The Traders Journal

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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The Most Profitable Takeaways from 'The Traders Journal'

After many years of writing The Traders Journal, I thought it was time to revisit how investors can best maximize the takeaways from these weekly blogs.

First and foremost, the reader should understand that my perspective is somewhat irreverent since it is based on the past 25 years of trading my own account full-time unburdened by the distraction of clients.  Some have described my blogs as similar to Harry Potter’s “defense against the dark arts” since one of my objectives is to show individual investors how to make money without drinking the Wall Street Kool-Aid. 

Secondly, although each blog can stand on its own, they’ve all been carefully crafted to capture the massiveness of the stock market and decipher it all down to the ten essential stages which I call ‘Tensile Trading’.  Each blog is specifically archived into one of these ten stages.   When you visit the blog’s Table of Contents, you’ll notice the ten headings that comprise my Tensile Trading roadmap.  Together, they organize and boil down the market’s complexity to provide you with a 10-stage complete step-by-step approach to achieving stock market mastery.  

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Investing: The Probability Tool

Investing and thinking in probabilities should go hand in hand.  Probabilities can be expressed both quantitatively (as a percentage from zero to one hundred percent) or qualitatively.  I use both, but recently I have found myself gravitating more to qualitative assessments and descriptions.

Determining the precise probability of any particular trade working out is always subjective.  In evaluating a trade’s potential, I find that it’s somewhat unreasonable to pin it down with a specific probability label of say, 75%, for example.  Such an exact number implies a mathematically accurate calculation, and as all experienced traders will tell you, that is hardly the case. 

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This is What Made a Top Hedge Manager So Successful

I just read The Buy Side, Turney Duff’s book about his years as the biggest and most successful healthcare hedge fund manager on Wall Street.  Let me say up front that I am not reviewing or endorsing the book or its content in any manner.  In fact, I’m certain that I’ll take heat from my trading buddies for even acknowledging this particular Wall Street insider’s sordid story.  Nevertheless, this book reinforced one very significant nugget of truth for me, and I’d like to focus on that alone.  

A simplistic encapsulation of this heavy weight confessional by an obviously talented wordsmith is that he is capable of telling an extremely personal story in a naked, undisguised manner far beyond what a normal self-deprecating person could ever do.  His introspection is courageously painful, and the authenticity, honesty and exactness of what he is willing to recognize in himself is, I believe, precisely the personal attribute that made him such an extraordinary trader.  

In this arena – and frankly, only in this arena – do I personally identify with Turney.  It punctuates the point I’ve tried to make in this blog for years.  The unique ability to be brutally honest about yourself and about the markets you trade is difficult and rare, but it empowers you as an investor as few things can.  My thesis is supported by the mere fact that Turney lives such a dysfunctional and decadent lifestyle after the market closes, yet during market hours he sees things clearly and profits from that clarity.  The importance of brutal honesty as it relates to the investor self has been the overriding message in many of my blogs.  This core belief emanates from my own experience and growth as a trader, and it is one of the sermons I preach in teaching my seminars.  Failing to achieve brutal honesty about your own investor self is the single largest impediment to producing consistent profitability in the stock markets.

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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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