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Readers reviews of The Right Stock at the Right Time

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We usually associate Larry Williams with trading approaches to the market, and in particular with futures and commodities. This book is not about trading. The focus is clearly on investment style opportunities built around long term analysis of the markets. The challenge for all traders is to turn their trading skill which is used to generate income into a skill that is used to generate wealth. This book details the solutions that Williams has developed. It makes for interesting reading, although the focus drifts from index behaviour, to stocks and then almost exclusively to  futures by the end of the book.

 

Williams has often suggested that traders need an edge to survive in the market and that the edge comes from a better statistical analysis of repeated behaviours and the seasonal nature of commodity trading in particular. This often underlies many of his short term, trading strategies. In this book he steps back into a longer time frame and applies the same type of statistical and cyclical analysis to the broader market.

He identifies a 4 year and 10 year broad market cycle, and several other clear relationships, and shows how they signal a more effective time to enter, or exit the market. He demonstrates that timing the market by entering in the best months, or years, has a significant impact on the final trading or investment results. This analysis is particularly useful for those who trade index instruments.

 

When he applies this analysis to individual stocks he uses several additional filters based not on technical analysis, but on fundamental analysis. He uses the standby measures such as PE ratio and dividend yield to develop a strategy based on consecutive increases in quarterly earnings. Unfortunately, the illustration of this strategy is marred by many charts that do not effectively label the elements being plotted in each chart.

Despite the claim to an appealing simple idea he does introduce more complex analysis by including a seasonality indicator and a market sentiment indicator which is applied to avoid false signals. Much of the application is based on a contrarian approach, buying when oversold and selling when over bought.

 

He includes a discussion of money management which provides a good overview of the shortcomings of the Kelly Formula and the more recent work done by Ryan Jones. This is specifically tied to the futures market and leaves little guidance for those who picked up the book because they thought it dealt with stocks.

The book contains many interesting ideas and is a good example of the way a trader can more effectively incorporate fundamental information into trading and investment decisions.

 

The book includes one significant short coming which is acknowledged when dismissing one approach, but remains embedded in Williams discussion. He is discussing the applicability of his approach to small-cap stocks and commenting on work in this area done by James O’Shaughnessy. On page 158 he notes that  there is an “inherent bias of their research with the drop out effect of so many small-cap companies that are no longer in existence.” In other words, he suggests the index used suffered from survivor bias because it only includes the surviving, winning stocks.

 

Survivor bias is a major flaw in any discussion that uses the S&P 500 index, the Dow Jones index, because as Williams notes “All one finds in the database are winners.” Unfortunately Williams does not address the issue of survivor bias in the indexes he uses to support his analysis of cycles and market timing. The reader must judge this impact   for himself.

 

 

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