Technical Analysis – Is It For You?

Defining Technical Analysis
What is technical analysis? Simply put, technical analysis is translating information from the past to predict future movements. It really doesn’t matter what you use to predict the future, it could be charts, oscillators, patterns, or moving averages to find your answers. Now, if you’re looking at the movement of the stars to predict how the stock of Microsoft will fare in the next 14 months, I have no idea what that would fall under. You might want to have a check up before reading this article…

Charts and Timeframes
There are a variety of charts available and there is no obvious right answer. I use candlesticks because I like having green and red on my screen (those are the actual colours of my candlesticks). Other charts include bar, line, and point and figure charts. Whatever works for you, is what you should use. Originally, I used line charts it wasn’t visually appealing to me. Yes, I know that probably shouldn’t be the only reason (and isn’t) why I should choose a type of chart.

With every chart you can choose a different timeframe to look at whatever you are trading. It could be 5-second intervals to 1-year intervals. It could vary depending on what chart service or broker you are using but either way you have a lot of variety. You should be looking at a variety of timeframes to get a good idea of the bigger picture. However, this would depend on what type of trader you are. If you’re a scalper, meaning you look to earn profits from extremely short timeframe, then you might not care about what the stock might have done in the past year, although it probably still does matter.

You need to understand what kind of trader you are before you set in concrete how you decide to set up your charts. Well, obviously you are a technical trader if you’re relying solely on charts for your trading decisions, but even within technical analysis everyone has their own distinct style of trading. At the point of the article, I have been trading for a mere two and a half years but I have my charts set up. However, I’m always looking for new ideas to add and changing things that aren’t working for me. Nothing is concrete; you always need to evolve with your use of charts and timeframes.

Trading with the Trend
Ah yes, probably one of the things that you hear the most in the trading world. Trade with the trend! Geez, it’s such an obvious thing to do and if you could do it, I guarantee that you would be a billionaire! The problem is, when you’re in the heat of the moment, it’s often really hard to determine if you are in a trend. Even if you are, you never know when there could be a sharp reversal (movement in the opposite direction). The market could also move into a long-term range you really never know.

Moving Averages
Moving average like the MACD (Moving Average Convergence Divergence) are often linked with trends.  Moving averages are essentially the average price of a security over a certain amount of time. There are different types of moving averages. The Simple Moving Average (SMA) adds the closing prices of a security over a given number of days and then divides it by the days. While the EMA (Exponential Moving Average) gives greatest weight to the latest information therefore putting more emphasis on what happened recently. What you choose entirely depends on what kind of information you want the moving average to give you and your trading style.

Other factors
I might get in trouble for not talking about the other things in technical analysis like indicators, oscillators, etc. I promise I will eventually, it really is too much information for one article and I need to do more studying myself. Technical analysis has everything and even if you aren’t a trader and are a longer-term investor, you can still use charts to your advantage. Even if you a fundamental believer you can still use technical analysis to compliment your trading style and help you confirm what you have learned with your fundamental analysis.

Mo2 Thinks
Technical analysis at first glace seems like an overwhelming field. And guess what? It is! If you try to look at everything and try to take on quantity over quality, you won’t accomplish anything with your trading. Imagine using 4 different charts and 10 different indicators and having various signals that don’t amount to anything. Obviously some tweaking is necessary and I’m sure some are capable handling 8 screens with different charts, timeframes, and oscillators; but last time I went to the Optometrist, I only had two eyes.

I like to keep things simple. I use one chart, sometimes two timeframes, one moving average, and two oscillators. I’m not saying I’m right because I don’t think I am. I still have much to learn and probably will change how I trade with time but I’m not in a rush I’ve made mistakes when I have tried to change things on the fly, always try to look at what you are using and if those indicators compliment your trading style. By golly, now you have to analyze how you use technical analysis! It’s a lot of work but if you can understand how it all works, it is definitely rewarding.

I’m a hybrid trader meaning I also look at fundamental analysis for help. I don’t try to over clog my mind with too much information but I try to stay on the right page with my ideas and do my best to grasp what’s happening in the markets. Not an easy task, but with time it becomes second nature. Everything takes hard work and technical analysis is no different, if you expect to make millions overnight, trading is not for you. If you heard of your neighbour making a million dollars just starting out with technical analysis, chances are they’ll be giving it back much sooner.

If this is what you want to do, read like mad! Try trading with technical analysis with free accounts or use minimal funds to test your ideas. Practice does make perfect and you definitely need to understand what you are dealing with to do well in any market. You need to stay disciplined because you always make similar mistakes unless you are on top of what you do. It’s a long-term investment of your time and money but it will surely pay off if you work hard enough. Good luck!

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What’s a ROE?

What is ROE?
ROE stands for Return on Equity. Which essentially tells us how the management of a company did with the shareholder’s money. The number is widely used to assess the strength of a company and generally a higher number is better than a lower one, since we all want higher returns right?

The formula for ROE is:

ROE = Net Income
Shareholder’s Equity

How is it used?
ROE has to be used in context otherwise it bears little meaning. If one shoe company has a higher ROE in comparison to a bubble gum company how do you know if this is good? You can’t because the two companies operate in completely different ways.

However, if we’re talking about two bubble gum companies that make similar flavours and use similar packaging (well just pretend everything is similar) then if one company has a higher ROE then the answer is obvious as to which company is better? You have to compare the ROE of companies in the same industry.

Is it really THAT simple?
I wish I could say yes but it isn’t. If it were this simple then everyone would simply use the ROE and our efficient market friends would have more credibility. First we need to understand what shareholder equity is. Shareholder equity is what is leftover after the company pays its expenses, debt (including interest) and its preferred shareholders among other things. Once this is done, we come to the shareholder equity which can be paid out as dividends, but that’s another story.

Is this good or bad debt?
That’s the important question here. Just because a company has a high ROE doesn’t always reveal the whole picture. We need to know how much debt is being used to boost the ROE. More debt can lead to a greater ROE but are they overdoing it with the borrowing to artificially boost the ROE?

Share buybacks
When the company buys back shares it can artificially boost the ROE. This is because when companies buy back their own shares for whatever reason, they are decreasing the outstanding equity. We also need to take into consideration as to why the company is buying back their shares. Don’t just listen to what the company says actually try to understand why. 99% of the time they’re going to say it’s because they are the best investment out there. Great sales pitch, really.

Mo2 Thinks
There is no clear-cut answer when it comes down to selecting a good company when you’re making an investment. The ROE is one of many figures an investor should be looking at to help them choose their investments. Simply put, the ROE tells us what kind of return the management of a company was able to create with the equity within the company. We also need to understand what kind of debt was used to obtain these returns. Even if financial statements are prepared according to generally accepted accounting principles (GAAP), there is so much that isn’t obvious.

One of the many factors is share buybacks. Most companies will say that they are buying back their own shares because they couldn’t possibly think of a better investment than themselves. While this may hold true sometimes, it may be one of the ways for them to boost their ROE.

Record ROE doesn’t mean much either if all the company invests in is government bonds. You have to go beyond the numbers and understand why these numbers are there and then decide if they are legitimate and positive.

Nevertheless, ROE is a great way to see if a company is being run efficiently. Having a positive and competitive ROE within an industry should be a must for investors. And the decision to buy a stock (if you are a fundamentalist) should be made after using other ratios and numbers to solidify your investment decision.

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What’s a REIT?

In a day and age that has countless investments it really is hard what to determine where to put your money. Just thinking about where to put it can make some feel sick, that’s why many put their money in mutual funds.

So, What exactly are REITs?
Real Estate Investment Trusts (hereafter, REIT) are an exchange-traded security that is operated by a trust company. Similar to stocks you can buy REITs at anytime when the markets are open and sell the just the same through any broker.

REITs have Initial Public Offerings (IPOs) just like any other stock to raise money but instead of buying companies or assets to make their company grow, REITs buy real estate or interest in mortgages. It depends on the REIT as to what they are going to invest in, and they could own both properties and mortgages. REITs also have a special interest consideration and hence have a higher yield than most stocks.

Types of REITs
There are a variety of assets that REITs invest in. Because of their larger capital base, they can buy and operate hotels, shopping malls, condominiums, and other commercial buildings. Some REITs can be developers and buy land and build on the land that they acquire. While some REITs may have residential property in aims of generating income through capital gains and rental income.

Advantages of Owning a REIT
The diversity of REITs makes them attractive to investors because not many people can buy real estate on their own. But by owning a REIT they can take part in the profits that these companies generate. You also get to choose the REIT that fits your investment style and market that they participate in.

You get professional management taking care of real estate. Real Estate is considered one of the more risky investments but with professional management this risk can be limited to some extent. Furthermore, the dividends of REITs are often very attractive because they pay out a large part of their profits in the form of dividends. So you should expect a higher payout ratio (see Payout Ratio Article for details) but it shouldn’t be excessive to the point that they aren’t growing.

Mo2 Thinks
I’m a pretty big fan of REITs. Despite wanting to own real estate on my own, it gives me headaches having to think about crazy tenants that call every 4 hours about how their bathtub isn’t draining properly. REITs can act as a management company for you and fellow investors by taking care of your real estate and paying you distributions. Sure it’s not the same as owning real property by yourself but it takes away the hassle of the tenants, government, repairs, maintenance, etc. of each real estate you hope to own. The only thing you pretty much have to worry about is the well being of the REIT.

Obviously, owning your own property is much more glamorous. You can actually go up to the building and know it’s yours (minus the mortgage). But with a bit of experience in the real estate field has made me feel otherwise. I would much rather just sit here and write articles then argue with a tenant about the garage door that they broke.

I’m getting off topic here. REITs will make a nice addition to any portfolio of any size. Because of their high dividends REITs can probably be considered both fixed income and equity at the same time. This would depend on what the REIT is investing in. For example, if a REIT is speculative and buys land in Nunuvat (that’s in Canada for you clueless people) for the purpose of development sometime in the next 47 years, that’s scary. But if a REIT has commercial buildings in the major cities and has long-term leases with big name companies, I would think it would be an attractive investment. Obviously that shouldn’t be the only thing you look at.

Always do your homework and don’t buy anything (even a REIT!) just because some bozo at work bought it. It isn’t hard to see what these companies are doing and most of them have their own websites (they are public companies after all) telling you what the own and their vision. Try to see if it is overpriced or has reached its valuation and go from there. But like Warren Buffet says, the price of the stock shouldn’t matter, the company should. Happy investing!

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