Published April 14th, 2008
in Trading School.
I had lunch with a friend last week and he said - why don’t you simply sell after you have a 15% gain in the bag? My response was that you will never have a 25% or 30% winner if you always sell after a 15% gain. He said – it seems like you have more trades that go from 15% to 10% than 15% to 25%.
Just for the heck of it – I went back and reviewed all of the 2007 Real Money portfolio trades. There were 10 trades that traded over 15% that were eventually sold at a smaller percentage. Those trades were sold at an average of 7.9%. There were also 8 trades that sold over 15%. Those trades were sold at an average of 23.5%.
So, my “friend” was right. Using the 2007 Real Money portfolio as a proxy, I did have more stocks go from 15% to 10% than from 15% to 25%. However, the results were NOT better when using a sell target. That being said, I must admit that the difference in performance weren’t earth shattering.
Continue reading ‘Stock Trading Plans are Personal’
Published March 31st, 2008
in Trading School.
Wall Street has many great sayings. One that I try to live by is “let your winners run and sell your losers quickly.” Many people buy into the “letting your winners run” part, because they have also bought in to Wall Street’s buy and hold philosophy. However, unless you are planning on “letting your winners run” until retirement – you will need to sell at some point. So when do you sell. In particularly, when do you sell a winner? Let’s take a closer look.
If you really think about it - you have two options for selling a stock: selling as it is rising (into strength) or selling as it falling (into weakness). To accomplish yet another famous Wall Street saying, buy low and sell high, by definition - one must sell into strength.
Selling into strength is a proactive trading strategy. It requires selling when a stock is still rising but is expected to reverse. The problem is trying to determine if a stock is preparing to reverse or if it is simply pausing on its way higher. This is a critical decision point.
Continue reading ‘Let Your Winners Run and Cut Your Losses Quickly’
In my report last week to my subscribers, I said the following:
“Some may recall that last year - our timing on becoming fully invested wasn’t the best. On almost every occasion it usually preceded a sell off. Hopefully this time will be different, but let’s not be too careless.”
Based on Friday’s action, I don’t think that this time will be any different. Although our Real Money portfolio closed up 1.1% for the week, it sold off 3.3% on Friday turning a great week into a good week. All of the major indices sold off around 2.5% for the day and closed down for the week.
Matter of fact, Friday marked the fourth consecutive losing month for the market. I looked back over the past 10 years and this is the third time that the market (as represented by the S&P 500) has strung together four losing months. The other two times happened 2001 and 2002. We haven’t had five losers over that time period. If we do happen to break the streak – we will undoubtedly be in an official bear market. Many are already claiming that we are already there.
Bear markets conjure up significant anxieties amongst individual investors. Interestingly its Wall Street’s buy and hold crap, sorry for the vernacular, that does most investors in. Continue reading ‘Now is Not the Time to Listen to Wall Street’
Published November 19th, 2007
in Trading School.
Not a day goes by that I don’t hear a talking head on CNBC talking about a well diversified portfolio. Diversification must be a required course in money management school. Here is a commonly accepted definition from the U.S. Securities and Exchange Commission’s web site,
One of way of diversifying your investments within an asset category is to identify and invest in a wide range of companies and industry sectors. But the stock portion of your investment portfolio won’t be diversified, for example, if you only invest in only four or five individual stocks. You’ll need at least a dozen carefully selected individual stocks to be truly diversified.
I have never been a big fan of diversification. Most people end up di-worse-si-fying their portfolios by adding stocks in unfamiliar sectors for the sake of diversification. It is a little easier with the advent of ETFs. Now, one can simply choose an ETF for additional exposure as opposed to trying to become a good stock picker in many different sectors.
Continue reading ‘Buffett on Diversification’
Published November 12th, 2007
in Trading School.
In late February, the Shanghai stock market reminded us how inter-related the world’s markets are when its 9% plunge reverberated around the world and concluded with the DOW closing down 400 points. The market recovery started once all three major market indexes (DOW, S&P 500 and NASDAQ) flirted with their 200 Day EMA.
The July/August credit induced correction ended in the same fashion. In that case the DOW was stubborn. It would take it an additional 14 days before it followed the S&P 500 below the dreaded 200 Day EMA.
Continue reading ‘Stock Market: Put a MACD Crossover on your Holiday Shopping List’
Published July 18th, 2007
in Absolute Must Reads and Trading School.
Wall Street has been advocating diversification forever. I have my cynical reasons why, but that’s a story for a different day. However, in certain sectors diversification is necessary. Gold mining is a great example. I have been trading these stocks for a number of years. Apparently a 10-15% meltdown, when least expected, is part of a gold miner’s DNA. On the flip side, since the industry is consolidating 20-30% pops to the upside are not uncommon either.
Many analysts suggest buying at least 10 stocks to sufficiently protect your self in highly volatile sectors. Thus, commissions could become excessive if trading multiple sectors in a small account. Mutual Funds were the first vehicles designed to provide sufficient diversification at a reasonable cost. Exchange Traded Funds (ETF) are Wall Street’s latest incarnation and have become extremely popular. Their fees are often lower than mutual funds and offer some trading advantages over mutual funds. ETFs are great, but I contend that the next best thing is already here with basket trading.
Continue reading ‘Using Basket Trading to Get Ahead of the Herd’
This thread tracks real trades in one of my portfolios. Refer to backgrounder for more info.
Here are some interesting half-year stats:
- Closed trades: 31
- Winners: 17
- Losers: 14
- Fewest Calendar Days in Trade: 1
- Most Calendar Days in Trade: 98
- Average Calendar Days in Trade: 28
- Largest Winner: 25.6%
- Largest Loser: -8.9%
- Closed Return: 5.5%
- Open Positions Return: 5.4%
- Closed + Open Return: 10.9%
- S&P 500 Return: 6.0%
At the half-year point Real Money has outperformed the market 10.9% v. 6.0%, while the number of winners versus losers are virtually even. Many people are overly concerned with making winning trades. The secret to outperforming the market is limiting your losses. If you manage your risk – the rest will take care of itself.
Published June 21st, 2007
in Real Estate and Trading School.
You don’t have to be a brain surgeon to realize that housing market is not going to turn around overnight. Even the homebuilder CEOs are finally admitting that this environment “sucks.” Economist Nouriel Roubini has been calling this blood bath for what is for awhile. I haven’t seen him on Kudlow and Company in awhile. My guess is that he is a little too bearish for old Larry.
Excuse me as I digress for a moment, but speaking of bears…. Peter Schiff is by far the most bearish guest to ever set foot in CNBC studios. It cracks me up when they invite him on the show. In the midst of possibly the most bullish market since 2000, Schiff, a U.S. market bear, is out performing most bulls by investing in foreign securities. It throws the bulls for a loop in the bull/bear debates as they expect him to sit in a corner eating humble pie. At the end of the debates, they wish that they were more bearish. LOL - Sorry, sometimes I write this stuff for my own entertainment.
Back to Nouriel…. Continue reading ‘Trading Thru the Housing Blood Bath’
Published June 19th, 2007
in Absolute Must Reads and Trading School.
I am often asked how I determine entries and exits for my trades. Let’s take a look at a real time example and walk through the process. It is currently 11:00 AM New York Time on Tuesday June 19, 2007.
First and most importantly, I determine how much risk I am willing to take on a trade. My preference is to limit risk to 1-2% of my portfolio. In this example, I will use a portfolio size of $50,000 and limit the risk to 1%. So that means I am willing to only lose $500 on a trade (1% of $50K). Continue reading ‘Stalking a Trade Thru the Eyes of a Trader’
Published June 11th, 2007
in Trading School.
My trading strategy is fairly simple. I identify a dominate theme and then buy leading stocks in that theme. This has worked quite well for me over the years. Back in the good old days it was the Internet and stocks like AOL (TWX), CMGI (CMGI), Cisco (CSCO), Intel (INTC) and Microsoft (MSFT). Over the past three years, it has been industrialization of the emerging markets. This led to the formation of my Big Build-Out (BBO) portfolio and stocks like Companhia Vale do Rio Doce (RIO), Souther Copper (PCU) and BHP Billiton (BHP).
Most recently I have formed The Big Spend (TBS) portfolio to capitalize on the new wealth being created in the emerging markets. The thinking being that people in the emerging markets are no different than ones in the developed markets - money burns holes in their pockets too and must be spent. Stocks like Apple (AAPL), Nokia (NOK) and MasterCard (MA) form the nucleus of the TBS portfolio.
This strategy also keeps me away from themes where I can’t identify a driving catalyst. Continue reading ‘Homebuilders Rallying: How Could This Be? Part II’
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