The Traders Journal

Only the 58 Navigators Matter

Of the approximately 6,000 stars visible to the naked eye, only 58 are considered navigator stars.  Since antiquity, these essential stars have guided mankind to many new horizons.  This wisdom came to me on a brokerage house Holiday card.

If you have ever stood atop a mountain at night or lay on your back in a country field as the stars came out, you will not dispute the overwhelming vastness of the heavens.  The stock market can be nearly as vast and overwhelming.  Much like the heavens, it’s most important to focus on the bold stars and forget about the faint stars.  It’s impossible – indeed harmful – to spread your gaze across all 6,000 stars.  Just because you see light in the heavens or the markets doesn’t mean it will get you where you want to go.

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Academics Prove that Trading the Markets Contributes to Your Longevity

Yes, the fountain of youth really does exist, and academic research is increasingly proving it to be found amidst your investment portfolio.  A growing body of scholarly research shows that, in many ways, life can get better as we get older and being an active investor can contribute in significant ways.

As I write this, I’m 62 years young, and without a doubt, I’m a far more profitable trader today than I was 10 years ago.  I expect to be even more skilled in another 10 years as my expertise deepens.  It’s as if the “intuition gap” that separates me from the market continues to narrow.  I’ve worked all my life to make that gap smaller and smaller.  I chose to believe that is why they refer to them as the ‘golden years’.  Without getting too metaphorical, it’s like the distance between me and the market has become a relatively narrow space such that I can nearly reach across the chasm and touch the other side.

Before you dismiss this stay-young-by-investing thesis, consider the investment track records of some mature money managers such as Warren Buffett, John Templeton, George Soros, Shelby Davis and Philip Carret who all practiced their craft for at a minimum of 38 years.  Some are still going strong beyond 55 years.  

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Why Successful Investors Embrace the Laws of Grouping

Fish swim in schools.  Birds fly in flocks.  Humans follow grouping principles too.  Gestalt psychologists describe these as the Laws of Grouping and the stock market most definitely acknowledges these laws at its core.

My own trading methodology leans heavily on these principles to such an extent that I actually named my version the “sisters strategy”.  In the most elemental form, it endorses and embraces the fact that equities tend to move together on four legs:

     Group 1:  We’ve all heard the cliché  “a rising tide lifts all boats.”  When markets trend up, the majority of equities participate in the uptrend.

     Group 2:  The market is divided into nine large sectors. Up-trending markets are lead by a number of these strong sectors.

     Group 3:  The strongest sector is composed of a basket of similar industry groups that are fueling its rise.

     Group 4:  Finally, a cluster of similar and robust individual equities, which are all part of the same strongly trending industry group, in the leading sector are driving the total market in a significant fashion.

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You Only Get 2,000 Profitable Trades Per Lifetime: Use Them Wisely!

The National Football League can prove statistically that top running backs, such as Marshawn Lynch of the Seatte Seahawks, have a football lifespan of approximately 2,000 ball carries in their careers before their productivity falls off a cliff.  Major League Baseball has similar statistics for the number of throws their pitchers toss.  There is even a website, www.pitchsmart.org, which offers a unified set of optimal guidelines on pitching usage for different age groups to aid in injury prevention.

My two points are these.  Once running backs approach that 2,000 number, team managements know their value is greatly diminished, and players’ contracts reflect this fact.  In addition, football coaches know that these carries must be strategically allocated, just as baseball coaches carefully track the number of throws their top pitchers deliver.  They, too, are managing a depreciating finite asset.

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Stock Market Mastery: Blending Fundamental & Technical Analysis Part I

The Harvard Business Review (November, 2014) just published its list of the Best Performing CEOs.  This list should interest investors since these top 50 CEOs have been undeniably effective in delivering total shareholder returns which averaged 1,350% while on the job.  That translates into a 26.2% annual return!

One classic example of why investors should hitch their wagons to these “best” CEOs, such as Warren Buffett at Berkshire Hathaway (BRK/A), is that those investors who did so have been rewarded with a 950% return over the past 20 years.  

From my experience in Silicon Valley, these individuals are obviously talented and driven with a very high bandwidth, are just as often somewhat quirky.  Their shareholder letters can make for interesting reading as they reveal their key business principles and management styles.  

Common to most of this group (and unlike many short-term focused CEOs) is that they focus on the long term and possess a powerful strategic vision as to implementation.  Another common denominator is that their companies connect effectively with customers, employees and the communities where they operate.  Interestingly, about a quarter of them are MBAs and a quarter are engineers by training.  That is all fundamentally good and academically interesting, but as an investor, I believe performance is paramount.

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Five Advantages Individual Investors Have Over Institutional Investors

The walls of advantage once held by institutional traders over individual investors have come crashing down.  Emerging from the dust, there now marches an entire army of real advantages that individual investors hold over their formerly superior big brothers.  

In the worlds of fundamental information, charting tools and trading costs, these institutional armies no longer have the high ground.  The field is indeed much more level. 

Despite all the talk about program trading, derivatives and flash crashes, I urge you not to become demoralized or dispirited.  Don’t tiptoe to the sidelines.  My objective here is to increase your overall personal satisfaction with your individual investing efforts while bolstering your confidence and stimulating a call to action.  There are dozens of actual advantages that we, as individual investors, have over institutional investors.  I want to share five that come to mind.

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Wizard Investing: Assembly Required, Construction Prohibited

Read the Market Wizard books.  These remarkable investors use proven off-the-shelf tools and indicators which they then assemble into whatever profitable methodology that they’re most comfortable with.  What they don’t do is construct black boxes with proprietary indicators and complex algorithms and then proceed to make billions.  Yet it takes years – even decades – for many ordinary investors to realize it’s not about secret tools or esoteric indicators still waiting to be discovered.  It’s about the investors themselves.  

In auto racing, the cliché is bet on the driver, not the car.  Contrast this to horse racing which is notoriously fickle.  Why?  Because in horse racing both sides of the equation are flesh and blood – that’s where the unpredictability lies.  In F1 auto racing, you would likely win more times than not by betting on the top drivers.  Since only one side of the equation is a living being, it is far less unpredictable than horse racing.

My point is that likewise in the investing arena, more energy needs to be spent by investors on keeping a trading journal and reading books that help them better understand themselves – the flesh and blood component in the equation.  These are the high leverage activities that the Market Wizards have told us about for years.

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Definition of Money Management

Google “money management” and you’ll get back a quagmire of non-sequiturs, disjointed, inconsistent and incomplete information.  There is no single comprehensive definition.  There isn’t even any number of consistently similar definitions.  Yet what do most Market Wizards disclose as one of the keys to their success:  money management.

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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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