The Traders Journal

New Potent Organizational Framework Plus 200 Timely Tradeable Insights ChartPack Update Version 7.0

“You don’t have to be a genius to be successful.  You just need a framework.”
 —Michael Dell, Entrepreneur and Investor

For those of you who regularly download the free quarterly ChartPack updates, I don’t need to explain the value of its framework and contents.  But there are still many StockCharts.com users who are unclear about how the ChartPack can improve their investing.  To those folks, I’d like to suggest a simple five-step investigation.  I guarantee you that, at the very least, your efforts will be rewarded with some clarity as to how you might organize and populate your own ChartLists.  The five exploration steps are as follows:

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An Investor Finds Motivation, Camaraderie, Discipline & Inspiration in a Unique Place

 

Trading camaraderie provides inspiration and motivation, but it does not always emanate from fellow traders.  The quest to become a consistently profitable trader demands ongoing discipline, and I often find that in unlikely places.  

I spent half my life being a business entrepreneur and the last 25 plus years engaging that same set of mind skills as an entrepreneurial trader.  By that, I simply mean that I am my own boss, keep my own hours, and get by on a paycheck that’s produced from my own investing skill set.  All reasons I love being a trader.

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My Methodology Allocation Beats Asset Allocation: Part III - Eternal Vigilance is the Price of Profits

Thomas Jefferson opined that “Eternal vigilance is the price of liberty.”  For modern investors, I’d say, “Eternal vigilance is the price of profits.”  This being the last installment of my three part series, I want to pull together the key pieces before I segue into the final Q & A.

A)  Academic research has confirmed time and time again that proper asset allocation disproportionately contributes to a large portion of an investor’s profits.  I am so convinced that this high-leveraged activity must be in essence the first stage of any individual’s virtuous investment cycle that I wanted to do something to make it easier for my readers to assemble their own personalized assortments of asset baskets.  

The best way I know to do just that is to gather together a so-called ‘buffet’ of some 59 major asset baskets from which individual investors can choose.  I loaded all of these asset baskets into a ChartList, labeled each appropriately and then pre-populated each basket with a suitable ETF.  I’ve added this to my ChartPack and labeled it “10.07 Investor Buffet of Asset Allocations – OPTIONS”.

http://store.stockcharts.com/collections/stockcharts-com-chartpacks/products/tensile-trading-chartpack-by-gatis-roze

You’ll notice that I placed it above all other ChartLists, both to illustrate its importance in the hierarchy and to encourage investors to consider where they’ll invest before they start deciding what specifically to buy.  Your survival depends on this!  Learn about asset allocation, embrace it, and personalize it.  You, too, will grow convinced that it is indeed a high leverage activity for you as an investor.

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My Methodology Allocation Beats Asset Allocation: Part II - Questions Answered

There’s nothing like teaching a seminar to fifty sharp investors on this topic and having them demand more clarity and specifics to encourage one to do the same for my blog readership.   To bring you up to speed, please read my previous blog on this subject.

http://stockcharts.com/articles/journal/2015/01/my-methodology-allocation-beats-asset-allocation.html

I think clarity and specificity are best served here if I use the question and answer format that worked so well in the seminar.  

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Secret Sauce: The Other 50% of Investing - Part II

I wrote about this subject nearly two years ago from my own personal perspective, but now I want to expand on the original blog and share with you the perspective of a well-known international portfolio manager on the same topic.  Here’s what I wrote two years ago:

http://stockcharts.com/articles/journal/2013/05/secret-sauce-the-other-50-of-investing.html?

I was asked not to name names, but let me set up the story.  

I was out of town, dining alone in one of those intimate restaurants in the high rent district where they cram tables so tightly together that the pretentious maître d’ shows you to the table but offers no helpful advice whatsoever about how to crawl into your seat.  You may consider crawling under the table as the preferred path since squeezing your derriere into the six-inch gap between the tables and into the faces of the neighboring patrons hardly looks like a viable option.

Nevertheless, once wedged into my seat, I ordered a drink and began to flip through a few stock charts on my phone.  The couple seated next to me couldn’t help but notice since I was virtually sitting in their laps, and despite my rudeness with my phone, they soon invited me to join them.  

As it turned out,  the husband is a well-known mutual fund manager and was intrigued by my chart reading.  A robust evening ensued and we covered a lot of ground thanks to his very patient wife, but we finally settled on discussing in detail why he believes that happier traders and investors generally make more money.

These are our observations (more his and hers than mine) about how happiness facilitates profitable investing, listed in no particular order.  I will add one caveat – our happy discussion was well lubricated by two sensational Napa Valley reds.  For the sake of the story, I’ll just refer to this couple as Ted and Alice.

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How I Only Trade Stocks Soaked in Positive Probabilities

I only trade the strongest and prettiest equities in the market.  I’ve written before about how I leave my deep value purchases to the Sequoias and Fairholme Funds of the world.   With my own stocks, the challenge is how to ascertain if one equity is stronger and prettier than another equity.  As a trader, it’s all about probabilities.  If the probability pointers align up better with one stock versus another, in my book that equity is stronger and prettier, thereby becoming a more appealing trade.  Let me explain.

Over the years, my trading journal has clearly showed me that “stock enchantment” is far less profitable than “stock engagement”.  Enchantment is that poor and inconsistent trading behavior where you buy an equity based on a nebulous intuitive basket of attributes that you don’t totally understand or can’t explain completely and that therefore becomes almost impossible to replicate consistently.   As soon as you sense you are giving in to the “dark side” of investing, get yourself re-centered.  

Engagement, on the other hand, is when you behave in a consistent manner, follow your methodology and move away from the dark side towards trading with the winds of probability at your back.  But, you ask, how does an investor compare probabilities on separate stocks?  Yes, it can be done.

I buy the strongest stocks – with my definition being those that meet my “Tensile Trading Triple Threat” criteria or T-cubed for short.  In other words, assuming that the general market is trending up, my T3 criteria (a) requires stocks to be in sectors which are outperforming the general market; (b) requires that the industry to which the stock belongs be outperforming its own sector; and (c) demands that the stock itself be outperforming its own industry group.

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Mind Games That Can Kill Investors

More often than not, most successful investors will admit that while investing may seem relatively simple, it’s not easy at all.  Handling the emotional challenges requires ongoing diligence and effort long after the mechanics of actual trading become intuitive.  From my experience teaching for over two decades, the biggest obstacle I see standing in the way of most new stock market enthusiasts is this immense reluctance to personally accept the fact that their own mind games can kill them as investors.  

Our brains are always trying to trick us, so we need to make a conscious effort to distract the brain and force it to engage in rational analysis instead of impulsive emotional  behavior.  Possibly the five most important words in investing are “deconstruct and control your urges.”  Find them, define them, write them down and control them.  You just may become the next Warren Buffett, if you do!  

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News Flash: Fundamental Investors Joining Chartist Investors, New Powerful Visualized Dividends

I have three objectives for this blog.  First, to invite and encourage fundamental investors to embrace the value of visualized dividends which can now be plotted on a chart along with price.  Secondly, to nudge all investors to consider allocating a percentage of their portfolios to dividend yielding stocks, both domestic and international.  And finally, to compare three dividend yielding options, ETFs, individual stocks and mutual funds and to consider which might be the best option for you.

The first objective is to show fundamentalists how they benefit in four distinct ways by bravely wading their big toe into the visual investor pool.  As an example, I’ll use Wells Fargo (WFC) which is one of the “dividend darlings” in my ChartPack (ChartList 640).

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Yes - Successful Investors Must Be Like Loving Parents

As any accomplished trader will tell you, investors should think of their equity positions as their children.  They should act like parents who love all their children equally, nurturing each and every one with care.   My trading journal seems to suggest that I’ve been a bad parent at times.

The truth is that my investment management style is often more akin to a screenwriter for the Downton Abbey television series.  Each character (i.e. equity) has its own storyline which must be regularly nurtured and developed, but the reality of the situation is that there are certain leading characters (i.e. equities) that simply require – indeed demand – more care and feeding based on their importance to the series (i.e. portfolio) as a whole.  All our portfolios are no doubt populated with these high-maintenance characters for a whole host of unique personal as well as market reasons.  

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Former Wall Street CEO: Guest Blogger

For over fifty years, Harvey Baraban has been an active stock market investor.  For over twenty-five years, he has been my mentor, friend and trading buddy.  Drawn together by a mutual shared passion for the markets, I am grateful to Harvey on many fronts, not the least being that he was the one who encouraged me to start teaching the investment classes that I’ve now done at Bellevue College for over fifteen years.  Harvey himself was an adjunct professor for many years at Golden Gate University in San Francisco. 

By background, he is a Duke engineering graduate who partnered in the 1970s with billionaire investor, Gerald Tsai.  Tsai was famous for starting the first publicly-sold Fidelity growth fund.  He also started the legendary and highly profitable Manhattan Fund which was one of the earliest proponents of concentrated momentum investing when the prevailing wisdom of the day advocated extremely broad diversification.  This entrepreneurial spirit rubbed off on Harvey Baraban as he, too, became a widely respected pioneer in the securities industry. 

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The Birth of a New Investor

General George Patton once said, “A good plan implemented today is better than a perfect plan implemented tomorrow.”

I just had a front row seat for the birth of a new investor, and the experience was not at all what I expected.  Few births probably are.  Before I lose you due to graphic visions of a hospital room, let me say that the investor birth involved my middle-aged sister finally transitioning from employing a full-service broker to grabbing the bull’s horns and managing her own retirement investment account. 

Over the years, I had tried to coax, cajole and beg her to do this, but all my pleas passed with no success.  I had approached the subject with the usual refrains: “be adventurous,” “learn something new,”  “be your own CFO” and everything in between.   Her steadfast reply was always the same:  “life is what’s happening while your money is being managed by someone else.”  What finally tipped the scales, however, was a combination of shame, performance and costs. 

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A Big Trading Mistake I Made So You Won't Have To!

I’ve learned that you have to be very thick-skinned to be a trader or a blogger.  Many of my blogs are lifted directly from the pages of my old trading journals, and as I write about these former trades, I am very conscious not to sugar-coat it or make it look better than it actually was. 

This week, I’ll describe how I slipped right into a rather expensive trading mistake.  At the same time, I’ll also tell you that I paid my tuition to the market, that I only did this misstep once and that I’ve learned from this mistake.  I’ll explain what happened in detail, but let me also add that despite this specific instance of being tutored in the mutual fund arena, the lesson has been carried over to the stock arena and ETF arena as well.  More on that later.

Let me take you back to the years 2003 – 2006.  The market had a strong, 85%-plus run, and in April 2006, it hit a high followed by a normal 8% pullback.  By late October of 2006, it took out the April high and was moving strongly into November.  I fell prey to an overly-excited state of mind and made a bad, impulsive decision during open market hours.  Normally, my strategizing is done when the markets are closed, which I’ve found offers me more clarity and tension-free reviews of my data points, information sources and charts.  On that day, my mistake was rushing a sizeable mutual fund buy without doing my normal due diligence and preparation.  Then pow… four days later, I received a humongous distribution which resulted in a pretty nice gift for Uncle Sam.   By investing at the wrong moment, I essentially was handed back a large portion of my investment as taxable capital gains with an untended large tax liability.

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Youthful Investors versus Grizzly Veterans: Beer versus Wine

At a recent seminar, I was asked by a sharp young investor how much trading rules had changed since I began trading way back in 1905.  He didn’t actually say 1905, but the tone and cadence of the question gave him away.  By pure chance, I had just picked up William Eng’s 1990 book, Trading Rules, off my bookshelf and had flipped through the pages again as I ate my lunch.  The young man asking me the question was not unlike a young athlete because after all, depending upon the sport, one statistically hits one’s prime in one’s 20s or 30s.  I answered with a knowing wink that serious investors are much more akin to an exceptional bottle of wine – such as a Domaine de la Romance, Conti Grand Cru – something that just keeps improving with age.   He stared back at me with a puzzled look as only a young beer-drinker can with no appreciation for what he was missing.

Most all dedicated investors get better with age.  It doesn’t take biceps to trade better.  It doesn’t even take extraordinary amounts of gray cells.  But it does take experience and intuition which is cumulative.  For every purportedly sensational youthful portfolio manager you present, I can offer up two grizzly veterans my age who’ll kick their derrieres. 

But I digress.  Back to Eng’s trading rules.  As he says, “an expert market mind is only acquired through careful analysis of many successes and failures.”  The other part of the equation deals with the reality that the market’s primary fuel is human emotions which have not changed in centuries.  Without getting into commentary on each of Eng’s fifty rules, I thought I’d simply list a dozen that illustrate, for my young questioner, that trading is timeless, experience matters and serious dedicated investors do significantly improve with age.  It’s simply a victory of fine wine over beer.

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Over 150 Fresh Tradeable Insights: The Tensile Trading ChartPack Update 6.0

For both existing ChartPack users as well as investors who have not yet downloaded the ChartPack – or perhaps don’t fully understand the many benefits of how to maximize its use – I’m pleased that a free video and user manual is now available for your review.  Grab a cup of coffee, put your feet up, and check it out!

Free Video & User Manual:
Recorded at ChartCon 2014, my 60-minute presentation steps through the powerful organizational structure and each of the 90-plus ChartLists that comprise the ChartPack.  All StockCharts.com users will benefit from the many organizational ideas.

http://store.stockcharts.com/collections/stockcharts-com-chartpacks/products/tensile-trading-chartpack-by-gatis-roze

As a full-time trader, I have been using this ChartPack personally for over a decade.   About five years ago, I began sharing my ChartPack with my Bellevue College class investors.  In November, 2013, I started offering the ChartPack and quarterly updates to my StockCharts.com friends, users who now number into four figures.  

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My Methodology Allocation Beats Asset Allocation

From what I’ve seen of most investors’ asset allocations, it’s a maze.  My personal asset allocation is better described as a labyrinth.  Unlike a maze that attempts to make you mentally confused and physically lost, a labyrinth provides a path towards inner calm and mental clarity.  My labyrinth allocation is in fact more accurately described as a methodology allocation and is built upon three foundations:  diversification, correlation and methodology.  Let me explain. 

Diversification means different things to different types of investors.  In my portfolio, this plays out as a lifetime mantra of distributing assets across a very wide array of buckets – classic diversification.  Some buckets are relatively uncorrelated, while others are negatively correlated (all the time acknowledging that in times of crisis, correlations tend to rise amongst all assets).  Basically, I’ve avoided the strategy of, for example, buying a dozen rental properties in one neighborhood.  These are all correlated assets and diversification is non-existent.  My point is simple.  Avoid putting all your eggs in one basket is not just a cliché but a truism as well.  But then also make certain your eggs are somewhat uncorrelated.  

My third foundation is methodology.  Here is where I differ from the sea of asset allocators because I factor in my own personality, skills and trading style.  As a trader, I buy individual stocks based on strength, relative outperformance and momentum.  I cover this base or asset bucket myself.  I don’t look to ETFs or mutual funds to do this for me.  Conversely, as a trader, I also know myself and acknowledge that I am not emotionally capable of buying deep discounted equities or distressed securities.  Those are what asset allocators label as ‘value stocks’.   

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My One and Only New Year's Resolution

Every January, investors throughout the world pledge to improve themselves and their financial management efforts.  Only a select few truly succeed in these eager commitments.  Let this be your nudge to join the ranks of those select few.

In past years, I’ve often fallen into the trap of making long lists of New Year’s Resolutions.  I’ve taken on towering tasks to weed out negative beliefs or unhealthy emotions, to become more personally accountable and action-oriented, or to seek answers from within rather than trying to place responsibility elsewhere.  While some of these resolutions have fallen short, many others have fortunately stuck to varying degrees and have grown into permanent staples of my routines.  The most prominent example is my personal Trading Journal, which began as a goal to document my behaviors, emotions and thoughts throughout each trade.  Most significantly, my journal has come to shape my definition of success by changing the way I classify winning and losing trades.  

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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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CAN SLIM 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 CAN SLIM® methodology that is so widely used.

I’d like to thank my friend Tom McClellan (of McClellan Oscillator fame) for bringing together two CAN SLIM® 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 CAN SLIM® 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 CAN SLIM® paradigm.  For this reason, the other night as I listened to both CAN SLIM® 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.

http://stockcharts.com/articles/journal/2013/05/gerald-loebs-timeless-wisdom-1899-1974.html?

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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My Top 12 Takeaways from ChartCon 2014

It was wonderful to see so many familiar faces this past weekend at the ChartCon 2014 Conference.  I know I walked away a more energized trader with a handful of new tactical options and strategies and a number of tradeable ideas I’m presently working through.  

Listed below are some of my favorite takeaways from the conference.  They are by no means a greatest hits list of the conference, but just what I personally found interesting.  If you couldn’t make it this time around, I would wholeheartedly encourage you not to miss the next ChartCon event.  Enjoy!

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Evidence-Based Trading for Dummies

Robin Griffiths, the renowned technical strategist, once opined that “Trading is a traffic light system.  At a traffic light, you wait for it to turn green and then you go.  You don’t try to predict when it’ll go green.

Unfortunately, far too many investors believe that to achieve success in the stock market one must become supreme master of the crystal ball by creating a complex methodology that will predict where the market is headed.  In reality, this is the absolute antithesis of what market wizards will tell you.  For that reason, I think Robin’s metaphor is spot on.

At a traffic light, you sit patiently with your foot on the brake; when the light turns green, you hit the gas and off you go.  It’s straightforward, and the average Joe who drives generally follows this program.  You don’t try to predict when the light will change; you simply respond appropriately when it does.   

There you have it – my trading methodology in a nutshell.  Occasionally, I do remind myself that I’m not in the business of trying to divine the market’s direction.  I’m in the business of reacting to it.

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How I Get Re-Energized as an Investor

Donald Trump was quoted as saying “Get going.  Move forward. Aim high.  Plan a takeoff.  Change your attitude and gain some altitude.  Believe me, you’ll love it up here.”

I will admit that in the middle of summer, my passion for the markets ebbs.  As I talk to my trading friends, I know I am not alone with respect to a  summer slump.  It’s just human nature.  My solution to this personal seasonality has been to participate in some sort of investment conference or seminar that will let me network with other investors belly-to-belly and help kick-start my investing goals for the fall when I once again amp up my trading activities.  Over the years, this “it takes a village” approach to investing has worked well for me.  

I’m reminded of a humorous quote by Zig Ziglar.  “People often say that motivation doesn’t last.  Well, neither does bathing—that’s why we recommend it daily.”  Much like bathing, I read Investors Business Daily every day.  This morning for some reason, my eyes gravitated to their regular feature entitled “10 Secrets to Success”.  It’s a shame but I often breeze past this feature in my quest for tradeable news.  Today, however, as I’m working on my two ChartCon presentations, I read the column in detail and it was a catalyst that re-energized me.  I thought I’d share this morning’s “10 Secrets” in the hopes that they have a similar effect on you.

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Tradeable Insights from the Past Quarter: Tensile Trading ChartPack Update #4

One of the highest leverage activities – if not THE highest leverage activity – that investors should focus on is to organize their routines, analysis and portfolios in a manner that maximizes tradeable opportunities.  Some investors will bump about for decades before they achieve a system that effectively analyzes the markets and identifies the best high probability trades.  The major benefit of reviewing the Tensile Trading ChartPack is that it will literally jump-start your organizational paradigm and save you years of trial and error.

This update is the fourth since we released the Tensile Trading ChartPack (note all ChartPacks include free updates for one year), and I must admit that my own trading has profited in unexpected ways.  For example, the simple routine of systematically reviewing each and every one of the 40 Fidelity Select Sector Funds to identify the equities that this Wall Street powerhouse has purchased and sold over the past quarter continues to yield tradeable insights.

In this update, Fidelity portfolios GR-420-12 through GR-420-88 show all the new equities Fidelity accumulated over the past three months for all 40 Select Sector Funds.
For your ease of use, new equity additions to their top 10 holdings are starred with double asterisks (**) next to their names.  The previous quarter’s new purchases were starred with a single asterik (*).

It is my opinion that all investors, regardless of skill level, would profit immensely from an analysis of stocks both purchased and sold by the mighty Fidelity portfolio managers.  By reviewing the last quarter’s activity or months April 1st through June 30, 2014,  
the charts literally teach you how Fidelity executes accumulation buying campaigns and distribution selling campaigns.  

I would encourage you to do your own analysis of the stocks that are double starred (**), but I will share ten of my own observations.  Make the effort and you’ll find the lessons and insights of real value.

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Bob Farrell: 10 Timely Reminders from a Wall Street Legend

As markets make new highs, investors often befriend a dangerous new companion.  He’s the greedy little devil that sits on your shoulder and whispers in your ear – assuring you that this market will make you wealthy as he coaxes you to buy more and ignore the naysayers.  

As I write this blog, the S&P 500 has soared nearly 300% since March of 2009 while other markets are also hitting new highs.  Without entering into a debate about market timing, I feel it might be prudent to revisit the sage advice of Wall Street legend Bob Farrell who had a front-row seat to a number of epic go-go markets in the late ‘60s through some brutal bear markets until he retired at the end of 1992.  These are ten of Farrell’s most famous observations:

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Memory Tricks for Investors

As Oscar Wilde aptly said, “Memory is the diary that we all carry with us.”  It’s July 4th, and I’m coaching kids about timing and firecrackers.  Not too different from coaching investors about timing and selling equities.  Most grownups have learned from experience -- perhaps some more than others – that once you light a firecracker, there is a certain period of time for which it is safe to hold it before tossing it off.  Exceeding the safe holding period will cause all sorts of pain.  

My point is that kids have to learn this timing thing.  Many will push the holding envelope and at some point be caught with an exploding firecracker in their fingers.  At this point, memory comes into play.  Next time, most kids will remember to toss it off sooner rather than later.  By the time you are an adult, your memory tells you when to safely hold, light and toss a firecracker.  

Your equities demand much the same timing.  I strongly suggest you use the same timing memory for investing.  Granted as you mature you begin to appreciate memory for the gift that it is because you start losing it.  With diminished skills in this area, your timing will suffer and therefore your profitability as well.  The best antidote to these senior moments, I believe, is threefold.  

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The Most Important Question Every Investor Must Answer!

Have you ever met a famous investor at a cocktail party or event, taken his or her advice on a stock and lost money?  You are not alone.  It may have been a sensational timely trade and the famous one made a 30% gain in four weeks while you held it an entire year and lost money.  Therein lies the crux of the problem.  Same equity but two different trading timeframes.

The reality is that we all are comfortable with investing on different time horizons.  Ask yourself this question:  “How many trades do you generally execute in a day, a week, a month, a year or every decade?”  My point is that while a conversation between a day trader, a position trader and a long-term investor may be academically interesting, it will not be profitable for any of the three parties.   They are simply not on the same timeframe page.  

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The Probability Buster Chart: Improved & Strengthened

A powerful profit-enhancing tool has just been refined and put on steroids.  Back in December of 2013, I wrote a blog titled “Possibly the Single Best Visual Analysis Chart Ever.”  Bill, my good friend at Stockcharts.com, is an exceptional developer, and he figured out a way to make this tool easier for us investors to use while at the same time bolstering its clarity and visual value.

In lieu of rewriting the previous blog, I’d just encourage you to reread it.  The beauty of the new syntax is that saving this chart in template form to be used again and again becomes a breeze.  We no longer have to look up symbols for sectors or industries because the program does this for us.  Simply type in “$SECTOR” or “$INDUSTRY”, and voila!   If you pull down the “Legends” menu and click on “Verbose”, the charts give the full label descriptions, too.  Very cool.

The chart below illustrates a top-down analysis strategy, beginning with the market and working down through the sector, industry, and to the individual equity.  The objective is to align trends by putting the winds of probability at your back.  Your likelihood of achieving a profitable trade increases significantly when the equity’s sector is outperforming the market, its industry group is outperforming its sector, and the stock itself is outperforming both its industry group and the market overall.

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Invest Like You Drive & Put $$$ in Your Pockets

I spent the weekend with my friend Dan, a prison chaplain, who always seems to have unique and useful insights.  This visit was no exception.  Yes, understanding the parallels between prisoners and investors will put money in your pockets.  Here is his insight on decision making amongst the two populations.  

He observed that some of the first time prisoners he sees are people who make a poor choice or decision, end up in jail and are subsequently scared straight – meaning that they learn from their mistake and don’t make bad choices again.  The repeat offenders, to the contrary, are people who continually make bad decisions and don’t seem to learn from their mistakes.  It’s as if they’re driving down the highway of life and looking only at the car in front.  Seemingly, they see each decision and event in life as independent, stand-alone occurrences when in fact all decisions inevitably have ramifications.  Think of this in terms of drivers on a highway.  Most reasonable drivers are looking four to five cars ahead so that if a sudden problem occurs, the red lights of car #5 ahead will issue an early warning before brake lights ripple down to car #4, #3, #2, #1 until finally demanding their car come to a stop.  Repeat offenders in the prison system don’t seem able to grasp consequences of today’s actions because they aren’t looking ahead down the road of life, so to speak.  

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How the Markets Have Changed Me Over 25 Years: Part II

“It is good to have an end to journey toward; but it is the journey that matters, in the end.”  -- Ernest Hemingway

And quite a transformative journey it has been.  Previously, I shared a number of the key lessons and changes I’ve experienced as I’ve evolved through all five investor stages – from novice, to advanced beginner, to competent investor, through proficient trader and finally emerging as a self-disciplined expert trader. Below you’ll find nine more observations.   As American entrepreneur Jim Rohn aptly said, “Discipline is the bridge between goals and accomplishment.”

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This Could Change Your Life! How You Can Mimic Wall Street's Best & Profit Handsomely: Part II

This is a continuation of last week’s popular blog about how individual investors can outperform institutional money managers.  For many novice investors, it’s all about their egos.  For us seasoned investors, it’s all about stocks that can make us money.  We’ll use any and every advantage we can find.  So if Fidelity offers us this sort of advantage, we’ll take it.  It’s important to remember that many of these institutional managers are in essence trying to maneuver the equivalent of a battleship – one that has an enormous turning radius.  They may point in the direction where they want to go, but it will take them a fair amount of time and effort to execute the turn.

On the other hand, we individual investors have an immense advantage in that we are in a virtual canoe and our nimble trades will seldom move the market.  We look, we turn, we execute the trade.  

You’ll get more out of this blog if you take a few minutes and read last week’s Part I (if you haven’t done so already).  These are insights from my updates of Fidelity’s Sector Funds for the past three quarters as I adjusted the Tensile Trading ChartPack to reflect what Fidelity was buying and selling each quarter.  

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This Could Change Your Life! How You Can Mimic Wall Street's Best & Profit Handsomely:Part 1

This should be illegal.  If I was a hedge fund or mutual fund manager, I’d be thoroughly upset, but since I’m not, let me show you a unique and powerful advantage that exists for us individual investors.

You may be familiar with a new breed of ETFs that mimic top performing funds.  For example, Global X Guru ETF (GURU) has outperformed the markets nicely in its young two-year life.  This is possible because regulations require money managers with more than $100 Million in assets to disclose their holdings each and every quarter.  It therefore makes it possible for GURU to assemble a basket of stocks which are the most commonly owned by a prescreened group of the most successful hedge funds.  Their logic is sound, but you can execute it better.

I had employed a similar “back door” strategy for my own equity purchases over the years, but only with the release of my ChartPack did the full potential of this approach actually make a significant contribution to my profits.  

In November of 2013, when the ChartPack was made available to StockCharts.com users, I included portfolios for the 40 Fidelity Select Sector Funds, as well as their top 10 equity holdings in each of these funds, as reported by Fidelity in the most recent quarter.  

Here’s where the fun begins.  In February of 2014, I updated the ChartPack as well as these 40 portfolios to reflect Fidelity’s most recent purchases and the new additions to their top 10 equity holdings for each of the funds.  The transformational insights from this exercise struck me immediately.  More specifics on this later.  

In May of 2014 with Version 3.0, I once more updated the portfolios in the ChartPack to reflect Fidelity’s most recent purchases and sells as well.  These fresh insights made it obvious to me that I had a tiger by the tail.  

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