and 20 “field engineers,” one of which was Tesla. One of his projects was to develop an arc lamp-based lighting system. At the end of only six months, Tesla quit the company over a financial dispute.

After leaving Edison, Tesla worked on patenting an arc lighting system…perhaps the same one he’d developed at Edison. He proceeded to submit patents and gained financing for his arc lighting manufacturing and utility company named the Tesla Electric Light & Manufacturing. He worked to improve the DC generator and installed the new system in Rahway New Jersey.

Early investors were not interested in Tesla’s ideas for new types of AC (alternating current) motors and electrical transmission equipment. His financial backers decided the manufacturing side of the business was too competitive and chose to form a new utility company; they abandoned Tesla’s company.

In 1887, Tesla secured funding for his new Tesla Electric Company and by the end of that year he had successfully filed several patents.

In 1901, JP Morgan gave Tesla $150,000 with the agreement that 51% of any profits generated from wireless patents would go to Morgan. The fact that Marconi beat Tesla to the punch put a damper on the Morgan agreement. When Tesla asked for more money, Morgan balked and didn’t invest another penny. Tesla continued to experiment for a few more months but in 1902, his inability to secure more investors forced him to put his wireless project on hold.

Fast Facts
• Tesla had a photographic memory.
• He was a polyglot. He spoke eight languages: Serbo-Croatian, Czech, English, French, German, Hungarian, Italian and Latin.
• Tesla was well known for designing the Alternating Current (AC) system of electricity in 1887. Today, the AC electrical system remains the standard around the world.
• In the late 19th century, he created the well known Tesla Coil, which laid is the foundation for wireless technologies and is still used today in radio technology. The Tesla coil is an inductor used in many early radio transmission antennas.
• In 1884, Tesla joined Edison Machine
Works, Located on Goerck Street in New York City’s Lower East Side. Several hundred employees worked in the machine shop – machinists, laborers, staff and about 20 engineers. The project was to build a large electric utility in Manhattan. About six months later, Tesla quit his job over a dispute relating to bonuses. There is evidence that Tesla met Edison, but only in passing.

1888, George Westinghouse was looking for a way to supply the nation with long-distance power and he was convinced that Tesla’s inventions would help him achieve his goal. With that in mind, George Westinghouse purchased Tesla’s patents for $60,000 in cash and Westinghouse stock. (Equivalent to approximately $1.5 billion in 2019 dollars.)

Tesla and Westinghouse teamed up to compete with Edison’s direct-current (DC) system, which he was designing to power the country. When the Westinghouse Corporation was selected to supply lighting to the 1893 World’s Columbian Exposition in Chicago, it was a direct hit on Edison’s DC system.

Throughout his career, Tesla developed ideas for a large number of inventions but most of them were patented by other inventors. He was a pioneer in the discovery of radar technology, X-ray technology, remote control and the rotating magnetic field, which is the foundation of most AC machinery.

Ten of Tesla’s Major Contributions

1.  The Polyphase Alternating Current Induction Motor (1887-8).
The induction motor revolutionized the possibilities for the appliance industry and is based on the principle of rotating magnetic fields.

2. Alternating Current (1880s)
When George Westinghouse entered the electric lighting business in the mid-1880s, he partnered with Tesla. AC current could be was easier and cheaper to transmit over long distances and safer to use. Edison’s DC current was known to be dangerous and expensive over longer distances. To prove the safety of AC current, Tesla used a Tesla coil to to send electricity through himself to produce light at the World Columbian Exposition.

3. The Tesla Turbine (1913)
The Tesla Turbine consists of flat steel discs properly balanced in a chamber that are moved with an inlet of steam or compressed air. Conventional turbines used blades. The Tesla Turbine was patented in 1913 as an “alternative to piston engines” and could be used in automobiles, airplanes and other vehicles. Over time, it was deemed to be impractical and saw limited success.

4. One of The First Hydroelectric Plants (1896)
Westinghouse and Edison won the contract to build a hydroelectric AC power station at Niagara Falls. The project delivered power to Buffalo and by 1896 was one of the first power stations of its kind in the world.

5. Tesla Coil (1891)
Tesla experimented with Heinrich Hertz’s electromagnetic radiations and radio
waves and developed the Tesla Coil, which he patented in 1891. The Tesla Coil could wirelessly transmit electricity and led to the “magnifying transmitter” forming the basis of Tesla’s wireless electricity dream.

6. The Electro-Mechanical Oscillator (1893)
Tesla patented a steam-powered electric generator, known as Tesla’s electro-mechanical oscillator. The reciprocating electricity generator forces steam into the oscillator which exits through a series of ports. The steam pushes a piston (attached to an armature) up and down which causes a high-speed vibration that to produces electricity. Tesla developed many versions of his electromechanical oscillators in an effort to replace inefficient reciprocating steam engines used to power generators.

7. Radio Technology (1900, 1904, 1915 & 1943)
In 1895, Tesla was preparing to send his first radio signal about fifty miles.
Unfortunately, his lab burned down and before he could test his equipment, Guglielmo Marconi (who had financial backing from Andrew Carnegie and
Thomas Edison) patented his radio device in England, based on two circuits. Tesla’s s
patent for a multi-circuit radio device was awarded in 1900 in the US and the US Patent Office rejected Marconi’s patent. Soon, the wealthy and well-connected Marconi transmitted a radio signal across the Atlantic, which infringed on many of Tesla’s patents. In 1904, the US Patent Office reversed their 1900 judgment and gave the patent to Marconi. In 1915, Tesla sued Marconi but was financially too weak to fight the corporation.
Oddly, in 1943, after both Marconi and Tesla died, the US Patent Office decided to uphold Tesla’s radio patent.

8. Tesla’s Wireless Remote Control (1898)
In 1898, Tesla performed at an electrical exhibition in New York City’s MadisonSquare Garden when he wirelessly controlled a boat using radio wave technology. He tried to sell the technology, which he called tele automation” to the US military and a type of radio-controlled torpedo but there was no interest. Over the years the technology evolved and was used in television sets, DVD players, etc.

9. X-Ray Development (1894)
Tesla wanted to solve damage he saw in his photographs but the1895 fire in his lab
put a hold on that project. In the meantime,
Wilhelm Conrad Roentgen went public with his
“Roentgen Rays,” or X-Rays. Tesla continued his experiments to produce what he called “Shadowgraphs.” Tesla understood that strong shadows could be produced only at great object-film distances, with short exposure times. He was also the first to note that X-rays had biological hazards.

10. Nearly 300 patents
Tesla held nearly three hundred patents worldwide. Not all of his innovations were patented, and some remain hidden in the patent archives. At least 278 patents have been issued to Tesla in 26 countries – mostly in the United States, Britain and Canada. These include patents for the dynamo electric machine, electromagnetic motor, electric incandescent lamp, electrical distribution systems and generators, fluid propulsion and signaling systems.

Tesla never married and claimed that his chastity was helpful to his scientific abilities. He also said that he felt women were superior to men and that he could never be worthy enough for a woman. He was not impressed when he noticed that women were trying to outdo men and in doing so were losing their femininity. In 1924, he said, “In place of the soft voiced gentle woman of my reverent worship, has come the woman who thinks that her chief success in life lies in making herself as much as possible like man—in dress, voice and actions, in sports and achievements of every kind…The tendency of women to push aside man, supplanting the old spirit of cooperation with him in all the affairs of life, is very disappointing to me.”
Tesla did not engage in many relationships as he found enough stimulation in his work. In later years his bond was with pigeons that he fed and cared for on a regular basis. The few people who did know or work with him claimed he was “distinguished, sweet, sincere, modest, refined and generous.”

Tesla worked every day from 9:00am until 6:00pm and ate dinner at exactly 8:10pm at Delmonico’s restaurant and later at the Waldorf-Astoria hotel. Tesla would telephone his dinner order to the headwaiter who would also be the only one to serve him.  “The meal was required to be ready at 8:00pm. He dined alone except on rare occasions when he would give a dinner to a group of people to meet his social obligations. Tesla would then return to his work, often staying at his offices until 3:00am. Tesla was 6’2” tall and consistently tipped the scales at 142 lbs. he was seen as an elegant, stylish man who was meticulously groomed. He was described as having light eyes, big hands and “remarkably big” thumbs. Tesla’s exercise regime included walking between eight and ten miles a day. Every night he curled his toes on each foot one hundred times, claiming that it stimulated his brain cells.

In the fall of 1937, one night after midnight, Tesla left the Hotel New Yorker to make his regular commute to the cathedral and the library to feed the pigeons. While crossing a street a few blocks from the hotel, Tesla was unable to dodge a taxi and was thrown to the ground. His back was severely wrenched and three of his ribs were broken. Since he refused to consult a doctor (a lifelong practice), the extent of his injuries was never known, and he never fully recovered.

On January 7, 1943 when he was 86, he died alone in Room 3327 at the New Yorker Hotel. A maid found his body two days later when she ignored the DO NOT DISTURB sign on his door. The assistant medical examiner, H.W. Wembley ruled that the cause of death was a heart attack.

At the time of his death, Tesla was poor and reclusive. He had lived in New York City for nearly 60 years. However, the legacy of the work Tesla left behind him lives on. In 1994, a street sign identifying “Nikola Tesla Corner” was installed near the site of his former New York City laboratory, at the intersection of 40th Street and 6th Avenue.

This is the last known photo of Nikola Tesla.

Tesla in the Movies

The Secret of Nikola Tesla, a 1980 biographical film starring Orson Wells as J.P. Morgan.
Nikola Tesla, The Genius Who Lit the World, a 1994 documentary produced by the Tesla Memorial Society and the Nikola Tesla Museum in Belgrade, Serbia.
The Prestige, a 2006 fictional production about two magicians directed by Christopher Nolan with rock star David Bowie portraying Tesla.

 

 

 

By Naoma Welk

 

A Car Named Tesla

Founded as Tesla Motors, Tesla Inc. was incorporated in July 2003 by Martin Eberhard and Marc Tarpenning who financed the company until the Series A round of funding. The founders were influenced to start the company after GM recalled all its EV1 electric cars in 2003 and then destroyed them. Both men played active roles in the company’s early development Tesla was incorporated in July 2003 by Martin Eberhard and Marc Tarpenning who financed the company until the Series A round of funding. The founders were influenced to start the company after GM recalled all its EV1 electric cars in 2003 and then destroyed them. Both men played active roles in the company’s early development prior to and after Elon Musk’s* involvement. The AC Propulsion tzero also inspired the companies first vehicle the Roadster Founded as Tesla Motors, Tesla Inc..

Martin Eberhard was the original CEO of Tesla until he was asked to resign in August 2007 by the board of directors. Eberhard then took the title of “President of Technology” before ultimately leaving the company in January 2008 along with co-founder Marc Tarpenning, who served as the Vice President of Electrical Engineering of the company until 2008. Musk led the Series A round of investment in February 2004, joining Tesla’s board of directors as its chairman. Tesla’s primary goal was to
commercialize electric vehicles, starting with a premium sports car aimed at early adopters and then moving into more mainstream vehicles, including sedans and affordable compacts. Musk took an active role within the on a carbon-fiber-reinforced polymer body and he led design of components. company and oversaw Roadster product design at a detailed level but was not deeply involved in day-to-day business operations. Eberhard acknowledged that Musk was the person who insisted from the beginning ranging from the power electronics module to the headlamps and other styling. In addition to his daily operational roles, Musk was the controlling investor in Tesla from the first financing round, funding the large majority of the Series A capital investment round of US$7.5 million with personal funds.

In 2008, Tesla unveiled its first electric car, the Roadster, a high-performance vehicle which helped change the perception of what electric cars could be. In 2014, Tesla launched the Model S, a lower-priced model that in 2017 set the Motor Trend world record for 0 to 60 mph acceleration at 2.28 seconds.

By Naoma Welk

Mark Saunders Journal on Benjamin Graham

I enjoyed reading about Benjamin Graham’s career. He shared his Wall Street experiences in the classroom and in his best-selling book, told readers lessons he learned in life.
Graham knew math and since his only tool was a slide rule, he had to keep things simple. Unlike today, he didn’t have the time or tools to help him perform complex algorithms.
Ben spent his life trying to simplify procedures. When he presented his ideas to colleges and Wall Street, firms weren’t interested because they couldn’t charge big fees and salaries if they only did simple things.

Investments and the Investing Environment

After years of experience, I found there were three parts of investing: the investor, the investments and the investing environment. These ingredients heavily influence investment price movements.

Graham presented concepts to select profitable investments and Charles Dow developed concepts to profitably navigate the investing environment. An investor needs to know both concepts.

I’ve always thought of Benjamin Graham as the father of fundamental analysis and Charles H. Dow’s “Dow Theory” (the name given to Dow’s writings in a 1903 book by S.A. Nelson called The ABC of Stock Speculation) as the father of modern technical analysis. They were a great team because they both were concerned with finding value. Dow had his “element of chance” and Graham had his “margin of error.”

Graham’s concept helps investors look at company fundamentals to decide what stock to buy. Dow’s Theory helps investors understand when the market is ready to rise. A good value stock in a rising market and a growing economy typically yields the best profits with a minimal amount of risk.

I find it interesting that both Graham’s and Dow’s approach to stocks and the markets are basically ignored by Wall Street firms as well as the academic world, even though the use of both concepts have been profitable for many users. I know these concepts will be just as valuable in the future as they are now.

Graham’s Yardstick for Performance For Investments

Graham considered the following factors essential in business:
1. Profitability – the ratio of operating income to sales.
2. Stability earnings growth over ten years, when compared to the last three years.
3. Earnings growth as compared to the Dow Jones Industrial average as a whole.
4. Financial position (equity to debt ratio of 2 to 1).
5. History of paying dividends without interruption: even better if they grow over time.
6. Price history: regular appreciation over time.

The Graham & Dodd P/E Matrix

Graham developed a stock valuation model based on future earnings growth and a AAA corporate bond rate. 0% growth had a P/E of 8.5. P/E=8.5 +2G. G is the expected rate of earnings growth over the next 5 years. Changes in interest rates and growth change P/Es and price valuations.


Dow Theory For the Investing Environment

Charles Dow began tracking a railroad average in the 1880s and later added industrial average. Both
averages needed point in the same direction for an up-trend or down-trend.
When averages are not tracking in the same direction, it is known as non-confirmation and the current direction is likely to end.
The logic behind Dow’s theory is economic. If the markets are rising, the economy is growing; stores are ordering goods to sell. When sales decline, stores order fewer items, which means fewer goods are shipped, transportation slows, which causing a non-confirmation. A Dow sell signal occurs when both averages fall below their previous lows and the rising trend is reversed.

 

 

 

 

 

Benjamin Graham’s Rules, Principles and Idea Excerpts for Stock Selection

Benjamin Graham’s 10 Rules for Stock Selection

1. An earnings-to-price yield at least twice the AAA bond rate (the reciprocal of the P/E ratio).

2. Price Earnings (P/E) ratio less than 40% of the highest P/E ratio the stock had over the past 5 years.

3. Dividend yield of at least 2/3 the AAA bond yield.

4. Stock price below 2/3 of tangible book value per share.

5. Stock price below 2/3 on Net Current Asset Value.

6. Total debt less than book value.

7. Current assets/Current debts ratio greater than 2.

8. Total debt less than two times Net Current Asset Value.

9. Earnings growth of prior 10 years at least at a seven percent annual compound rate.

10. Stability of growth of earnings, meaning that no more than two declines of five percent on year-end earnings in the prior ten years are permissible.

NOTE: It is unlikely that you will find many stocks that meet all the rules. However, Henry Oppenheimer, a professor, found rules 1, 3 and 6 resulted in good returns. Use as many rules as possible that are a good fit to gain good returns with reasonable risks.

 

Benjamin Graham’s Three Timeless Principles

1. Always Invest With a Margin of Safety ~
BUY A STOCK SUBSTANTIALLY BELOW ITS INTRINSIC VALUE.

2. Expect Volatility and Profit From It ~
GREET DOWNTURNS AS OPPORTUNITIES TO FIND GREAT VALUES; UNDERSTAND MR. MARKET.

3. Know What Kind of Investor You Are ~
ARE YOU AN ACTIVE-ENTERPRISING INVESTOR OR ARE YOU A PASSIVE-DEFENSIVE INVESTOR?

 

Excerpts of Ben Graham’s Ideas

“…there is one advantage in reading Security Analysis. The investor will be cleansed of any notion that there is much new on Wall Street. It soon becomes clear that scams, frauds, misrepresentations and clever approaches to salesmanship simply get dressed up in new clothes for subsequent generations of investors. The underlying ruses have not changed much.”

“At the very least, reliable dividends provide a foundation for share price.”

“…the market is not a “weighing machine” on which the value of each issue is recorded by an exact and impersonal mechanism…. Rather, it should be said that the market is a voting machine, whereon countless individuals register choices which are the product partly of reason and partly of emotion.”

“The disciplined, rational investor neither follows popular choice nor plays market swings.

Rather, he searches for stocks selling at a price below intrinsic value and waits for the market to recognize and correct its error (price goes up). When the price has risen to the actual value of the company, it is time to take profits, which then are reinvested in a new undervalued security.”

“I think we can do it (invest) successfully with a few techniques and simple principles.” (See Graham’s rules above.)

“Investing in a market where people believe in efficiency,”

Speaking for Graham, Buffett scoffed and said, “it is like playing bridge with someone who’s been told it doesn’t do any good to at
look at the cards.”

Areas to review from Benjamin Graham’s Security Analysis book and others.

Areas to review from Benjamin Graham’s Security Analysis book and others.

Investments have two valuations, one is the intrinsic value determined by various methods and a market value. These two value/prices are rarely the same. The market price continually goes above and below the intrinsic value range.
Investors can determine their own intrinsic value range or they can use a price determined by a service like Value Line or Standard & Poor’s.
The items below determine intrinsic values and General Market factors-including interest rates for individual investments:

Quantitative (Intrinsic value factors):
• Earnings
• Dividends
• Assets
• Capital structure
• Other, e.g., sales

Qualitative (Future value factors)

• Management and Reputation
• Competitive conditions
• Company and industry prospects
• Possible and probable changes in volume, price, and cost

Market Factors:

• Technical
• Manipulative
• Psychological

The four common ways to value equities are earnings, dividends, assets (book value) and hope.

Investors who expect returns from income will probably use dividend and assets for their valuations.
Speculators who hope to sell at prices higher than their purchase price will probably use earnings and hope for their valuations.

Speculative ways to value equities are best used when the economy is going from recovery to peak.
Investment ways to value should be used to protect gains when the economy is going from peak to the end of a recession.

 

Benjamin Graham’s Mr. Market

Who is Mr. Market?

According to Benjamin Graham, Mr. Market is a fictional character who shows up every day at an investor’s office and offers to buy or sell shares at various prices. Often, Mr. Market’s quote sounds good but in reality, his quote is crazy. The investor has the option to agree to trade with him or ignore him. Mr. Market doesn’t take anything personally; he will be back the next day with a different quote.

Mr. Market was “born” in Graham’s classes at Columbia University to explain stock market fluctuations. Mr. Market suggests it is best to ignore fluctuations when making a decision about buying or selling a stock. The character also appears in Graham’s 1949 book, The Intelligent Investor.

What is Benjamin Graham’s message?

Graham’s point is that the investor should not consider Mr. Market as having the ability to determine the value of shares the investor holds. Rather than paying attention to Mr. Market, the investor is better off focusing on facts such as a company’s earnings and dividends, not what Mr. Market is saying.

The use of Mr. Market helps Graham illustrate his concept that true investors pay attention and form their own ideas about the value of their investments based on facts, not on how the stock market is performing.

Graham suggests the prudent investor is one who bases his decisions on full reports from the company that details its operations and financial position.

Fundamental Analysis

Graham advises investors to analyze financial statements, management and competitive advantages, competitors and markets. Look at both historical and current data to help make a financial forecast. This will help investors predict probable price targets, project business performance, evaluate its management and internal business decisions and calculate credit risk.

 

Benjamin Graham: The Father of Value Investing


Benjamin Graham is known as an economist and professional investor who was first to promote the concept of “value investing.” Graham began promoting his investment ideas in 1928, when he began teaching at Columbia Business School. He refined his idea in Security Analysis (1934), a book he wrote with David Dodd. Serious investors consider the book (which has been published several times) the “bible.”

The Early Years
Benjamin was born May 8, 1894 in London to Dora and John Grossbaum, He had two older brothers, Victor and Leon. When Benjamin was just a year old, the family immigrated to New York. His parents came through Ellis Island in an era when it was common to Anglicize ethnic surnames by using the first two letters of the original family name to create a new name. Thus, Grossbaum became Graham.
Benjamin’s father was a successful importer of china dishes and figurines and they lived very well in an exclusive Fifth Avenue neighborhood. Sadly, in 1903 Graham’s father passed away and the family business tanked. When the family’s finances took a downturn; his mother turned their home into a boarding house and she borrowed cash to trade stocks on margin. Unfortunately, the Crash of 1907 wiped out the family’s savings.

Education
The dramatic change in the family finances had a huge impact on Graham. He threw himself into his studies and won a scholarship to Columbia; in 1914 he graduated 2nd in his class. His academic achievements led to several invitations to join the Columbia faculty when he was just 20 years old.

Early Career
Graham chose Wall Street over academia when he joined Newburger, Henderson and Loeb as a runner, earning $12/week. His job was to deliver securities and checks. He soon advanced to writing descriptions of bond issues and later he wrote the firm’s daily market letter. In 1919, at 25, he was a partner and earned an annual income of more than $500,000.
With Jerome Newman, he opened his own invest-ment firm in 1926, the Graham-Newman Partnership. Until 1956 he lectured Finance classes at Columbia.

The Crash of 1929 almost wiped him out; the partnership survived with help from friends and the sale of most of the partners’ assets. Things were so tight that Graham’s wife returned to work as a dance teacher. The firm recovered and Graham learned valuable lessons that he wrote about in books.
In 1949, Graham wrote The Intelligent Investor, which Warren Buffett claims to have read at least four times.
The Graham-Newman partnership continued until 1956 and never again lost its investors’ money; the
average annual return was about 17%. Warren Buffet studied under Graham at Columbia and later joined his firm.


Not a Dull Boy
Graham, who was a womanizer, spent thousands of dollars on dance lessons and was married 3 times. He never divorced his third wife, Estey, but carried on a long-time affair with his dead son’s girlfriend, Marie Louise Amingues, who gifted him an STD. Upon his death, Graham’s $3M estate went to Estey (cash), Marie (a house in La Jolla, CA,) and his children (book royalties).

Written by Naoma Welk

 

 

 

Wall Street Bubbles

This illustration shows a bull market blowing bubbles labeled, “Inflated Values,” with many unwary investors reaching for them.

 

“A bubble is where investors buy an asset, not for its fundamental value, but because they plan to resell, at a higher price, to the next investor.”

                                               Peter Kugis-Stanford University

 

     Wall Street bubbles of over evaluation occur every few years for the same reason; people get greedy.

     There is a list of reasons people get greedy and cause the bubbles.

       We see an excessive amount of enthusiasm of big bubbles occurring after there has been great economic growth (railroads in the 1870s, cars and electricity in the 1920s and since 2000, internet/ technology). Bubbles create extreme amounts of enthusiasm, debt, corruption, hope, and speculation.

       This story presents highlights of bubbles in human nature and the reasons for their cause.

Stages of an Economic Bubble

     According to the economist Charles P. Kindleberger, the basic structure of a speculative bubble can be divided into 5 phases:

  • Substitution: increased value of an asset
  • Takeoff: speculative purchases (buy now/ sell high in the future for a profit)
  • Exuberance: a state of unsustainable euphoria.
  • Critical stage: begin to see fewer buyers; some begin to sell.
  • Pop (crash): prices plummet

Social Psychology of Bubbles

     GREATER FOOL THEORY states that bubbles are driven by the behavior of perennially optimistic market participants (the fools) who buy overvalued assets in anticipation of selling it to speculators (the greater fools) at a much higher price.    

       According to this explanation, the bubbles continue as long as fools can find greater fools to pay for the overvalued asset. The bubbles will end when the greater fool becomes the greatest fool who pays the top price for the overvalued asset and can no longer find another buyer to pay for it at a higher price.

           Extrapolation

       EXTRAPOLATION is projecting historical data into the future; if prices have risen at a certain rate in the past, they will continue to rise at that rate forever. The argument is that investors tend to extrapolate past extraordinary returns on investment of certain assets into the future, causing them to overbid those risky assets in order to attempt to continue to capture those same rates of return.

Herding

     Another related explanation used in behavioral finance lies in herd behavior: investors tend to buy or sell in the direction of the market trend. This is sometimes helped by technical analysis that tries to precisely detect those trends and follow them, which creates a self-fulfilling prophecy.

Moral hazard

     Moral hazard is the prospect that a party who is insulated from risk may behave differently from the way it would behave if it were fully exposed to the risk.                                                (Source: Wikipedia)

Economic or asset price bubbles are often characterized by one or more of the following reasons:

     ● Unusual changes in single value measures, or relationships among measures (e.g., ratios) relative to their historical levels. For example, in the housing bubble of the 2000s, the housing prices were unusually high relative to income. For stocks, the price to earnings ratios were unusually high.

    ● High debe use (leverage) to purchase assets, such as purchasing stocks on margin or homes with a lower down payment. Higher risk lending and borrowing behavior, such as originating loans to borrowers with lower credit quality scores (e.g., subprime borrowers), combined with adjustable rate mortgages and “interest only” loans.

    ● Rationalizing borrowing, lending and purchase decisions based on expected future price increases rather than the ability of the borrower to repay.

     ● Rationalizing asset prices by thinking “this time it’s different” or “housing prices only go up.”

     ● A large amount of marketing or media coverage related to an asset class.

     ● International trade (current account) imbalances, resulting in an excess of savings over investments, increasing the volatility of capital flow among countries. For example, the flow of savings from Asia to the U.S. was one of the drivers of the 2000s housing bubble.

               ● A lower interest rate environment, which encourages lending and borrowing.  

                                                                   (Source: Wikipedia) 

Human Psychology of Economic Bubbles

      What’s really at the heart of financial bubbles is human behavior. There are four distinct psychological phases of financial bubbles. (see chart below)

Stealth Phase

      The stealth phase is the very early days of an asset when only a relatively few people are aware of it and can see the value… They are the true believers.

Awareness Phase

     Now big money comes calling. Institutional investors take an interest. There is some selloff during the awareness phase by the initial true believers but not enough for anyone to notice. …

 

Mania Phase

     The media notices what is going on and broadcasts it everywhere. Average investors catch wind that something big is happening and they want in. The price starts to rise, and inexperienced investors think it will keep going up forever.

Blow off Phase

     The blowoff phase is the bubble part. The selloff accelerates driven by fear. The fire sale plunges the price of the asset. There are now no greater fools. …”

               (Source: Candice Elliot of listenmoneymatter)

 

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