Prague Twin

Friday, April 06, 2007

Fibonacci


Ok, It looks like I've completely lost my readers with the previous post. That is understandable, having just re-read it. I was hoping to introduce the golden ratio as it pertains to the stock market and charts in general, and I failed miserably.

If we take nothing else from the discussion, hopefully the picture above highlights the basic principle I was trying to get across. I do hope that it helps.

If it doesn't, please check out this very short flash animation for the most basic description of what it was I was trying to get a across. Really, check it out. I promise it is painless. If you like it, you might want to skim this article about the man himself.

What amazes me is that this ratio appears in nature, as well as in the stock market charts. Why is this so? Well, no one really knows for sure. That is why it is so interesting to me.

17 Comments:

  • Thanks dude. That helps. I am clueless when it comes to making any sort of guess about market activity.

    I find it strange that people in COngress always seem to be one step ahead of the market.

    By Blogger Graeme, at 8:29 AM  

  • You are welcome. I am glad I reached you.

    I find it strange that people in COngress always seem to be one step ahead of the market.

    Ok, now YOU lost ME.

    By Blogger Praguetwin, at 11:50 AM  

  • Looks like a spiral of DNA.

    By Blogger Frederick, at 11:20 PM  

  • Just shoot me.

    And what the hell does Liberace have to do with this?

    Oh, Liber abaci. For a minute there I thought I recognized something familiar.

    By Anonymous abi, at 3:42 AM  

  • Looks like a spiral of DNA.

    I'm sure it conforms to the same rules.

    Abi,

    LOL. I thought the same thing when I read the article.

    By Blogger Praguetwin, at 8:30 AM  

  • I was talking about this

    By Blogger Graeme, at 9:41 AM  

  • praguetwin, you wrote:

    "What amazes me is that this ratio appears in nature, as well as in the stock market charts. Why is this so? Well, no one really knows for sure. That is why it is so interesting to me."

    If stock market averages followed a pattern described by Fibonacci series or any other function, the person who discovered this coincidence would have accrued more wealth than anyone else on Earth. But there is no person of extreme wealth to make this claim.

    Warren Buffett acquired his billions from buying good stocks, not betting on the mathematical patterns of market averages.

    However, it is true that his insurance companies depend on their ability to anticipate statistical possibilities and set premiums to match those risks.

    But his thesis on this topic is the opposite of yours. He says it is not possible to predict what will happen. He says catastrophes -- breaks in the pattern -- will occur. That you must be ready for the unexpected. But your claim states that ups AND downs in the market are described by simple formulas. I don't think so.

    By Blogger no_slappz, at 2:57 PM  

  • graeme,

    You linked to the NYer article about the stock market prowess of our elected officials.

    Insider trading was not a crime until the 1950s. The fact that it's a crime today is unfortunate. If it were not a crime, stock prices would reflect the meaning of trades by insiders.

    The real crime occurs with stock options awarded to insiders. To make a long story short, insiders can create riskless, profitable stock options for themselves -- and they can do it legally.

    They don't need inside information to profit from trades in their own companies. If they've misjudged the stock price of their companies, they can simply rewrite the terms of their options to put them in the money.

    On the other hand, insiders cannot control what outsiders think of their companies and the prices of their stocks. Good news usually brings temporary advances to stock prices and bad news does the opposite. But either way, the news is the result of the companys' endeavors and their success, which, unlike a stock price from the past, is not a sure thing.

    It's far better for insiders to signal outside investors with their stock trades than for insiders to simply pick the pockets of investors by pricing stock options to their advantage.

    Moreover, it's beyond ridiculous to think that it's possible to stop insider trading. But it would be easy to end the abuse occurring through the self-dealing of stock options.

    By Blogger no_slappz, at 4:10 PM  

  • abi,

    Since you've blocked my posts on your blog, I'll respond to your most recent item here.

    abi, you wrote:

    "Take presidential elections. We know who can't win two years before the actual election. Like Ralph Nader in 2000 and 2004."

    Ralph Nader, like all third-party candidates, he lacked the voter support to win. He provided an emotional escape valve for a couple of million voters. Meanwhile, despite what you might think, Nader's appeal is limited.

    Frankly, our system of electing a president should require a race between only two candidates. Why? The point of primaries is to allow a group of candidates to run. The primaries are supposed to narrow the field to two players. Not two players and a potential spoiler.

    Bill Clinton can thank Ross Perot for his win in 1992. Had not Perot run, Bush 41 would have won re-election. But Perot took 15% of the popular vote and upset the electoral outcome.

    Hey, those are the rules. No tears from me. Meanwhile, you can attribute Gore's loss in 2000 to the haircut given his vote totals by the presence of Nader.

    In 2000, Gore lost votes to the third-party candidate. Had Nader not run that year, I believe Gore would have won and we'd be screaming at him for failing against muslims in the post 9/11 world.

    By Blogger no_slappz, at 5:14 PM  

  • n_s, I blocked your posts because they're intellectually dishonest.

    By Anonymous abi, at 5:40 PM  

  • Very good article, Graeme. Thanks.

    By Blogger Praguetwin, at 5:41 PM  

  • NS,

    But there is no person of extreme wealth to make this claim.

    I know some currency traders who are pretty rich using nothing more than these mathematical principles which I have here described.

    Warren Buffett acquired his billions from buying good stocks, not betting on the mathematical patterns of market averages.


    Really? Who is he? Never heard of him. (sarcasm alert). Yes, that is true, but 1. this does not preclude anyone else from acquiring wealth by other means. and 2. Warren Buffett undoubtedly has a team of technical analysts that fine tune his (very good) market decisions using these principles.

    As an aside, Warren Buffett has made most of his money in the last half decade investing in Europe and shorting the dollar.

    I am not predicting that anything in particular will happen, but that we are at a crucial point and that the data will likely move the market considerably from here as it is at this level. That is not certainty, and clearly nothing you can bank on, but they are tendencies that most traders use to inform their decisions. The patterns exist over time, but that doesn't mean that you can bank on them. Obviously, if it was that simple, everyone would do it.

    But your claim states that ups AND downs in the market are described by simple formulas.


    I've made no such claim, only that patterns exist and that these key levels are points where resistance and support are found.

    By Blogger Praguetwin, at 6:20 PM  

  • Since you've blocked my posts on your blog, I'll respond to your most recent item here.


    Look, fight your battles elsewhere. I'll let it slide for now, but again I will recommend that you update your own blog, and develop some relationships (friendly and adversarial) on your own.... like the rest of us have.

    By Blogger Praguetwin, at 6:22 PM  

  • praguetwin, you wrote:

    "I know some currency traders who are pretty rich using nothing more than these mathematical principles which I have here described."

    As impressive as their wealth may be relative to 99% of the world's citizens, it's spare change compared with Buffett, Gates and others whose wealth is built on capturing the benefits of growing businesses.

    Meanwhile, your example is one that highlights luck, not skill or knowledge. As you will see, currency speculators frequently give back their gains.

    Buffett, by the way, is not a currency speculator. He took the long-term view that the dollar would decline. Whether he profited most by a direct investment in a currency position or indirectly through a different mechanism, I'm not sure. But he didn't speculate. He went in for the long term. By definition, traders don't do that.

    Nick Leeson was a trader who destroyed his employer -- Barings -- with a little trading error. Meanwhile, the hubris of traders has sunk a number of hedge funds in the last couple of years. Amaranth is one of the multi-billion-dollar funds to blow-up and disappear as a result of a little trading error.

    The Amaranth error occurred when the head energy trader decided he could predict the weather in the year ahead. He was so wrong he turned a $10-billion fund into a $4-billion fund, which was liquidated.

    There was also the unforgettable Long Term Capital hedge fund that imploded about nine years ago. I met a former Long Term Capital employee in 2002. He was still suffering from the financial fallout. Much of his net worth had been tied up in the firm when it failed. He kissed it all good-bye in the debacle.

    By Blogger no_slappz, at 8:13 PM  

  • praguetwin, you wrote:

    "Warren Buffett undoubtedly has a team of technical analysts that fine tune his (very good) market decisions using these principles."

    No way. His skill is identifying good companies and slipping into them unnoticed. He's got a staff of about two people.

    Also, in many, cases, he buys companies in bankruptcy. That's how he acquired the Hathaway segment of Berkshire, as well as Fruit of the Loom, Johns-Manville, and many others.

    By Blogger no_slappz, at 8:24 PM  

  • Whether he profited most by a direct investment in a currency position or indirectly through a different mechanism, I'm not sure. But he didn't speculate. He went in for the long term. By definition, traders don't do that.

    He most certainly did speculate, and he most certainly is a trader.

    The Amaranth error occurred when the head energy trader decided he could predict the weather in the year ahead. He was so wrong he turned a $10-billion fund into a $4-billion fund, which was liquidated.


    Yawn. You've told me this story before. He speculated on the weather. If he had done some technical analysis, perhaps he would not have lost his shirt.

    There was also the unforgettable Long Term Capital hedge fund that imploded about nine years ago.


    A long term hedge fund... you mean like Warren Buffett. Wait, I though you said that since Buffett was in for the long term, he wasn't speculating. Whether short term or long, as traders we all speculate, that is what traders and investors do.

    Buffett, by the way, is not a currency speculator.


    Really, buying $11 billion in forward contracts to deliver dollars with foreign currencies is not acting as a currency speculator? Get your head out of your... oh, sorry, I don't swear.

    What the hell does Warren Buffett have to do with any of this any way? He is very successful and he has my admiration.

    Nonetheless Fibonacci patterns in stock market charts exist, are payed attention to, and are taken advantage of.

    Whether Warren Buffett got rich without using them, or someone else lost his butt betting on the weather doesn't change that fact.

    By Blogger Praguetwin, at 11:03 PM  

  • praguetwin, you wrote:

    "He most certainly did speculate, and he most certainly is a trader."

    You should spend a little time studying Buffett and his investing style. The following is an excerpt from the latest Berkshire-Hathaway 10-K:

    "Derivative gains and losses from foreign currency forward contracts arise as the value of the U.S. dollar changes against certain foreign currencies. Small changes in certain foreign currency exchange rates produce material changes in the fair value of these contracts and consequently can produce volatility in reported earnings. The notional values of open foreign currency forward contracts were approximately $1 billion and $14 billion as of December 31, 2006 and 2005, respectively..."

    "...During 2005, the value of most foreign currencies decreased relative to the U.S. dollar and these contracts produced losses..."

    "...Conversely, the value of many foreign currencies rose relative to the U.S. dollar in 2004, and Berkshire’s contract positions produced significant gains..."

    "...Over the past three years, Berkshire has also entered into several other derivative contracts pertaining to credit default risks of other entities as well as equity price risk associated with major equity indices. Such contracts are carried at estimated fair value and the change in estimated fair value is included in earnings in the period of the change..."

    "...Other derivative contract gains in 2006 derived primarily from credit default contracts. Management attributes the gains to tightening of interest rate spreads and market perceptions that the creditworthiness of many of the underlying credit issuers has improved..."

    The currency traders you've met do not do what Buffett does. Keep the following comments from the BRK 10-K in mind:

    "Berkshire’s management views insurance businesses as possessing two distinct operations — underwriting and investing..."

    "...Underwriting decisions are the responsibility of the unit managers; investing, with limited exceptions at GEICO and General Re’s international operations, is the responsibility of Berkshire’s Chairman and CEO, Warren E. Buffett..."

    ..."Accordingly, Berkshire evaluates performance of underwriting operations without any allocation of investment income."

    Buffett is in the insurance business. He doesn't speculate. But you seem to think that anyone buying a futures contract or forward contract is trading the contract for a profit rather than holding it to protect against losses that might occur due to risks associated with attributes of the businesses. As Buffett admits, the value of his dollar contracts declined a lot in 2005 after gaining a lot in 2004.


    You wrote:

    "Really, buying $11 billion in forward contracts to deliver dollars with foreign currencies is not acting as a currency speculator?"

    No. It isn't. If you knew a little more about financial markets and Buffett you would know this. If you can read 10-Ks, read the latest from Berkshire and you can see for yourself.

    By Blogger no_slappz, at 4:38 AM  

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