Monday, February 25, 2019

How to Invest in a Rising Market

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How to Invest, or Reinvest, in a Rising Market

The S&P 500 (SPX) recently climbed above 2,700 for the first time since last December. The question on many minds is this: are we experiencing the start of a new uptrend or are we in the middle of another "bear market" rally?

First, let's dispense with the loaded "bear market" vs. "bull market" terms and simply look at the charts. Here is a daily chart of the SPX, one of the world's most widely watched stock indexes.
Clearly visible on the chart is the sharp correction (downtrend) in the S&P from October 2018 to January 2019. The market had a recovery move starting in January 2019, with the index climbing to higher highs and setting higher lows (uptrend) as it moved back above 2,700.

Now that the S&P 500 is back to trading above its 200 day moving average (a "bullish" sign of strength), overall sentiment is improving and we are seeing the backdrop for continued gains in individual stocks.

Over the last few weeks we've seen quite a few positive earnings reactions for US stocks, with strong upside moves in tech and newer growth stocks.

Sure, there have been some recent dismal earnings failures like Kraft Heinz (KHZ) and Stamps.com (STMP), but these type of underperforming stocks can get punished in just about any type of market, and usually have over the last 10-15 years.

Let us focus instead on strong stocks that have recovered their footing and are trading at or near their highs.

Tech giants such as Intel (INTC), Microsoft (MSFT), and Cisco (CSCO) are resuming their steady upward march and are trading near multi-year highs.

Big-name, liquid index ETFs like QQQ, SPY, and ACWI are now trading at or above their 200 day MAs, while sector ETFs like XLK (tech) and IGV (software) have made strong recovery moves this year.

For those who want to replenish their watch lists with some younger, more dynamic individual names, check out the chart list below.
Charts and symbols included in this watch list: ACIA, APPF, CHGG, CRON, FOXA, FTNT, GRMN, HMI, LSCC, NVTA, TTD, W, XLNX, YETI.

Please note: Make these watch list chart ideas your own. Every investor or trader is ultimately responsible for their own research, risk management, and investing decisions.

The ideas shared here are pulled from my personal watch list and I own several of the stocks and ETFs mentioned above in my personal account.

If you decide to increase your exposure to stocks, remember to build your positions gradually and only add to positions as they move in your favor. Let them show you a profit and provide a bit of a cushion or "margin of safety".

If you are sitting in cash on the sidelines, let today's letter and watch list spur you to take a second look at your stock scans. Avoid laggard stocks in downtrends and focus on the ETFs or stocks that have recovered and are resuming their uptrends or entering new uptrends.

It can be tough to get your toes back in the water after a nasty market decline. The best way to get started is with small initial positions.

Scale your capital at risk and your trading size way down if you are experiencing nervousness or fear. Small positions will help you sleep at night and help you get over the fear of missing out (FOMO) that plagues most individual investors (myself included, of course!).

As your comfort level (and profit) grows, you can build on what is working and sell off positions which fail to show you a profit. Cut those losses early and let your winners grow to their true potential!

This is something I will be working on this year. Always room for improvement!

Until next time, thanks for reading and subscribing. Have a great week ahead.

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Thursday, January 31, 2019

Jesse Livermore Quote: Buying at the Right Time

Jesse Livermore on buying stocks or commodities when they are seemingly "cheap" after a decline:

"It isn't as important to buy as cheap as possible as it is to buy at the right time."  - J. Livermore

Jesse Livermore trader speculator stocks stock operator
Jesse Livermore, speculator and "stock operator"


For more on the great (and ultimately doomed) speculator of the early 20th century, see "Jesse Livermore: How to Trade in Stocks (1940 ebook)".  

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Wednesday, October 31, 2018

Moneyball: How the Red Sox Win Championships

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The Boston Red Sox won their fourth World Series title of the 21st century this week.

Having won their first Series in 86 years back in 2004, the last decade-plus has marked a very strong return to form for one of baseball's oldest big league clubs. So how did they do it?

Quick background: in late 2002, team owner and hedge fund manager,
John W. Henry (with his partners) bought the Boston Red Sox and its historic Fenway Park for a reported sum of $695 million.

Henry and Co. quickly set out to find their ideal General Manager (GM) to help turn around their newly acquired, ailing ship.


This brings us to one of my favorite scenes from the 2011 film, Moneyball, in which John W. Henry (played by Arliss Howard) attempts to woo Oakland A's GM Billy Beane (Brad Pitt) over to Boston with an excellent job offer

 
 

What I love about this scene is that it packs so much value and insight (that goes far beyond the sport of baseball) into a short, two minute dialogue.

As Henry tells Beane (Pitt) in this scene, "For $41 million, you built a playoff team... You won as many games as the Yankees won, but they spent $1.4 million per win and you paid $260,000."

"I know you're taking it in the teeth now, but the first guy through the wall always gets bloodied. Always."

"This is threatening not just their way of doing business, but threatening the game. But really it's threatening their livelihood, their jobs... Every time that happens, whether it's a government or a way of doing business, the people who are holding the reigns go batshit crazy."

"Anybody who is not tearing their team down right now and rebuilding it using your model is a dinosaur. They'll be sitting on their ass in October, watching the Boston Red Sox win the World Series."


John Henry's shrewd eye for value and statistical analysis, which played a major role in his trading career, was a decisive factor in turning the Boston Red Sox into one of baseball's most successful franchises.

As it happens, Billy Beane didn't end up taking the job with Red Sox, who instead hired Bill James acolyte, Theo Epstein as their GM. Soon after, Boston was able to break "The Curse of the Bambino" by winning their first World Series since 1918.

After winning two World Series championships with Boston, Epstein went on to help turn around my home team, joining the beleaguered Chicago Cubs in 2011. The Cubs won their first World Series in over 100 years in 2016.

The championships are wonderful, but for me the real point of this story is that these teams made a break with tradition, while disregarding their critics, in order to create a winning system and a whole new style of play.

As Billy Beane told ESPN, "It’s all about evaluating skills and putting a price tag on them."

"...Thirty years ago, stockbrokers used to buy stock strictly by feel.  Anyone in the game with a 401(k) has a choice.  They can choose a fund manager who manages their retirement by gut instinct, or one who chooses by research and analysis.  I know which I’d choose."


By viewing the field differently, and creating their own unique approach to the game of baseball (heavily influenced by Bill James' statistical insights), all of these teams - the A's, the Red Sox, the Cubs - were able to shake off years of underperformance and low expectations. They became winners, champions.

While it's true that, as John Henry's film counterpart pointed out, the pioneers often get bloodied, it's also true that the early adopters who follow closely on their heels often reap the richest rewards.  

Related posts and newsletters:

1. On Being Wrong... and Profiting Anway

2. Maximize Your Trading Gains, Not Wins: William Eckhardt Interview

3. Relentless (Interview): Michael Jordan's Trainer on Champion Performance and Mindset


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Monday, October 15, 2018

On Being Wrong... and Profiting Anyway (Quotes and Wisdom)

While revisiting the 1996 documentary Triumph of the Nerds this week, I came upon this fantastic segment on Apple co-founder, Steve Jobs.

Finding it eminently quotable (and useful), I just had to share some of Jobs' thoughts from this special clip.

"I don't really care about being right. I just care about success." - Steve Jobs



While Jobs was an entrepreneur in the emerging computer industry, and not an outright share investor or speculator, his quote about the relative unimportance of being right hit me right in the trader's gut.

Here is a game changing company founder saying, "you know what... I don't need to have the best forecasts or even the most original insights and innovations (hence the looting of Xerox's PARC). I don't need to always be right. I just want to ship the best products and win. That is what will ultimately make Apple the most successful company in our industry."

Now anyone who has studied modern business and the art of the "pivot" will understand that success may not come through your original idea or business plan. It may be the second or third business model you pivot to that leads you to find your true purpose and success.
Traders and investors in the capital markets must also realize that the need to be "right" while proving the markets wrong can lead to significant losses of capital or financial disaster. I'm sure we can all think of some high profile cases (ruined hedge funds and bailed out banks), or our own experiences in the market, where such a scenario has unfolded.

We can doggedly insist that we are "right" while we continue to lose money (as investors) or market share (as businesses), or we can learn from what real world conditions are telling us and align ourselves correctly to learn and profit from a new course of action.

So with that in mind, let's soak in some wisdom and see if we can change our attitudes and long held beliefs about being wrong. After all, no one is right all the time. How can we shift our focus from a need to be right to embracing ambiguity or being wrong, while learning from the situation?

Quotes: On Being Wrong and Learning or Profiting Anyway

"It is better to be roughly right than precisely wrong." - John Maynard Keynes

“There are two kinds of forecasters: those who don’t know, and those who don’t know they don’t know.” - John Kenneth Galbraith

"It's not about whether you're wrong or right in this business, it's about how much you make when you're right and how much you lose when you're wrong." - Stan Druckenmiller, citing lessons from George Soros

"Really good traders are capable of changing their minds in an instant. They can be dogmatic in their opinion and then immediately change it." - Steve Clark, via Hedge Fund Market Wizards. 
 
"The only thing to do when a person is wrong is to be right by ceasing to be wrong. Cut your losses quickly, without hesitation." - Jesse Livermore

"I became a winning trader when I was able to separate my ego needs from making money. When I was able to accept being wrong. Before, admitting I was wrong was more upsetting than losing money." - Marty Schwartz

"My stop loss method had two effects. It got me out of the wrong stock and into the right one." - Nicolas Darvas

"Every day I assume every position I have is wrong. I know where my stop risk points are going to be. I do that so I can define my maximum drawdown." - Paul Tudor Jones

"I think there's a certain amount of humility with top traders. You have to make enough mistakes and learn to overcome them." - William O'Neil

"It is very important to know the edge of your own competency. You're a disaster if you don't know it." - Charlie Munger

"Being wrong isn't a bad thing like they teach you in school. It is an opportunity to learn something." - Richard Feynman
 
"The type of thinking that is necessary to succeed in the markets is entirely different from the type of thinking required to succeed in school... Mistakes are a good thing. They provide an opportunity for learning." - Ray Dalio, via Hedge Fund Market Wizards

"A prudent speculator never argues with the tape. Markets are never wrong, opinions often are." - Jesse Livermore

"Speculation requires and teaches you to accept reality as it is, rather than reality as you would like to have it." - Rakesh Jhunjhunwala

"The best thing you can do as a trader or investor is learn to recognize and cut your losses. Due to our schooling system, we equate being wrong with losing points and esteem... In the markets, losing or making money is not about being right or wrong. We need to manage risk and stick with our process." - Brendan Moynihan, What I Learned Losing a Million Dollars
 
"You can't use analysis to overcome fear of being wrong. More analysis will not produce better trading results." - Mark Douglas

"No problem can be solved from the same level of consciousness that created it." - Albert Einstein

"The best training ever for rigor and critical reasoning is trading. You can only survive long term by going against the wrong consensus by "experts"." - Nassim Taleb

"If you act in sync with the market, trading can make you rich. If you argue with the market it will surely make you poor." - Mark Minervini

"Minimizing mistakes is incompatible with maximizing learning." - Kent Beck

"If you want to improve, be content to be thought foolish and stupid with regard to external things." - Epictetus

Can you think of an instance where you realized you were wrong, or changed your mind and then benefited or learned from the situation? Tell us about it!

Keep these quotes handy, or print them out, and share them with your friends and family.

Maybe you will help someone change their outlook (or your own) and profit by doing so!

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Saturday, October 13, 2018

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