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Taming the Lion: 100 Secret Strategies for Investing

Book Description

Richard Farleigh reveals the 100 secret strategies that he developed to enable him to succeed in the markets. During his time running a trading desk, Farleigh set out to develop a repeatable methodology based on observation and reasoning, not just on one-off flukes and luck, to enable him to outperform the market on a regular basis. The (potentially controversial) beliefs that he incorporates into his strategies include: - Markets tend to under-react, not overreact. - Big, obvious ideas offer great opportunities. - It is safe to invest with a consensus view. - Contrarian trading is usually irrational. - It is best to enter and exit the share market at the right times instead of always staying invested. - Price trends are well known but under-utilised. - Chartists are just astrologers. - Investment and trading are increasingly similar. Some of the techniques simply involve being better than other investors at some of the basics, including only chasing genuine opportunities, managing risks and coping with losses. As his trading results started to attract some attention, Farleigh was frequently asked to give presentations of his ideas to other professional traders. From the feedback during these sessions he realised that others were interested in an approach to investing which was based on first principles. Finding that anecdotes were the best way to make a point, and that ideas could be summarised into numbered strategies, allowed him to show clearly how the methodology worked. Years later, he is still using the same approach, and has found that amateurs, as well as professionals, are keen to find out how markets work and how to improve their investment performance. This book contains those secrets. ----- About the 100 Strategies The rules are based on two broad experiences. Firstly, my involvement with investing and trading has been an endless pursuit of looking for patterns and developing my own repeatable methodologies. I have wanted to turn an art into a science. Secondly, from so many conversations with intelligent and educated people, who are curious about markets, but have been unhappy with a lack of useful reading material. The book is intended for anyone with an interest in trading or investing, whether they are amateurs or professionals. The laws grew out of a series of popular lectures that I gave in my early career and out of the process of training new people to trade the markets. Perhaps a unique thing about my approach in this book is that I have developed a framework which is applicable to all markets, whether they are bonds, money market, commodities, currencies, stocks, or property. The more I have learnt about these markets the more I have been convinced that it is sensible to approach them the same way. This is very useful, especially when some markets are underperforming. This is a serious book. It is definitely not a "how to get rich quick" trick. I have presented my observations and interpretations as laws for practical purposes. It incorporates equally a lot of groundwork analysis of markets. In finance there has been a gap between practitioners and the theoreticians. I intend to bridge that gap with a solid and, at times, theoretical explanation for my observations. Nevertheless, I have presented the material in a personal way. It is light hearted, with lots of anecdotes. I have not done endless amounts of research on each of the laws, so at times I may have erred on the detail. However it is always the concepts that are important, as these are what I am trying to get across.

Table of Contents

  1. Cover
  2. Publishing details
  3. Introduction
  4. Structure of the book
  5. A brief biography by Janine Perrett
  6. A day in the life
  7. 1. Markets
    1. 1.0 The different markets have many useful similarities
    2. 1.1 Fear the market
    3. 1.2 Markets are more efficient than generally acknowledged
    4. 1.3 Market opportunities are disappearing
    5. 1.4 The markets can overwhelm government intervention
    6. 1.5 The market is strengthened by speculation
    7. 1.6 Respect the market not the experts
    8. 1.7 Most professionals are not outguessing the market
    9. 1.8 Listen and read very critically
    10. 1.9 Understand recent history
  8. 2. Comparative Advantages
    1. 2.0 To outperform the market you need a comparative advantage
    2. 2.1 Everybody is a hero in a bull market!
    3. 2.2 Never stray from your comparative advantages
    4. 2.3 A small percentage advantage is enough to outperform the market
    5. 2.4 Test the advantage over time and make changes slowly
    6. 2.5 Financial markets advantage #1: Information
    7. 2.6 Financial markets advantage #2: Original analysis
    8. 2.7 Financial markets advantage #3: Brokers and bankers have extra information and free insurance
    9. 2.8 Financial markets advantage #4: Understanding market behaviour
    10. 2.9 The Strategies are based on six types of market behaviour
  9. 3. Risk
    1. 3.0 Manage and embrace risk
    2. 3.1 Good ideas can lose money
    3. 3.2 Asymmetry has fooled a lot of investors
    4. 3.3 Wild swings and losses are uncomfortable, but they may offer the best rewards
    5. 3.4 Diversify
    6. 3.5 Assess risk - and then double it
    7. 3.6 Risk adjust results after the trade
    8. 3.7 Qualities of the successful trader
    9. 3.8 Trading pressure increases with amount at risk
    10. 3.9 The trader’s dilemma - the stop-loss?
  10. 4. Patterns and Anomalies
    1. 4.0 Look for patterns and anomalies
    2. 4.1 Choose the right markets
    3. 4.2 The share market dilemma
    4. 4.3 Crisis situations almost always provide an opportunity
    5. 4.4 Short term interest rates will tend toward the inflation rate plus the economic growth rate
    6. 4.5 Government bond markets for the major economies are not prone to crashes
    7. 4.6 Currencies: two economies and fact or fashion?
    8. 4.7 Some markets are driven by supply
    9. 4.8 Property prices often lag stock prices
    10. 4.9 Chartists are the astrologers of the markets
  11. 5. Big Ideas
    1. 5.0 Markets are slow to react to structural influences
    2. 5.1 Look for the next Big Thing
    3. 5.2 Ignore obscure theories and observations
    4. 5.3 Only invest in the broad markets when they are in line with the prevailing economic environment
    5. 5.4 Be methodical – use a checklist to quantify and add rigour to a view
    6. 5.5 Buy stocks when economic growth is strong and inflation is weak
    7. 5.6 Buy bonds when inflation and economic growth are both weak
    8. 5.7 Buy commodities when inflation and economic growth are both strong
    9. 5.8 Few assets benefit when inflation is strong and economic growth is weak
    10. 5.9 You are unlikely to out-analyse the analysts
  12. 6. Small Companies
    1. 6.0 Small companies offer more opportunities than large companies
    2. 6.1 The quality of a company’s management is by far the most crucial factor in determining its success
    3. 6.2 Determining the fair valuation is more difficult with small companies
    4. 6.3 Clearly identify the comparative advantages
    5. 6.4 Be sure the business is sustainable
    6. 6.5 Good products don’t always sell
    7. 6.6 Growth puts strains on small companies
    8. 6.7 Be sure of a route to exit and adequate cash resources
    9. 6.8 Shareholders can help unlisted companies
    10. 6.9 Be pragmatic with due diligence
  13. 7. Price Behaviour
    1. 7.0 Prices go further than expected
    2. 7.1 Forget the old price
    3. 7.2 People often misjudge probability and logic
    4. 7.3 A price is an average of possibilities
    5. 7.4 The probability can be asymmetric
    6. 7.5 Be nervous when a market doesn’t rally on good news
    7. 7.6 Don’t day trade!
    8. 7.7 Avoid trading in options if you do not understand their pricing
    9. 7.8 Back your hunches with a small investment at least
    10. 7.9 Features of good trading models
  14. 8. The Understanding and Use of Trends in Prices
    1. 8.0 There is statistical proof that market prices trend
    2. 8.1 Trends operate across commodities, currencies, interest rates, stocks and property
    3. 8.2 Trends have been in operation for a long time
    4. 8.3 It is not true that markets usually overreact
    5. 8.4 Trends are resistant despite being well-known
    6. 8.5 Trends represent the gradual dispersal of information
    7. 8.6 Price reaction is delayed by inertia and scepticism
    8. 8.7 A rising price attracts buyers
    9. 8.8 Economic cycles breed market cycles
    10. 8.9 News against the trend is often ignored
  15. 9. Market Timing
    1. 9.0 Combine fundamentals with price action
    2. 9.1 Ignore the noise in price movements
    3. 9.2 Don’t be a hero - do not buy falling markets
    4. 9.3 Trade with the trend - wait for the trend before you enter the market
    5. 9.4 Add to winning trades, not losing trades
    6. 9.5 It is safe to be with the consensus
    7. 9.6 Do not use price targets or time limits
    8. 9.7 If the fundamentals have changed, adjust the position accordingly
    9. 9.8 You will not get the high or the low
    10. 9.9 A powerful model shows probability is on your side
  16. 10. Avoiding Temptation
    1. 10.0 Know when to stay out of the market
    2. 10.1 Identify what is difficult about the existing environment; It may change
    3. 10.2 Monitoring trends may alert you to opportunities you wouldn’t normally find
    4. 10.3 With success, bank some profits
    5. 10.4 Negotiation is an art
    6. 10.5 The evolution of the con artist
    7. 10.6 Wealth preservation is not simple
    8. 10.7 Be sceptical of sophisticated retail products
    9. 10.8 Management and brokerage fees should be minimal in a passive portfolio
    10. 10.9 Follow these strategies and be part of the hedge fund (r)evolution