The Traders Journal

Nine Reasons for You to Join Our Club: ChartPack Update 7.25

Once a quarter, I update my Tensile Trading ChartPack.  With such a large number of users now it was easy to poll some of these investors to ask how and why they use the ChartPack.  Their reasons were enlightening, so I’m summarizing a few of their comments in this week’s blog.

Simplifies the Markets:  The ChartPack captures the massiveness of the whole market and organizes it into a manageable number of ChartLists.

A Professional’s Own Organizational Tool Kit:  It’s like the only tool kit personally used by a veteran money manager everyday for decades that’s available to the public.  The 100% transparency allows for it to be used in part or as a whole – however investors wish.

Maximizes Your Efficiency:  Its structure facilitates the relative strength approach of market / sector / industry / stock focus, allowing investors to find the highest probability trades that the market has to offer in the shortest amount of time.

Heavy Lifting Done for You:  This organizational tool kit represents over 1,000 man-hours of effort.  It contains over 90 ChartLists strategically prepopulated with the most appropriate indexes, ETFs and equities and then preformatted with the best indicators.

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Trading the News: Lessons From My Personal Trading Journal

The motto in the news business seems to be “If it bleeds, it leads.”  Investors must appreciate that our news is packaged by the news media in a manner to motivate the audience to tune in.  It is thus sold for the benefit of sponsors, not for the benefit of the public.  The headline “Dog Bites Man” is not news, but one reading “Man Bites Dog” surely is.

I have my own filtered definition of news.  I consider hard news to be earnings announcements which occur on a predictable calendar basis and are reported as data points.  The gossip before earnings are announced and the commentary afterwards are the soft news reports which I completely ignore.  Reported earnings, in my book, are relevant data points and I do pay attention.  My personal description of news is that certain unexpected events, such as merger rumors, labor strikes, management changes and accounting irregularities, do tend to move the market wildly up or down.  I do not, however, base my trading on these events.  This is the arena of the programmed trading firms with expensive super-fast computers and event-based algorithms that continually scan live feeds and watch for news that could affect a publicly traded equity.

This is the day trader’s sandbox.   Not mine.  I’m a position trader.  In much the same way that I like to let IPOs play out for at least six months before I begin accumulating a position, I like to let the markets digest the news before I jump in executing trades.  If the basic trend of the stock chart does indeed change, I will act appropriately, but I’ll let the market digest the actual newsworthiness of the report over a couple of days.  For me to try and guess correctly which way the price will move based on fresh news is a gambling game that I’m not willing to play.

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How I Improved My Asset Allocation Profile by Using a Correlation Calculator

Many investors would be shocked to learn that what they thought was their prudent well-diversified portfolio of five different asset classes might be effectively no different than owning the same car in five different colors.  If you fail to understand asset correlations, most of your portfolio could be essentially the identical make, model and year of car, just appearing different in five hues.  As I’ve been preparing my upcoming seminar on Asset Allocation (set for October 17, 2015), I’ve realized that it’s a major challenge to simplify the topic of modern asset allocation strategy.  It’s a subject that academics love to complicate and that Wall Street seems reluctant to make transparent for investors.  Let me explain. 

So, what is a correlation and why is it important?  Mathematicians and statisticians refer to it as covariance.  Wall Street refers to it as a correlation between asset classes (ETFs) or equities.  A correlation calculator is a tool that calculates the historical relationship between two equities that happen to change together.  It can occur over many different time periods and can be done based on daily, weekly or monthly prices.  The degree to which the prices of two different equities or asset classes move together is expressed as a range between +1.0 down to -1.0.  If the two equities’ prices move historically in the same direction, it’s a positive correlation with the mean value falling between zero and +1.0.  If they move in opposite directions, it’s a negative correlation and readings range from zero to -1.0.  

This is important because earnest diversification involves more than just allocating assets to different baskets.  You only reap the benefits of reducing your risk if your portfolio is truly balanced in the correlations amongst the portfolio’s assets.  It’s useful to think of it as a vertical spectrum where you have high correlations at the bottom that yield little diversification, while at the top you have low correlations amongst your assets – thereby yielding greater diversification.  

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Your Biological Passport To Profits: Use It With Care!

Most professional athletes these days have biological passports.  I submit to you that investors should apply the same principle to their own trading.

A biological passport is an individual’s electronic record which profiles his or her personal genetic biological markers.  The premise being that rather than testing for and identifying new illegal drugs, violations can be detected by simply noting variances from an athlete’s established normal biological profile.

To paraphrase Ross Perot, “Sports has rules, war has rules, investing has rules.”  My suggestion to you is that as traders, we need a similar paradigm to detect and expose prohibited behavior.  Investors, it’s time for a ‘selfie’!

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Plunger Investing: A True Story

To paraphrase P.J. O’Rourke, “Giving assets to a stock market plunger is like giving beer and car keys to teenage boys.”  This is a true story.  As you read this morality tale, you’ll recognize a person you know or investors you have known or possibly a person in your own mirror.  

John was a very successful entrepreneur.  Although his distribution company had a very narrow product line, its market segment had been hot for decades and demand had grown exponentially for years.  

When John retired, he was a wealthy man with a large cash bank balance and a luxury home owned free and clear.  With his newfound free time,  he began to focus his energies on the stock market for six hours a day.  So here we have a newly minted investor who made his money via a sales strategy that was narrow and deep.  Diversification or asset allocation were never part of his lexicon.  His entrepreneurial business experience had yielded significant wealth, and he adopted the same tactical approach to the stock market.

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Where Investment Lessons Reside

Michael Jordan is probably the greatest basketball player I have ever seen.  He wrote a book titled I Can’t Accept Not Trying:  Michael Jordan on the Pursuit of Excellence which lays out his rules for success.  This book is of interest to us as traders even though we pursue excellence in a totally different vocation.  The parallels between Michael Jordan’s success and our investing world are uncanny.  

A few years ago, my trading buddy and I gifted the same Christmas present to one another by sheer coincidence.  It was Michael Jordan’s book.  In the copy I gave my friend, I had methodically crossed out the word “basketball” and substituted it with the word “trading”.  My point was to show these parallels.  I’m sure Michael Jordan was not even aware that he was writing a sensational book on successful investing.  To excel in trading, as in sports like basketball, one must subscribe to the same universal truths.  Valuable investment lessons can be gleaned from exceptional individuals all around us.  Therein lies the secret.

The one recurring attribute I’ve seen in those students of mine who become consistently profitable investors is their wholehearted acceptance of the notion that the secret to successful investing does not reside in some indicator but within the ‘investor self’.  You know when you have truly embraced the investor self because you’ll become aware of investing lessons all around you.  You’ll look for them and you’ll find them.  Poker players always say that it’s critical to know your individual “tell”.  Poker is a game that is, like investing, based on limited information and probabilities.  A tell is the personal trait or demeanor that can disclose a player’s true feelings about his or her poker hand.  

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Four Timeless Investing Principles

I’ve spent many years of digging into my own trading journal, looking for lessons, rules, principles and insights to improve my investing.  I continue to do so, not just to find fodder for this blog but to provide supporting documentation to lend more weight to the teachings of other significant investment writers.  Such is the case this week.  

In a recent letter to clients, Vanguard CEO, F. William NcNabb III,  wrote about how much has changed in the investment arena since Vanguard was founded in 1975.  He explained that, despite all the changes, there remain four timeless principles that continue to offer investors the best chance for success.  Interestingly, I have written a number of blogs on precisely these points.  As McNabb notes, the roots of these four principles go back many decades and are startling in their simplicity.

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Investment Editor Retires: Leaves Us with Four Lessons That Matter

Almost without exception, institutional money managers use Exchange Traded Funds (ETFs). My own trading routines call for reviewing the top 100 ETFs daily. This is a process that I encourage you to include in your own routines. Here’s how and why.

I maintain a personal ChartList of the top 100 ETFs and scan it virtually every day. My ETF ChartList was carefully assembled by using the ETF.com website and Morningstar’s ETF Investor newsletter edited by Samuel Lee.

Let me elaborate a bit here. My ETF ChartList is comprised of the top 100 ETFs based on my own equation. I weighted about 200 ETFs based on daily trading volume, expense ratios, tax cost ratios, total assets, relative performance over the past three years and the asset class they represent.
My winnowing procedure then produces a basket of candidates to which I frankly apply a significant subjective factor based on my experience. The result is a nicely balanced ChartList of the top 100 ETFs representing all the essential asset classes.

The reason this ChartList is so powerful is that it clearly shows me which asset classes the institutional investors are presently most interested in, as well as how they are actually putting their money to work.

When I see the institutional money flowing into perhaps a number of Large Growth Domestic Stock ETFs, I take a special interest. This provides the catalyst for revisiting a wider assortment of ETFs and stocks in this asset class. I don’t just immediately jump into one of the ETFs in my top 100 ChartList, although usually they remain first tier candidates.

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The Vincent van Gogh Trading Toolkit - Refurbished

This popular blog was first published over three years ago.  I thought that a timely update was called for.  You’ll see that the Equity Chartstyle has been significantly revised and I have aded a Mutual Fund Chartstyle as well.  

I spent a couple of hours this past Saturday at the van Gogh exhibit in Philadelphia, and I walked away with a number of confirming insights about successful trading. Vincent van Gogh produced over 2,100 artworks in his brief life of 37 years. From what I saw, his highly recognizable style varied significantly depending upon his mental equilibrium. My observation is that during well-documented bouts of mental illness, he produced more complex paintings. Without exception, my favorite canvases were those painted by van Gogh when he was at peace with himself and completely in control. The results from those periods of his life were simple, bold and beautiful paintings. To me, this confirmed my own experiences as a trader. When I am in equilibrium, I manage to ‘keep it simple’ and invariably, I then produce beautiful results.

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Ten Timeless Tenets of Trading: A 2,500 Year Perspective Part II

Art, history and life can parallel investing.  This blog is my continuation from last week’s Part I where I encouraged readers to be open to a sort of borderless-type of thinking.  To be willing to challenge oneself to look backwards as an aid to moving forwards in the investment arena.  To acknowledge that the past offers us a cumulative depository of wisdom and that art is one vehicle to experience conversations across generations with the masters themselves.  Here is the link to last week’s blog:

http://stockcharts.com/articles/journal/2015/05/ten-timeless-tenets-of-trading--a-2500-year-perspective.html

Experience is Cumulative:  I have written in previous blogs how Warren Buffett, at 85 years old, is still running Berkshire Hathaway with a market cap of $340 billion.  This year, over 40,000 shareholders attended the annual meeting in Omaha to hear the Oracle speak about his company.  Impressive, yes.  But when you actually walk through the St. Peter’s Basilica at the Vatican and absorb some of its physical complexity, you experience something beyond impressive.

With some parallels to Buffett, Michelangelo was 71 when he was commissioned as architect of St. Peter’s Basilica.  His dome there, completed after his death, is considered by many to be the greatest creation of the Renaissance – a structure which influenced church design for centuries thereafter.  Less known, however, is the fact that at 88, Michelangelo began work on yet another architectural commission, the immense basilica of Santa Maria degli Angeli located in Rome’s Piazza della Repubblica.  It’s no wonder that he was often called Il Divino – “the divine one”.  The man was ageless.

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Ten Timeless Tenets of Trading: A 2,500 Year Perspective

For those of you who pooh-pooh the lessons of history, listen up!  I myself am guilty of being overly focused on today’s web – obsessed with the latest hot stocks, investment technologies and trading methodologies.  But at times, it’s important to challenge oneself to look backwards as an aid to moving forward more effectively.  I did this just recently, and I came away quite astonished.  Ten days in Rome convinced me that I was naively ignoring powerful historical insights that could help me become the ‘Michelangelo of the Markets” or at the very least improve my investing skills. 

Rome captured my imagination like no place before.  I experienced it as the cumulative depository of wisdom from hundreds of generations of some of the world’s greatest scions of commerce and philanthropy, transcendent spiritual leaders and supreme visual artists.

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