Mac Murray

Our Investment Approach

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RIDING GIANTS AT VERY LOW RISK

by  Mac Murray

Riding Giants at Very Low Risk.

(Total Reading Time: 15 Minutes)

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Chapter I         Big Wave Coming

Chapter II      The Take-Off:  Dropping In Without Wiping Out

Chapter III    Exit the Wave Without Going Over the Falls

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Chinese Blue Marble Half Slice

“The large fortunes in the Philippines have been made in long-term investments and not in the trading side of the field.”

Irving Ackerman

Chinese Blue Marble Half Slice

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Chapter I

Big Wave Coming

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Few sports are as thrilling to watch as modern big wave surfing.  Not just regular surfing, mind you. Big wave surfing. Picture a remote beach on the far side of the world where daredevil athletes are towed by jet-ski and turned loose among towering waves the size of office buildings.

The fascinating documentary Riding Giants chronicles Laird Hamilton and other surfing pioneers braving walls of water up to 80 feet high.  What would compel a man to risk getting pinned to a reef five stories under water?  The ultimate ride, of course.

I’m told that if you were to sit on a surf board between sets of waves, the movement of the ocean surface appears choppy,  random, and fairly uneventful.  Yet any surfer can describe the distinct recurring sea movement signifying the approach of a big wave—the telltale tug of the current, the subtle drop in the water level.

This distinct movement occurs with such regularity a seasoned surfer doesn’t even have to look to know the next set has arrived.  Indeed, years witnessing this phenomenon throughout various sea conditions might lead us to conclude no wave has ever arrived without it.

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Chinese Blue Marble Half Slice

“It is by riding these wild mood swings like a surfer taking a wave that you can make money, hand over fist. An entirely rational market, after all, is a market that would barely budge at all.”

Mark Mobius, Templeton Emerging Markets Fund

Chinese Blue Marble Half Slice.

In the same way, if you were to patiently and meticulously scrutinize the stock charts of hundreds of long term trends—the big waves of the Philippine Stock Market—a similar phenomenon would catch your attention: distinct recurring price movement signifying the inception of a long-term trend.  Depending on how your brain is wired to analyze information, you might describe this as a nonrandom price pattern, a combination of long-term trend-following indicators, or perhaps both.

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Philippine Long Distance Telephone Company

PLDT 2

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In any case, a keen observer could make several key observations:

  • 1st : This price movement is distinct. That is, it is easily observable and occurs primarily at the inception of long term trends, rarely elsewhere.
  • 2nd : This phenomenon is recurring. The inception of each long term trend, whatever the stock, appears to be accompanied by this distinct price movement. By contrast, out of hundreds of stock charts you’d be hard pressed to find a single long term trend absent this phenomenon.
  • 3rd : This distinct recurring price movement is easier to see on larger time frames.  However if you fixate on intra-day price fluctuations it may elude you completely.
  • 4th : Market leading stocks happen to be those which first exhibit this phenomenon.

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Let The Evidence Speak

It is important to understand that these observations of “big wave” market phenomena were developed by direct investigation of stock price movement.  (See Research & Development)  The objective was to build an investing approach from the ground up, derived directly from the evidence.

One thing we learned was that over a 10 year time period of the Philippine Stock Market, this distinct recurring price movement occurs only a handful of times in any individual stock.  Of these, roughly one third of the ensuing trends fizzle out in a few months or less.  The other two thirds, however, lead to trends continuing for an average of over 18 months with stock prices rising in excess of 200%.

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MegaWorld Corporation

MEG

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For this reason, we shall regard this distinct recurring price movement as a high-probability indication of a long-term trend—a Big Wave Indicator, if you will.

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Merits of a Long Term Orientation

“Big wave investing” is, by definition, long-term.  A long-term orientation is superior to short-term for several reasons.  For one, you hold winning trades longer, so your average profit per trade is necessarily larger than in short-term trading.  Second, holding winning trades longer lends itself to low-frequency trading, meaning transactions costs are greatly reduced.

Another key benefit is since each wave represents disequilibria likely to last 18 months to several years or more, if you find you’ve missed the beginning of the trend, simply pinpointing a Big Wave Indicator in the not too distant past may be reason enough to begin buying that stock.

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Chinese Blue Marble Half Slice

“No real movement of importance ends in one day or in one week.”

–Jesse Livermore

Chinese Blue Marble Half Slice.

A Bottom Up Approach

Big wave investing requires big wave price movement.  Although this more frequently corresponds with bullish conditions, there are many cases where it doesn’t.  This approach therefore exemplifies what’s known as a bottom-up stock picking methodology.  That is to say, you must look for big wave conditions on a stock by stock basis.  And as big wave hunters, we’ll ride them wherever we find them.

This is not to be confused with benchmarking a large cross-section of the market, as in Index trading.  Since big waves are best found by analysis of individual stocks, we’re not overly concerned with what the Index as a whole is doing.  It is not unheard of for the Philippine Stock Exchange Index to be sucking wind while one or two stocks are exhibiting big wave conditions and going sky-high.  This is true for any market.

Keep in mind, the Big Wave Indicator makes an appearance only a few times every ten years.  Consider this:  this means during bull markets your portfolio will tend to be larger, and during less-bullish conditions your portfolio will be smaller.

In any case, it’s hard for a big wave to sneak up on you—particularly if you’re looking for it.

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Manila Electric Company

MER

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Big Wave Market Screen

Hence, the Big Wave Indicator may be used as an initial screen—a method of scanning the trading universe for stocks exhibiting high-probability big wave conditions.

Interestingly, this methodology is harmonious with either value or growth stock investing;  it helps pinpoint the ideal value or growth stock candidate to begin taking positions in.

Put another way, the Big Wave Indicator serves as price confirmation of favorably reported fundamentals for a company.  There’s less worry about financial statement ”smoke and mirrors” when reports are backed up by a tidal surge in price.

(See The Reluctant Technician: Death Toll for Fundamental Analysis?)

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Chapter II   The Take Off:  Dropping In Without Wiping Out

E. M. Murray, Fixed Downside Risk Managed Accounts

Mac Murray. Customized Stock Portfolios. Professional Management. Fixed Downside Risk.

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