Monday, April 07, 2014

Jesse Livermore on being wrong: "Cut your losses quickly"

Legendary trader, Jesse Livermore on being wrong in the markets and how to get yourself right. "Cut your losses quickly, without hesitation." 

A timeless lesson for tough markets and the inevitable losses that will come your way (in good markets and bad) in the course of speculation. Manage your risk, don't let your ego's need to be proven "right" take over your trading.

Related posts:

1. Jesse Livermore on trading (quotes).

2. Marty Schwartz ("Pit Bull", trader) speaks at Amherst College.

Tuesday, April 01, 2014

GM vs. Tesla stock performance (it's not even close)

General Motors vs. Tesla Motors in charts, from late 2010 to 2014. I'm sharing these charts to highlight the difference between a former industry leader, GM, and the auto industry's current leading growth stock, which is Tesla. 

Let's say you have a choice between a former leader-turned-laggard and an emerging new leader with strong sales and earnings growth. Which investment will you choose? If you select the right stock, you will see a profound increase in your investment returns.

First, let's look at the individual stock charts of post-bailout GM, which emerged from bankruptcy and IPO'd in November 2010, and TSLA which IPO'd in June 2010

GM went public (again) at $33 a share with an IPO day close at $34.19. The stock peaked above $41 in late 2013. Today, GM trades at $34.87, about 2 percent higher than its first day closing price back in late 2010. 

Tesla had a stronger IPO day back in June 2010, surging 41% from its $17 opening price to close at $23.89. 

Initially, newcomer Tesla may not have had the widespread brand name recognition of a General Motors. However, this also worked in Tesla's favor as former US auto industry leader, GM was plagued with the bad reputation of its declining years and a highly unpopular taxpayer-funded bailout. Tesla also faced its share of detractors and doubts over its ability to scale up future car production and achieve profitability.

After nearly 3 years of slowly moving higher, TSLA shares broke out above $40 in April 2013. This marked the beginning of a powerful uptrend, fueled by the popular new Model S and turn to (non-GAAP) profitability, that has taken TSLA well above the $200 mark. TSLA trades at $215 today, down from its recent peak of $265. 

As you'll see from the relative performance chart, since November 19, 2010 (GM's IPO) Tesla has trounced General Motors. GM is up 2% from its first weekly closing price of $34.26, while TSLA (shown in green) is up 593% over the same period, from a $30.99 closing price. 

Tesla, the upstart electric car manufacturer, has outmaneuvered GM, the very company that once famously "killed the electric car".

The current news coverage and mood surrounding the two firms reveals another stark divergence. While Tesla is in its dynamic growth phase, leading the worldwide charge towards electric vehicles and winning over customers with its handling of recent underbody and fire safety issues, GM is issuing a corporate apology to families of drivers who died in cars with faulty ignition switches and disabled airbags. GM's growth phase and leadership position, dating back to the 1920s - 1950s, can scarcely be seen in the proverbial rearview mirror.

The market is currently voting in favor of the auto industry (and power generation) upstart, Tesla. GM is the former industry leader, Tesla the current emerging leader. In the future, you may be faced with a similar leader vs. laggard choice in your trading or investing process. Which stock will you buy?

Disclosure: I have no position in either TSLA or GM at this time. Posts are strictly educational material. No buy or sell recommendations on securities or personalized investment advice are offered to readers of this blog.  

Related posts

1. He shorted Tesla (a rags to riches story).

2. Tesla hits new all time high: do androids dream of electric cars?

Thursday, March 27, 2014

Marijuana stocks: cannabis fuels 2014 "green rush"

Cannabis stocks have had a big run this year. With the recent legalization of recreational marijuana use in Colorado and Washington, and growing public support of further legalization efforts in the U.S., the nascent pot industry is springing to life. 

If marijuana legalization goes national, which may happen in 10-15 years, estimates on sales could range from $10 billion to over $100 billion annually.    

Marijuana stocks infographic invest
Marijuana stocks infograph via

Because there are few large cap plays on the sector, info on publicly-traded marijuana firms, mostly traded in the OTC market, has been a bit harder to come by. 

Since we've been talking about marijuana legalization and cannabis stocks on Twitter and StockTwits (not the "royal we", but a group of us on the stream) quite a bit lately, I thought it'd be useful to put together a convenient list of publicly-traded cannabis plays here. 

Disclaimer note: I've added some thoughts on microcap "penny stocks" and OTC market risks in the paragraphs below. Please read these comments fully and manage your risk. It's your money, after all.   

List of marijuana and cannabis-related stocks (Updated - click ticker for share price and company info):

     AERO     AFAI    ATTBF    AVTC    BABL   BRDT    CANN    CANV    CARA    CBDS     CBGI     CBIS  

     DIGX      DIRV      EAPH    EDXC    ENDO    ENRT    ERBB   EXMT    FITX    FRTD     FSPM   GLCO   GRNH  

     GWPH    HEMP    HSCC   ICBU   LVVV    MCIG    MDBX    MDCN    MJNA    MNTR    MWIP   MYEC    
     MYRY    MYSK     NTRR    NVLX   OSLH   PHOT    PLPL    PMCM    REFG    REVO  RFMK    SKTO        

     SPLI    STEV    TAUG     TRTC    TWD.V   UTRM    VAPE    VAPR     WNTR     ZDPY.                                                                                                                

See also: the Marijuana Index, Dan Mirkin's 420 Index, and the Pot Stocks company list (updated forum thread).

Due to the fact that most of these companies trade in the OTC market, I want to point out that many of these companies have reporting standards that differ from listed companies on the Nasdaq and NYSE. You should not trade these stocks if you do not understand the unique risks in this market. 

Many of the stocks attached to hot themes or sectors are just fly-by-night companies with no real revenue stream, issuing press releases to entice "investors" or speculators to buy. Some stocks get halted by the SEC when there is a suspicion of manipulation or fraud.

While there are some real companies with real businesses (and a few OTC names do go on to be listed on the US exchanges), there are also a lot of quick boom and bust (or "pump and dump") plays. Some of these stocks may quickly go back to sub-penny prices.

This is also a "battleground" theme, as marijuana legalization efforts move along in fits and starts. If progress is hampered, or doesn't happen quickly enough, you might see quick declines throughout the sector. A lot of these microcap weed stocks have run up 300% - 500% or more in recent months, so their recent pullbacks may have farther to go.

See the tweets below for more on this...   

I have traded some of these cannabis shares in recent weeks, but have no positions in any of the companies mentioned above at the present time. Everything in this post is strictly an educational reference, so please use this stock list as a jumping off point for your research.

Lastly, I'd like to point out that I'm excited about the emerging cannabis industry and I hope some of these companies achieve real growth and success. I could have spent the last few years betting against this legalization trend and investing in something like for-profit prisons, but that would not have made me a happy person. 

War on Drugs Prison Population Increase

To profit, even greatly, from something as disastrous and destructive to human beings as the "War on Drugs" would be a hollow endeavor. I'd rather go long some cannabis stocks and invest in personal freedom, choice, and innovation in cannabinoid medicines. Here's to the "green rush" and a freer, healthier America!

"The illegality of cannabis is outrageous, an impediment to full utilization of a drug which helps produce the serenity and insight, sensitivity and fellowship so desperately needed in this increasingly mad and dangerous world" - Carl Sagan

Related posts:

1. Prohibition's rise and fall: EconTalk interview with Daniel Okrent.

2. Cannabis stock news via The Cannabist.

3. Sen. Rand Paul's testimony against the Drug War.

Sunday, March 16, 2014

Developing your mental trading edge

"True self confidence is your mental edge" - Dr. Andrew Menaker

While it may not be as glamorous or attention grabbing as a post detailing the latest trading setups, psychology is a very important topic for developing traders.  

Examining one's trading psychology and dedicating time to self-improvement in the hours after the market closes may be the difference between failure and success in your trading career. After all, the most important battle you'll face in the markets is not with other traders - it is with yourself. 

So with that in mind, I'd like to share a video with you from trading psychologist, Dr. Andrew Menaker, that addresses this very topic. But first, a few more quotes - from experienced, big-time traders -  to help convince you!

"The key to trading success is emotional discipline. If intelligence were the key, there would be a lot more people making money trading." - Victor Sperandeo

"Unfortunately, most aspiring traders find out far too late that the act of trading is 20% intellectual and 80% psychological." - Michael Martin

"I haven't seen much correlation between good trading and intelligence. Average intelligence is enough. Beyond that, emotional makeup is more important." - William Eckhardt

Now, on to the webinar: Develop Your Mental Edge with Dr. Andrew Menaker. 

A few key ideas and tips from Dr. Menaker's presentation...

1). The typical trader who is struggling will look for outside information that completes the puzzle or "holy grail" of trading. Go and look at yourself in the mirror. This is the missing piece in the trading puzzle.

2). Mental rehearsal (of both positive and negative scenarios), positive imagery, inducing a relaxed state of mind, and developing daily rituals can help put you in the flow state of mind for trading.

3). The most important question a trader can ask: "Am I acting in my own best interest right now?". Menaker explains why this question will help you define your risk and maximize your opportunities and trading results.

4). The very largest traders are focused primarily on risk management. Accepting and managing risk is a big part of trading. Some traders have difficulty following rules in this area. We should spend time learning about the mental biases humans have against suffering losses (see: Prospect Theory) and become aware of these showing up in our trading. Keep a trading journal to highlight awareness of these events.

5). "If I was forced to rank the importance of [various aspects] of trading, setups would be at the bottom of the list. Position sizing, risk management, and psychology are really what's going to keep you out of trouble and ahead of the game. The best traders understand this and have internalized it.".

6). You need to learn to do more of what works and less of what doesn't. While it sounds obvious, many traders have difficulty with this as their unmanaged emotions are interfering with their perceptions and trading process. 

Enjoy the webinar, and I hope these lessons help you in your trading! 

Related posts:

1. Overcoming Your Fear of Pulling the Trigger (Trader Interviews).

2.  Lessons from Hedge Fund Market Wizard, Steve Clark.

3. The Inner Voice of Trading: a lesson on ego and risk.

Sunday, March 09, 2014

He shorted Tesla (a riches to rags story)

An oldie, but a goodie...

In Reminiscences of a Stock Operator, protagonist Larry Livingston (aka Jesse Livermore) reminds readers of an old phrase, "He went short of Harlem", which veteran speculators used as a shorthand for "he went bust".

Maybe the modern version of that phrase is, "he went short of Tesla". 

Your ego may be telling you that the stock is "overvalued" and the bulls are wrong, but the market is telling us that Tesla is an emerging new leader in its dynamic growth phase. The price chart shows a very clear uptrend in progress - demand for the stock is fueling its ascent (for now).

Until the facts change and the stock chart reveals a topping pattern and a shift towards a "stage 4" decline (see Stan Weinstein and Mark Minervini for more on this), a long or neutral (on the sidelines) bias would likely be best. 

This applies not just to Tesla, but to any stock going through the life cycle of neglect (base forming) to major accumulation, distribution, and eventual decline. 

Disclosure: I have no current position in the stock at the time of writing. This can change at any time in the future (after posts are published). These posts are an educational exercise for myself and for readers, personalized investment advice is not offered here.

Thursday, February 20, 2014

Reading list: Books for new and veteran traders

There's a stack of books on a corner of my desk and it's piled 10 high. They are all, in some way, related to trading or professional money management and investing. 

These are books you may have heard me mention on Twitter. Some I've read and re-read. Some are newly acquired and I may have only had a chance to flip through or read to the halfway mark. We'll focus more on those I've read, but I want to give you the heads up on some of the newer (to me) titles as well. I think they all contain some useful insights that will help you to become a more focused and informed trader (or investor).

Quick disclosure note: all the books I write about on this site are either purchased by me or have been given to me, either as review copies (free) from authors and publishers or as gifts from friends. 

Now on to the reading list, which I hope will help you fill out your list of must-read trading books.

1. Inside the House of Money by Steven Drobny is a book I've mentioned several times in past posts and tweets. It is mainly composed of interviews with hedge fund managers operating in the "global macro" field - big picture macroeconomic analysis expressed through trades in multiple asset classes (currencies, bonds, derivatives, stocks) across the globe. The book begins with an introduction to the world of global macro investing and its historical progression to the present day. 

The interview chapters are laid out in the style of Jack Schwager's Market Wizards series, and in fact, Drobny's book arrived six years before Schwager's latest Wizards update, Hedge Fund Market Wizards

I'm currently in the process of re-reading both, dipping into randomly selected chapters as time allows. They are both full of interesting market insights and character studies. I'd recommend both to any avid investor or to more experienced traders. 

I'd only caution that newer traders may be overwhelmed by the variety of investing styles and markets represented here. The interviews may tempt some to venture outside their areas of competence or to spend time thinking about concepts that bear little relevance to their own trading styles. Having said that, Drobny's book and Schwager's are a great store of knowledge and quotes from some very experienced, top shelf money managers.

2. The Invisible Hands: Top Hedge Fund Traders on Bubbles, Crashes, and Real Money is a newer interview book by Steven Drobny, originally published in 2010. I have the new paperback edition but have not had a chance to read it yet. 

Drobny's preface to the 2013 edition centers on the need to focus on lessons from the 2008 crisis, especially now that we've returned to complacency mode 5 years into a post-crash bull market and recovery. I'll provide more insights from this book, here and on Twitter, when I've had a chance to read more.

3. The Successful Investor and How to Make Money in Stocks by William O'Neil. 

I first read The Successful Investor, O'Neil's slimmer stock trading guide, sometime in 2009 or 2010. It served as a great introduction to his CANSLIM method and his overall philosophy on risk management and market timing. 

If you are really willing to commit to trading stocks or guiding your own investments, his How to Make Money in Stocks (4th edition) is a must-read. You don't have to follow his methods to a T, but the review of chart patterns and common characteristics of winning stocks are lessons that should be learned and absorbed. I wish I had acquired copies of both books sooner

4. How I Made $2,000,000 in the Stock Market by Nicolos Darvas. 

Maybe it was the hokey, attention-grabbing title that put me off of reading this book for years. However, it kept coming up as a top recommendation of stock traders I respected. Finally, when a friend told me I had to read Darvas' book, I acquired a copy. 

It's a fun read based on Darvas' journey from stock-picking neophyte to a "man with a plan". Darvas found a bull market system that worked for him, picking growth stocks emerging from a breakout "box" pattern. I'm going to have to pick this one up and start reading it again.

That's it for now. I'll provide more updates and lessons distilled from these books when I have more time to write. Until then, here's to your own unique educational path and success! 

Thursday, January 16, 2014

John Templeton: Contrarian (2013 documentary)

The life of famed investor, Sir John Templeton is recalled by family and friends in Contrarian, a 2013 film directed by Mary Mazzio. You can watch the film online here, via Bloomberg, for a limited time.  

As an admirer of Templeton's investing acumen and wisdom, I was glad to check out this breezy overview of the legendary investor's career and to hear a few tales about his long and productive life (Templeton, who lived to be 95, died in 2008). 

However, those looking for a more critical look at John Templeton's business and philanthropic efforts may be disappointed. The documentary is wholly based on interviews with family and colleagues who fondly look back on his life and his habits and drives. You won't find much here that bucks the close-knit family atmosphere and retellings of cherished memories. In fact, I felt this biographical film bordered on hagiography. 

Having said that, there is still much to be gained from a look back at the ups and downs of Templeton's life and the lessons he accrued, and passed on, from his travels, his spiritual inquiries, his writings, and his long investing career. In fact, it might be a good idea to share this link with your family (especially your kids) and friends. You never know what good habits Templeton's lessons may inspire in others.

You can also find an excellent review of John Templeton's investing lessons in this video post from investor, Lauren Templeton (Sir John's grand-niece). There are some fantastic quotes and lessons within on savings, investing, and long-term contrarian thinking.