This was a true revelation…

Friday, 1 September 2017
Melbourne, Australia
By Kris Sayce

  • Nothing else like it
  • This mistake could mask the truth…

To look at him. His hair. The blue cotton shirt. The discreetly pierced ear.

You could be forgiven for thinking you were in the presence of a tradie from Bairnsdale.

But when he speaks. When he starts to explain the history of financial markets. The relationship between land prices, real estate, commodities, and stock markets…well, it’s clear there is more to this man than meets the eye.

Quite frankly, since I (Kris Sayce) first got into the markets in 1995, I’ve never come across anyone who is anything like the gentleman in question.

When he explains how the ‘Grand Cycle’ works, and how it influences absolutely everything, there is almost nothing you can say in reply. Except perhaps, ‘I see’. Although, even this gentleman admits, that not everyone ‘gets’ it first time.

For many, the ideas and evidence he produces are so far removed from what most people think they know, it can come as something of a shock to them. But if they stick with it — if they allow their mind to open, and to listen to a new way of understanding how the markets and economies work — it truly is a revelation for them.

The gentleman in question is Phillip J Anderson. He is, without doubt, the most extraordinary economist and financial markets expert I’ve ever met. If you haven’t done so yet, I’d encourage you to meet him too.

I’ll explain how you can do so below…

Markets

Overnight, the Dow Jones Industrial Average closed up 55.67 points, or 0.25%.

The S&P 500 gained 14.06 points, or 0.57%.

In Europe, the Euro Stoxx 50 index ended the day up 17.76 points, for a 0.52% gain. Meanwhile, the FTSE 100 gained 0.89%, and Germany’s DAX index added 0.44%.

In Asian markets, Japan’s Nikkei 225 index is up 45.75 points, or 0.23%. China’s CSI 300 is up 0.41%.

In Australia, the S&P/ASX 200 is down 1.62 points, or 0.03%.

On the commodities markets, West Texas Intermediate crude oil is US$46.97 per barrel. Brent crude is US$52.75 per barrel.

Gold is trading for US$1,319.17 (AU$1,659.96) per troy ounce. Silver is US$17.54 (AU$22.07) per troy ounce.

The Aussie dollar is worth 79.47 US cents.

Nothing else like it

So, what is it about Phil Anderson that sets him apart from other folks, from other economists and analysts?

For a start, most traders are emotional. Even when they say they aren’t emotional, they are. In my experience, whenever you have a trading or investing approach that involves human deliberation, emotion will always get in the way of its performance.

That means, there are only two ways to trade emotion-free. The first is using a ‘black box’ or systematic approach to trading. The second, and far less common approach, is to have a complete understanding and knowledge of how the markets work, and why, and then allow it to show you what to trade.

That’s how Phil Anderson and his team approach the market. It’s a systematic approach too. But unlike most ‘black box’ trading systems, it’s not purely based around price action in the market.

That’s what makes Phil’s approach so different.

Because according to Phil, if you’re only looking at the price action in a stock, you’re only looking at half the picture. It’s like looking at just half of the Mona Lisa, or just the top half (or bottom half) of Michelangelo’s David, or only the base of the Great Pyramid of Giza.

If you don’t see or appreciate the full thing, then you don’t really know what you’re looking at.

In a similar way, if you only look at half a stock chart, you’re not looking at the full thing. That’s because, according to Phil, the most important part of a chart isn’t necessarily the price action, it’s the ‘time action’.

Most traders only afford a cursory look at the ‘time’ on a chart. Most pay more attention to the price. They want to know if a share price has risen or fallen, and what it may do next. That’s important, don’t get me wrong.

But the x-axis of a chart is important too. Because it’s only when you look at time, that you’re able to see how the chart, and therefore the price action, fits into the overall ‘Grand Cycle’.

And it’s the ‘Grand Cycle’ that again, according to Phil Anderson, has the biggest influence over how markets will behave now and in the future.

Remember earlier, when I said that some people can’t grasp this the first time? I’m certain you have that feeling right now. It’s likely completely different to anything anyone has ever explained to you before. And it’s also why most folks just dismiss it, and move on. Because they don’t want to invest the time into thinking about it.

But for those folks with an inquisitive mind…those who can sense that there’s something bigger to learn…well, the first time they hear Phil explain it, it triggers something. They just have to know more. That’s when they go back to Phil and ask him to explain it all again.

They listen. It takes maybe two, three, or four explanations, before they get it. But when they do, it’s like a revelation to them. From that moment on, they learn to look at and see the markets, and the world, in a whole new light.

In truth, I can’t do justice to Phil and his teachings here. I won’t even try. Instead, I suggest you listen to the man himself. Right here, right now. I’m certain you won’t have heard anything like it before in your life. Watch it right here.

Finally…

And now over to our resident quantitative trading analyst, and former trader for one of Wall Street’s biggest investment firms, Jason McIntosh…

Cheers,
Kris


This Mistake Could Mask the Truth…
Jason McIntosh, Quant Trader

Is a paper profit the real deal?

Many people would say that it isn’t. They believe a profit only counts when the money is in the bank.

Others take a more liberal approach. These people don’t need a bank statement. It’s a case of tallying the gains as they happen. For them, a paper profit is every bit as real.

Think about this for a moment. Which type of person are you?

If you’re like me, the answer will vary. It all depends on the situation. The key is knowing when to think one way and not the other.

I’m going to discuss this further in a minute. And I’ll explain a common mistake I believe many traders make.   

But first, let me tell you about a friend. His story is a classic tale of money in the bank meaning everything. There are times when you just can’t rely on paper profits. 

Illusionary wealth

The year was 1999. My friend, Sean, was a bond trader at a global investment bank. He also traded his personal account with great success.

Sean was a ‘contrarian’ trader. His strategy was to look for extremes in optimism or pessimism, and then trade in the opposite direction. And one of his favourite plays was gold.

You see, the precious metal was in a bear market. Central banks and hedge funds were constant sellers. The miners were even selling gold they were yet to mine. It was a full-on bust.

This was exactly the sort of set-up Sean would target. It was a textbook contrarian play. Almost no one thought gold could go higher.  

Sean decided to trade gold via the options market. He bought a deep out-of-the-money option to buy gold in six months. This meant gold had to rally a long way for the trade to be profitable.

The high exercise price was part of Sean’s strategy. This gave him a lot of leverage. It was a bit like backing a long-shot to win. Even a small bet produces a big payout. 

I remember Sean saying the option cost him around $40,000. The outlay was relatively small compared to the potential return, but it was still a big personal speculation.

Well, Sean was right. Gold exploded higher. It erased two years of losses in just 11 days. This was one of the biggest reversals ever seen in the precious-metals market.

On paper, Sean’s profits were staggering. He was up over $1 million. It was the fastest trip to millionaire-status I’ve ever seen.

Sean decided it was time to take profit. The trade was with the options desk at the bank where he was working, so he didn’t expect a problem — closing the trade should have been a formality.

But there was a problem…

You see, Sean had held the trade for several months. His bank had been the subject of a takeover during that time, and the new owners didn’t like personal trading. He couldn’t get out.

Sean eventually got permission to sell. But the delay was costly. A sharp correction saw his profits plummet. Sean pocketed about $250,000 — a lot of money, but well short of a million dollars.

My friend’s paper profit was anything but money in the bank — it was mostly a mirage. He could see it, but he couldn’t touch it. 

The dotcom millionaires of the late 1990s had a similar experience…

Some of these new-wave tycoons were worth a fortune. But their shares were often in escrow. This means they couldn’t sell for several years after their company’s listing. 

Many of the dotcom millionaires lost everything in the crash. Those who took out loans against their paper fortunes were the hardest hit. About all they got to keep were the debts of a big lifestyle. 

Spending paper profits is the worst thing you can do — especially when you can’t sell.  

Keeping it real

So, when should you count a paper profit?

Well, I ask a simple question: Is it reasonable to expect I can obtain the current market price?

If the answer is ‘yes’, then I’m comfortable counting a paper profit as real wealth.

I know many people don’t think this way. Instead, they put their paper profits to the side. They believe a profit doesn’t count until it’s in the bank. Have a read of the following extract…

I can’t help but notice the very up-beat comments in your weekly statements from both yourself and your subscribers. I have been a subscriber since February 2016, okay, only 18 months, but my concern is still rising as my trades continue to lose money and I’m talking “realised” trades, those that have been sold and therefore reflect an actual result.

I trust you can understand my concern with the actual performance verses the very optimistic comments in your column, am I the only one…???

Member, Peter

I understand Peter’s concerns…

Trading can be difficult when you’re losing money. You wonder if your strategy still works, and how much longer you should keep going. Many people quit trading because of this uncertainty.   

But don’t make it harder than it needs to be…

Peter says that he excludes open trades and dividends from his results. I don’t believe this is the correct way to assess a stock portfolio. It simply won’t give you the true picture.  

Take my personal portfolio for instance. I revalue it regularly. This tells me what I would receive if I sold every stock on that day. I use this figure to help calculate my overall performance.

Yes, open profits are paper profits. But they are realisable — I can quickly turn them into cash. This is a key difference to my friend Sean’s options trade and the dotcom millionaires.

I also include dividends. These are an important part of my overall return.

Here are some stats for Quant Trader’s 517 closed long trades:

  • 228 are profitable — that’s 44.1%
  • The average gain is 27.4%
  • The average loss is 14.2%
  • The dollars-won to dollars-lost ratio is 1.53 to 1 (this means $1.53 is made for every dollar lost)

Now compare this to the 168 open long trades:

  • 103 are profitable — that’s 61.3%
  • The average gain is 21.6%
  • The average loss is 6.9%
  • The dollars-won to dollars-lost ratio is 4.99 to 1

The above figures do not include cost or dividend. But depending on your trade size, dividends could add much more to your bottom line than costs take away. 

Have a close look at the two sets of results. You’ll notice that they are entirely different. It would be easy to think they were for different systems.

The reason for the variation is simple: Quant Trader runs winners and cuts losers.

Just think about this for a moment…

The closed trades tend to include a higher proportion of losing trades. This is because the system exits the trades that don’t work, but keeps the ones that do.

Your portfolio could be similar. The best stocks could remain open for years. Excluding these from your performance calculations could dramatically distort the true picture.

I don’t know what Peter’s open portfolio looks like. I also don’t know about the dividends he’s been receiving. But I do know these could make a considerable difference.    

Lastly, I would never suggest spending an open profit — that’s a sure way to get into trouble. I avoid this by keeping separate accounts. My trading capital and everyday money never mix.

But my open share trading profits, although unrealised, are every bit as real. I believe it’s a mistake not counting these simply because they’re on paper.

Until next week,
Jason

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All graphics produced by Quant Trader unless otherwise noted.