Special Guest Post
At any moment during the trading day, at least five traders with different time horizons are looking at price and volume of any security. There’s the scalper, who wants to be in and out within minutes and is often the first trader on the other side of any transaction. There’s the day trader, who typically has no positions on at the beginning and hopes to leave with none at the close. There’s the swing trader, who may be in and out within a day but typically within a week to a month. There’s the intermediate trader, who is in and out in a few weeks to several months. And, finally, there’s the long-term trader, who is in and out in a couple of months to years. I once held onto a trade for more than 10 years because it continued to fulfill my original reasons for entering the trade (fair value above price) and never triggered by trailing stop for that period. Warren Buffet advocates buying stocks that you never have to sell. All are looking at price and volume of the companies in which they have an interest.
Fischer Black, one of the authors of the famous Black-Scholes options pricing model, based his formula on the random movements of gas molecules or, in other words, noise. Richard Thaler, who won the Nobel Prize in 2017, states that noise makes markets possible. I reject both. Noise is. It is all the events that have any relevance at the time. It is what it is. My check list for events that might influence the price of a stock includes government regulations, corporate governance, the ability of a company to innovate, earnings growth or lack thereof, sales, profit margins, revenue, global events, interest rates, price action in the markets, forced liquidation and foreign markets. Each of these has more importance to some traders than to others.
Sometime in spring 2012, an article caught my eye. Micron Technology was going to place a bid for the Japanese chip maker Elpida, which had filed for bankruptcy. Elpida was being supported by the Japanese government, which was looking for a buyer. That piece of news was important to me. My daughter is a computer engineer for Intel, and I had done a review of chip makers for her. From 2005 to present, Intel and Micron have been partners in several joint ventures. In her/my opinion this partnership kept Micron afloat in those difficult times. Micron simply lacked scale to compete with Samsung Electronics both in manufacturing capacity and in human resources. Micron was offering $750 million in cash and would take over 140 billion yen in debt. Micron would be paying the yen debt with dollars. In other words Micron was buying Elpida at a very steep discount, $750 million and change. I bought shares. When the deal went through, I bought a lot more shares and sold far out OTM calls on those shares, the only strategy comfortable to me at the time. I held onto those shares until fall 2014, when I sold them because my viewpoint of Micron changed. When it purchased Elpida, Micron obtained engineers considered the best in designing memory chips for mobile devices. It was Apple's biggest supplier of memory chips at the time. In two years other chip manufacturers had caught up. Micron gained economies of scale, but in 2014 it was no longer the lowest cost chip maker.
My whole point is that piece of news was noise to some and important to others. It was very important to me.
The human brain is simply unable to cope with possible factors and instead focuses on what seems important at the moment. Certainty comes only when you know everything and rank order of importance properly, which is an impossible task. A good trader/investor chooses the events that are relevant to his trading style. Then he proceeds to analyze it to the best of his ability.