1 2 Academic research is an often-overlooked treasure trove of information for investors. Some investors ignore the research journals because they know the academic community believes markets are efficient and since academics believe that, some investors reason that there can’t be anything about how to beat markets in the journals. This is not true. Academics do tend to believe the efficient market hypothesis (EMH). In broad terms, this idea says market participants, as a group, immediately analyze new information about companies as it becomes available and then efficiently push the price...

1 2 Almost every investor wants to be like Warren Buffett in some way. While there is unlikely to ever be another Buffett, we can certainly learn from studying his investments. Many analysts point to his ideas about value investing and being patient as keys to his success. What they could be missing is how, at times, Buffett has combined value investing, patience and a desire to generate cash into a successful investment strategy. The strategy associated with this lesson is one any individual investor can apply. One of Warren Buffett’s biggest winner is Coca-Cola (NYSE: KO) according to B...

1 2 It seems obvious to state that markets are connected and moves in one market are often related to moves in other markets. But in 1991, this was a new idea. In that year, John Murphy published Intermarket Technical Analysis Trading Strategies for the Global Stock, Bond, Commodity, and Currency Markets to provide the first explanation of the relationships between markets. First, let’s look at Murphy’s ideas and then we can develop trading strategies based on intermarket relationships. Many traders believe intermarket relationships can define the best time to buy and sell asset classes. ...

1 2 Risk is part of investing. It is unavoidable and it’s even sought after. Risk is clearly related to potential rewards. To achieve the largest possible returns, investors have to accept higher than average risk. Low risk is associated with low returns. While these basic principles are well understood, the meaning of risk is less well understood. Professionals almost always tend to define risk in terms of standard deviations. This is frustrating because the idea of a standard deviation means nothing to most of us. If a financial adviser tells a client that portfolio risk is two standard...

1 2 If you watch any one of the business news channels for more than an hour a week, you are likely to hear an expert proclaim that investors are moving money in or out of particular sectors. They might say “money is flowing out of financials and into gold mining stocks” for example. While it seems statements like this require actual knowledge of what other investors are thinking, that really isn’t the case. Sometimes the comments are based on observations of money flow indicators and other times they might be based on a theoretical sector rotation model like the one shown below. This mod...

1 2 I saw an interesting chart over the weekend and want to share it with you so I recreated it. There are Bollinger Bands, moving averages, trend lines, stochastics, RSI and MACD. I think the chart is saying to buy but it’s not easy to tell. This chart is clearly an example of too many indicators. In fact, all three of the indicators at the bottom use the same information and will almost always give the same signals. We can confirm that with another chart. In the chart above, all three indicators have been scaled to show the same range. They all generally move in the same direction at...

1 2 A little more than 17 million voters in Great Britain created turmoil in global markets when they voted to leave the European Union. According to analysts at Standard & Poor’s, the vote led to $2 trillion in losses for investors around the world. These short-term losses reminded investors that markets are always volatile. Volatility is also defined as risk and is often explained in academic terms. From an investor’s perspective, stripping away the academic jargon, risk is the  amount of money you can lose on an investment. Risk is unavoidable and arguably risks are highest for pas...

1 2 Traders are usually focused on maximizing profits and moving averages (MAs) are one of the tools some traders use to meet that goal. An MA is applied to smooth price data and help to identify the trend. One of the earliest references to this strategy can be found in the classic technical analysis text book, Technical Analysis of Stock Trends by Robert Edwards and John Magee. In the first edition of their book, in 1948, they wrote: And, it was back in 1941 that we delightedly made the discovery (though many others had made it before) that by averaging the data for a stated number of da...

1 2 Income investing is often thought of as conservative. Because they are focused on income, income investors might try to minimize risk. Some do this by limiting their investments to blue chip stocks like the ones in the Dow Jones Industrial Average or other large stocks. In the current stock market trading, this strategy might work well if you have enough wealth to generate adequate income from blue chip stocks. With the current yield on the Dow at about 2.3%, a $1 million investment will generate income of almost $2,000 a month. High quality bonds offer about the same yields right now...

1 2 Income investors face two challenges in the current environment – they need to combine high income with safety. Neither challenge is easy in the current environment. With the Federal Reserve holding short-term rates below 0.5% since 2009, the challenge of finding income has left many investors with more risk than they are comfortable holding. One example of this is master limited partnerships (MLPs), an asset class that promised high income but carried hidden risks. The chart below shows Alerian MLP ETF (NYSE: AMLP), an ETF that tracks an MLP index. These were actually investments in the...