The Traders Journal

Here Are the Past Eight Market Corrections (I've Been Through Six of Them)

Straight from the pages of my own trading journal. These are my charts from all the market corrections since 1981.  Here’s why I want to share these with you.

The beauty of technical analysis is that it represents human emotions expressed by the buying and selling behavior of investors – emotions which are predictably repeated in times of crisis and have not changed over time.  In the midst of the present correction, I find that looking back at these charts stops me from doing anything rash or stupid.

Dan Ariely, a Professor of Behavioral Economics at Duke University, said this at the Yale Club in 2013.  “In the present, we get tempted and misbehave time after time.”  He explained how investors are apt to be swayed by short-term temptation without consideration or appreciation for long-term benefits or disadvantages.  To fight that temptation, we must make use of self-control, which in turn will limit the influence that temptation has upon us.  

I don’t want to list too many of my own conclusions concerning these charts as that would provide a disincentive for you to study all the market tops and bottoms to draw your own conclusions.  Those are the personal insights with the most adhesive long-term quality.  A lecture from me will be forgotten far quicker than those lessons you learn by digging into the charts yourself and finding lasting observations.  

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The Triple Crown of Investing: Motivation, Confidence, Action

As many of you know who’ve taken my Tensile Trading seminar or watched the DVD, the tenth stage of stock market mastery pulls together all previous nine stages. As the title of this blog suggests, Stage 10 incorporates all three essential ingredients:  motivation, confidence and action.  Successful investors must leverage each of these:
     1.    They need the motivation to seek out meaningful investment tools and real market knowledge.
     2.    They must have the confidence to dig deeper into complex investing methodologies and explore their own investor self.
     3.    They must embrace a personal action plan to convert their knowledge into bankable experience.  
Let’s explore each of these in turn.

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Can You Believe 90% of Fortune 500 Equities Have Vaporized?

Be careful where you sit.  I shared a table at Starbucks last week with two investors who became very animated and energized when I disclosed that I was a full-time stock investor.  What a coincidence, they said, so were they.  They retired in 2004 and bought large positions in the hot names of the day back then, stocks like Cisco and Yahoo.  They proudly told me that they were buy-and-hold investors.

I asked them how that had worked out for them over the past eleven years.

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How to Profit from Momentum Investing: Guest Blogger, Harvey Baraban

 

Harvey Baraban is a Wall Street insider.  As the  former CEO of Baraban Securities, he managed 1,500 brokers and trained over 30,000 men and women for certification as full-service stockbrokers.  In the 1970s, he partnered with billionaire investor Gerald Tsai who was famous for starting the first publicly-sold Fidelity Growth Fund.   Considered to be the father of momentum investing, Tsai also had an extraordinary record running the Manhattan Fund for years based on his momentum investing principles.  I recently asked Harvey Baraban to write about the key insights he learned from Tsai.  Here is what he wrote:

I was fortunate to have had Gerald Tsai as both a partner and a mentor.  He taught me the ropes of how to be a successful trader using momentum as my key technique.  With momentum investing being very much in the news today as the style of choice, I thought it would be appropriate to review the meaning of momentum because the phrase “in momentum” is quite different than a “momentum stock”.  

A “stock in momentum” is a stock that is rising and capturing new buyers, simply based on the fact that the stock is rising and showing only small pullbacks of less than 7% during its rise.  The continuous rise in the stock is based more on technicals than on fundamentals.  As you know, in the world of money management, portfolio managers have to compete with their peers as to performance.  A rising stock owned by leading fund managers forces other managers to buy the stock in order to match or exceed the leading managers’ performance.  These insiders know that in order to maintain the momentum label, these stocks rarely trade below their 50-day moving average.  If or when they do, they become suspect.  It is usually fundamental news that takes a stock out of momentum.  The news could be a disappointing EPS report, a major analyst downgrade or a company’s negative guidance as to its future business or management changes.

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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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