Professional Documents
Culture Documents
In Modern Finance
And Technical Analysis
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Gregory L. Morris
Aerospace Engineer Univ. of Texas, 1971
Top Gun Fighter Pilot US Navy, 1971 - 1978
Airline Captain Delta Air Lines, 1978 - 2004
Software Developer 1979 1995
N-Squared Computing
Windows on Wall Street
G. Morris Corporation
Authored Candlestick Charting Explained (1992, 1995, 2006), Complete
Guide to Market Breadth Indicators (2005), Candlestick Charting Explained
Workbook (2012),and Investing with the Trend (2013)
Founder and CEO of MurphyMorris.com (1995 - 2002)
Started MurphyMorris Money Management in 1999
Sold MurphyMorris.com in 2002 to Stockcharts.com
MurphyMorris Money Management acquired by PMFM in 2004
PMFM became Stadion Money Management in 2009
Over $5.5 Billion AUM
Six mutual funds, separate accounts, and 401k plans
Currently semi-retired
Writes blog on StockCharts.com called Dancing with the Trend
Consultant for Stadion Money Management and Chairman - Board of Trustees
Struggling to keep golf handicap below 18
My Favorite Books
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Believable Misinformation
George Washington cut down a cherry tree.
Some believe water runs out of a bath tub
faster as it gets toward the end.
Dogs sweat through their tongues.
How many think that Dec. 21st in the
northern hemisphere is the shortest day of
the year?
Bath water drains counter-clockwise in the
northern hemisphere.
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Question
If you believed something that you
learned when you were young from
your parents or teachers, then
How many things about investing and
finance do you also believe but have never
questioned?
That is the purpose of this
presentation.
Market Fiction
Market Flaws
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Believable Misinformation
Buy and Hold is the only way to be successful in the stock
market.
Dollar cost averaging is a good technique.
Diversification will protect you from bear markets.
Compounding is the Eighth wonder of the world.
You must remain invested at all times or you will miss the
10 best days each year.
Average returns are never better than compounded
returns.
Probability and risk are the same thing.
Equity asset allocation will protect you from bear markets.
Economists are good at predicting the market.
Chasing performance is a common technique.
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This is what Modern Finance
Uses
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Dow Industrials Drawdown
Bear Markets Can be
Expected
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Equivalent Returns
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Missing the 10 Best / Worst Days since
1979
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Missing 10 Best / Worst
since 1926
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Compounding is the
8th Wonder of the World
Investment Option Investment Option
A B
Year 1 +10% +36%
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What is Wrong with
Modern Portfolio Theory
The markets are efficient.
Investors are rational.
Returns are random.
Returns are normally distributed.
Gaussian (bell-curve) statistics is appropriate for
use in finance/investing.
Alpha and Beta are independent of correlation.
Volatility is risk.
Is a 60% equity/40% fixed income appropriate?
Comparing forward (guesses) PE with long term
trailing (reported) PE.
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What MPT Forgot or Ignored
Do people trade / invest using different
time horizons?
Are there different views of risk among
traders / investors?
Are there different views on where a stocks
price will be in one week, one month, one
year, etc.?
CAPM assumes investors AGREE on return,
risk, and correlations of all assets and
invest accordingly.
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Gaussian Statistics (Bell
Curve)
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Reality vs. Theory
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Probabilities of an Event
Sigm Population in Range Expected Interpretation
a Frequency
Outside Range
(1 in X)
0.5 0.383 1.621 Three times a
week
1 0.683 3.151 Twice a week
1.5 0.866 7.484 Weekly
2 0.954 21.978 Every three weeks
2.5 0.988 80.520 Quarterly
3 0.997 370.398 Yearly
4 0.999 (plus one 9) 15787.193 Every 43 years
5 0.999 (plus three 9s) 1.744 x 106 Every 4,776 years
6 0.999 (plus five 9s) 5.068 x 108 Every 1.39 million
years
7 0.999 (plus eight 9s) 3.907 x 1011 Every 1.07 x 109
years
8 0.999 (plus fourteen 9s) 8.037 x 1014 Every 2.20 x 1012
years
9 0.999 (plus eighteen 9s) 4.430 x 1018 Every 1.21 x 1016
years
10 0.999 (plus twenty-eight 9s) 6.562 x 1022 Every 1.82 x 1020
years 23
12 0.999 (plus thirty-two 9s) 2.815 x 1032 Every 7.71 x 10 29
Shortcomings of Sigma
October 19, 1987 a 22 Sigma Event
Twenty-two sigma as shown in previous table, based
upon Gaussian statistics, should only occur once in every
9.5 x 10103 years.
The speed of light is approximately 186,282.21087 miles
per second, so the speed of light in miles per hours is
(186,282 x 60 x 60) = 670,615,200 miles per hour.
Further expansion shows that the speed of light per day
is (670,615,200 x 24) = 16,094,764,800 miles per day
and so the speed of light per year is (16,094,764,800 x
365.25) = 5,878,612,843,200 miles per year.
In scientific notation this is expressed as 5.878 x 10 12. Or
about the expected frequency of 8 Sigma.
October 19, 1987 a 22 Sigma Event
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Does Academic Sigma Hold
Up?
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5 Yr. Look-back 5 Yr. Look Forward
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Risk vs. Uncertainty
Is volatility risk? (here we go again)
In the sterile laboratory of modern finance, risk is defined by
volatility as measured by standard deviation; however...
It assumes the range of outcomes is a normal distribution (bell
curve)
Rarely do the markets yield to normal.
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Risk vs. Uncertainty
Risk and Uncertainty are NOT the same thing.
Risk can be measured.
Uncertainty cannot be measured.
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The Heart of MPT
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Withdrawals and Bears!
6% Withdrawal
3% Inflation
adjusted quarterly)
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Linear Analysis Nonsense
The world of finance is locked into
it.
Be very careful with it or the results
are bogus.
Basically it is taking data and
creating a straight line to represent
it.
Whiteboard time y = mx + b
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Academic Alpha and Beta
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FEAR of negative numbers
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60 / 40 Myth (1960-2010)
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60 / 40 by Decades
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Discounted Cash Flow Model
Discount Rate
Cost of Equity, in valuing equity
Cost of Capital, in valuing the firm
Cash Flows
Cash Flows to Equity
Cash Flows to Firm
Growth (to get future cash flows)
Growth in Equity Earnings
Growth in Firm Earnings (Operating Income)
Hubble Telescope
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85 Year Annual Returns
What is wrong
with this?
A. Closer to 1
B. Closer to 0
C. Closer to -1
D. Cant tell
Correlation =
-1.0
How?
Correlation of Daily Returns
The process was:
Day 1: Series A: +1.0%, Series B -0.5%
Day 2: Series A: -0.5%, Series B + 1.0%
Over any period of multiple days,
both series advance, but they
do so in perfect
inverse daily
correlation.
Correlation?
+1.0
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This is how Technical Analysis Works
1 + 1 = 2
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Gregs Rules
1. Turn off the TV and stop surfing the Internet for advice (stop the
noise).
2. Develop a simple process, one that you can explain to anyone
(mine is trend following).
3. Create a security selection process based upon momentum.
4. Devise a simple set of prudent and reasonable rules and
guidelines.
5. Follow your process with discipline; without it, you will fail.
6. If you do not have the discipline to do this, seek professional help
from someone who does.
7. Do not be upset with yourself if you do not have the discipline at
times; be proud of yourself for recognizing it.
8. Do not confuse luck with skill.
9. Listen and learn from the market it is always right.
10. Read this list often.
Pot At The End of The
Rainbow?
The End
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