The Traders Journal

A Virtual PhD in Institutional Style Investing: Tensile Trading ChartPack Update 5.0

Each quarter, I present you with the ultimate equity shopping list.  A virtual 5-star smorgasbord of alluring delights, showcasing the stocks that Fidelity is presently buying in each of its 40 Select Sector Funds.  This is no newsletter XXX hypothetical model portfolio of recommendations.  Rather, it is the actual equities that they are buying and that are showing up in the top 10 holdings in these  40 Select Sector mutual funds.  Frankly, I look forward to Fidelity releasing their quarterly holdings like a child waiting for Santa to appear at Christmas.

Over the past year, this quarterly review of Fidelity’s 40 Sector Funds has literally evolved into a methodology unto itself.  It yields many tradeable ideas, charting insights, management strategies (when they replace portfolio managers) and offers a PhD equivalent in investing as if you are being personally mentored by  Jesse Livermore himself.  

After all, these are Fidelity’s best and brightest sector specialists who each focus exclusively and in-depth on just one market area.  Most equities’ big runs start with these specialist funds and often their ideas get picked up by the larger Magellan Fund or Contra Fund who further sponsor a big run with the result being that many high probability winning investments can be found here by us individual investors.  

I have many insights to share with you from this quarter’s update pertaining exclusively to Fidelity, but more on those specifics later.  This is the first anniversary of the Tensile Trading ChartPack, and the depth of this quarter’s updates honors that fact.  Let me describe the updates.

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CANSLIM on Steroids

Profitable investing demands a unique type of profitable thinking.  Once you’ve achieved this consistently in your thinking and investing, you are ready to move on to focusing on
how best to nudge the probabilities in your favor with respect to all elements of your methodology.  Specifically, the example I’ll use in this instance is William O’Neil’s CANSLIM methodology that is so widely used.

I’d like to thank my friend Tom McClellan (of McClellan Oscillator fame) for bringing together two CANSLIM experts and traders for an enlightening evening last week.  My first exposure to William O’Neil and his methodology was in graduate school, just as he was starting the Investors Business Daily newspaper.  Back then, he came across as an almost shy but clearly brilliant investor when he spoke to our class about his trading methodology.

When I began trading full-time, my methodology was heavily influenced by his books, his newspaper and his CANSLIM approach.  Over time, as I managed to achieve both profitability and consistency in my investing, I began to look for what I’ll call ‘probability-enhancers’ to layer on top of the standard CANSLIM paradigm.  For this reason, the other night as I listened to both CANSLIM traders who were presenting their versions of O’Neil’s methodology, I could not help but revisit my own growth as a trader.

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Why Investors Need to Appreciate Fine Wines

As I sip my 2008 Cabernet Sauvignon, I ponder all the similarities between myself, as an investor, and Marty Clubb – the extraordinary winemaker at L’Ecole 41 in Walla Walla whose wine I am enjoying.  His vines produce sensational wines because he diligently prunes the branches as any widely acclaimed gardener would do.  He chose a outstanding location for his vineyard, and he uses the local climate to his advantage, whatever the weather offers up in a particular season.  

Marty regularly prunes the branches of his vines to promote growth and prepare it to blossom because fruitful branches yield a higher quantity and quality of grape.  Since nonproductive branches are not only worthless but can infect the rest of the vines, they are cut off, separated from the tree and burned.  This farming analogy perfectly illustrates what investors should be doing as well if they aspire to bottle vintage profits.

Investors need to pick a location and focus on working that location.  In other words, know what you know and don’t try to trade the entire market, long and short, options and futures, penny stocks and blue chips, currencies and commodities.  Pick a location within the market that you understand and enjoy – then focus to grow your profits there.

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Smart Beta Funds Leading to Stupid Choices

The latest wave on Wall Street’s beach of complexity and opaqueness is a new type of ETF fund referred to as a Smart Beta Fund.  I’ve even heard these new funds referred to as Bionic Beta Funds.  Consider this a case-in-point and follow-up to my blog last week where I ranted against Wall Street’s purposeful complexity.

It’s no longer a case of passive (index) funds versus active managed funds.  Now, they offer ETFs that are semi-active.  These funds operate in the overlapping area between passive rules-based ETF funds and actively managed discretionary portfolios.  According to Morningstar, there are now at least 342 such funds in the USA.

My concern is that these funds keep ratcheting up the sales pitch before they actually produce any noteworthy results.  None of them has existed through one full market cycle, yet not so smart investors are acting recklessly aggressive by throwing big money into these so-called “Smart” Beta funds.  

To go along with their unproven track records and bionic marketing claims, some of these funds reference proprietary indexes with little or no discernible edge being offered.   Many of these funds sponsors are adept at promising greater returns, but I’m not yet convinced that I’ll be adequately compensated for the greater risks.  

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Wall Street's Complexity versus Investors' Profits & Simplicity

“Any darn fool can make something complex; it takes a genius to make something simple.”  -- Pete Seeger

As a long-time trader, I am living breathing proof that simplicity and profits are positively correlated while complexity and profits are inversely correlated.  In other words, as my 25 year investing career has jettisoned multiple methodologies and numerous indicators, my profits have became more regular and predictable while my losing ratio has diminished.  This is the absolute antithesis of what Wall Street wants you to believe.  

Wall Street lives and breathes on complexity.  They pitch derivatives of every variety and alternative funds for specific self-serving reasons.  

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Gerald Loeb's Battle Plan for Investment Survival

Sometimes the things that need to be said can’t be said any better than they were said in the past.  I’m a big fan of Gerald Loeb (1899-1974), the man Forbes called the most quoted man on Wall Street.  I’ve written about this extraordinary investor before.

These are the six elements of what Loeb described as his ‘Battle Plan’ for investment survival.  I believe we still have a lot to learn from G. M. Loeb.

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A Game of 21: 21 Investors / 21 Rules

I don’t know of any college in the world that offers you a higher return per unit of effort than the value of a proper investment education.  I believe a solid investment education is one of the most high leverage activities an individual can possibly do.  

Bold statement, yes, but I’ll give you some examples.  I’ve been running the bases, so to speak, teaching investors high probability trading for nearly 15 years.  What I mean by that is to reference the simple baseball paradigm I’ve used for years.  To get to first base, investors need information and knowledge.  To get to second base, they require investing tools and organization.  To get to third base, they must have an analysis methodology.  Finally, to get to home plate, they need to understand themselves and the “investor self,” and they must be able to take action.  Just as the Viagra advertising slogan says, “this is the time for taking action!”

After 25 years as a stock market trader, I’m able to vouch firsthand for witnessed some sensational stories of success.  I’ve witnessed firsthand as accountants, engineers, entrepreneurs, doctors, salespeople and many others who initially embraced investing as a hobby made the transition to investing full-time.  I’ve had the distinct pleasure of being involved in part of their journey.  And so, I thought it would be fitting and interesting to poll a number of them and ask them to share their favorite investment rule.  The following 21 rules are their contributions.

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You Do Want To Be A Type D Investor!

I have two things in common with Richard Sherman, the Seattle Seahawks’ Super Bowl star.  We both graduated from the same university and we both have two personalities.  Sherman articulated that fact nicely the other day when he explained to the press corps that he has his game face for interviews, team functions and on-field athletic efforts.  His game face is how he makes his living and what he shows to the public.  His other face is for family and friends, and he doesn’t care to share that side of himself with anyone outside of his inner circle.  

As an investor and trader, I, too, have both a game face and a private face.  For 6.5 hours a day, I’m in my stock market trader mode and it’s all about me.  I am wearing my game face.  I am one of the ‘haves’ – everyone else is a ‘have-not’.   It’s the selfish mindset that  I literally wear for those 6.5 hours, but hopefully only for those 6.5 hours, 5 days a week.  It’s most apparent when I’m actively putting on a trade or literally taking money off the table.

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Now Commission-Free Trades!!

Just announced:  Schwab, Fidelity and Ameritrade are offering all individual investors infinite commission-free trades!  Now that I have your attention, let me tell you that in actual fact they aren’t doing any such thing, but as an investor, you should adopt that “free” mindset.  The reality of today’s electronic market is that the average online brokerage fee is just $5.95.  Interactive Brokers, Inc. charges just $1 per stock trade, while the big three mentioned above all charge under $10.  Some brokerages, such as Vanguard, even offer 25 free trades every year if your assets exceed certain thresholds. 

The point I wish to hammer home is that the act of selling your equity position is a particularly episodic exercise because so many complicated emotions, events and indicators can influence your actions.  Yes, tax consequences matter and allocation decisions are also important, but what is most required at this stage is decisiveness and a firm response.  Anything and everything that might stand in the way of that – regardless of the size of the speed bump – must be purged, removed and completely banished from your trading psyche.  Worrying about commission costs or factoring them into the equations of your investing will just hurt you.  Unless, of course, you are a very high frequency day trader – then you might want to shop around a bit.

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How to Invest with Your Own Pit Crew

You wouldn’t ever try to change the tires on a moving car, would you?  You wouldn’t go to a dentist who hadn’t finished his dental degree, would you?  Yet investors every day seem to do exactly the equivalent by investing in the stock market with little or no groundwork or preparation.  Without common sense and some basic readiness, they approach investing with a carefree unsuspecting attitude.  If you disrespect the markets to that degree, the markets will disrespect you right back.

Imagine how a NASCAR race team would do if they entered a race without a pit crew.  Yes, Mr. Investor, you do need your own pit crew.  You may need to assume all ten roles for each of the crew members, but that’s fine.  The point is that you need all ten.  You can’t do average here and go for seven out of ten.  Close enough is not part of the vocabulary in this game.  If you forget to hire a crew member to fill up the gas tank, you will not finish the race.  

Precisely the same is true with investing.  You need your investing pit crew and all ten of them must have practiced together, worked together and focused on the same objective.

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