The Fear Factor - Using Quindell PLC as an example.

Good afternoon traders and investors,


I've discussed before what I think is a level of spectacular value for money that Quindell offers at the moment, so I don't intend on giving anymore points to support my strongly bullish view on this stock. I am also going to ignore the manipulation theories for the sake of this article, even though in reality I think they make a sound and plausible point. I do however wish to focus on and discuss the concept of fear in the stock market, using Quindell as a my primary example. The main three ideas I'm going to discuss are points which, if acknowledged, can be used to not get sucked into selling in a state of fear, but more importantly can be used to make great trades.


1. Markets overextend expectations:


- This is not a new idea by any stretch of the imagination (in fact I nicked it from Richard Farleigh - my trading role model!), but it's a very important factor when considering the nature of stocks that are hit by a fear-mongering attacks, such as Gotham City's attack on Quindell.


This point applies both ways in trending markets too: take the Australian government bond market in the late 1980s and 1990s which saw falling interest rates from 1989-1993, causing falling ten-year bond yields from 14% to 7%.


- Stocks that are hit in this way by a fear-mongering attack (Gotham City Reports - Quindell plc) will as a result often take much longer to recover than people expect them to and a large portion of this comes down to fear in the market. In the case of Quindell the market was very quickly made aware of the fraudulent nature of Gotham City's claims, but yet the price continued to fall - a clear sign of fear in the market regarding Quindell combined with dubiously moral money management techniques (loading the bid to hold prices down, rinse and repeating by short sellers, etc).


To summarise this point: assets always takes significantly longer to recover from falls than people expect.


2. Patterns and Anomalies always exist:


- Quindell falls strongly into the 'anomalous' category at the present time for numerous minor reasons, but with the main reason being that the fundamentals of the company simply dictate a significantly higher share price than is currently being expressed by the market.


Crisis situations will regularly provide strong imbalances in supply and demand that cause great bargains to be had if your risk management is correctly followed. Take private equity for example, which always takes a big plunge when the global economy is hit (for example, 9/11 or the emerging market crisis in the late 1990s) because it's inherently illiquid and also because smaller markets are less watched by investors, meaning they take significantly longer to bounce back from major falls. The imbalance in private equity prices in the 1987 stock market crash created huge opportunities for many investors in that sector, which aloud them to yield such huge gains - in short they did their homework on the companies and saw there was a strong imbalance between the current company valuation and the true company value.


This continues on from my first point, that markets tend to overextend expectations, in this case regarding how low Quindell's share price has fallen, but also how long it has stayed so low. This is when common sense kicked in for me as a trader and since about a week after the Gotham City attack on Quindell, I have held stock in the company, because in my eyes this is simply an anomalous period for the company and one that can be profited from.


- Understanding whether you're looking at an anomaly or not requires asking oneself what comparative advantage you have against the market (obviously you must think you have some edge or you would never profit from trades and investments).


In the case of Quindell, my comparative advantage (which is the advantage of many who are strongly behind the company) is that I understand the company and have done so much research into its earning profile (please see my post on understanding Quindell and its dividends: http://themaskedaimtrader.blogspot.co.uk/2014/07/quindell-plc-frustrating-but-stay-with.html), that I believe I have an advantage in the medium to long term where the noise of short term price movements are excluded.


It's also worth remembering here that you don't have to have a huge advantage over the market to yield large gains. Take casinos for example, which rely on a very small percentage advantage when customers play roulette and other games, where on average the casino will only win 55% of the time. It's this small advantage I believe that I've got in truly understanding the company, that makes me believe I have the potential to yield strongly from Quindell, especially in this currently anomalous period for the company.


3. You're unlikely to out-analyse the analysts:

- This is pretty much stating the blatant obvious to an extent, as most people aren't full time traders, but it's an exceptionally important point when a stock begins to behave anomalously and especially when looking at smaller companies that are rarely tracked by large brokers and analyst firms.


To continue using Quindell as an example, the most recent analyst ratings are as follows:

Canacord Genuity: 362p
Daniel Stuart: 1005p


In the case of Quindell these firms have an extra advantage over the private investor because they are often in direct contact with members of Quindell and therefore simply have a greater level of information available to them to base their predictions on. Furthermore, professional analysts normally only have five to six companies to look after in their portfolio, meaning that a huge proportion of their time overall spent with these companies (at work and at home), so they're consequently always aware of the company specific updates and the further market issues that impact the companies under their belt.


With Quindell in particular, this means understanding that claims against companies for industry induced deafness have increased by two thirds since 2012 and that this will positively impact upon the company. It also means that analysts will understand that insurance companies are making a drive to increase their telematic insurance base, thus out-pricing those without the devices over the next ten years.


Therefore, I often trust the analysts strongly over a medium to long term period and I'm especially confident when two firms put out targets that correlate.



Overall, the these three ideas are points which can be used to assist when the market pricing of any asset becomes anomalous. I think that all three ideas can be strongly applied to Quindell under the current circumstances and moreover, I believe that in these anomalous circumstances it's important to regularly assess your positions and double check that your opinion remains as it was on the purchase of the asset.


Enjoy,

The Masked AIM Trader.

A coffee trip:

Good morning,


A couple of days ago I had the huge pleasure of meeting up with one of my school contemporaries. Having gotten top grades in his A-levels and just having finished his first year at LSE studying economics, my friend is probably one of the smartest and hard working people I know.


We were meeting to discuss my attempted run at trading so far and what my friend could do to improve his demo trading account and while we were there I asked him the question I ask all other professionals and or prospective professionals:


"What is your opinion on the current bull market run?"


Now, my friend is very switched on, but I can remember the long pause that followed after asking him this, which was then followed by something along the lines of:


"I've never thought of that before."


I didn't ridicule him, but nevertheless, I was surprised that someone so smart could not have an opinion on something so important - especially for those trading high beta stocks on the FTSE100 or S&P500 it's always essential to have an opinion.


Trading and investing is all about having an opinion; yes, you may end up on unprofitable side of a trade, but without having an opinion you'll never be able to trade successfully.


Other questions I ask prospective traders are questions like:


"If people became invincible what would your trades be to take advantage of this?"


This is a technique I stole from Richard Farleigh (a man who is basically my hero) to assess the raw idea generating ability of people. I've met many people who say they could do a great job at trading, but you ask them a question like this and they stumble.


Good luck guys,

The Masked AIM Trader