I actually wear my office during the trading hours. “All work is social,” claims Larry Prusak, director of IBM’s research labs, and that is how I see my work as a stock market trader. My downtown office offers face time with the markets in a manner that working at home does not. Literally, the first thing I do when I arrive – even before I flip on the computer screens – is to put on my trading vest, stand in front of the mirror and ask myself, “are you up to the challenge today?” Frankly, there are days that a brutally honest response is “no”. On those days, I tape a little red square to my monitor and try not to make any big bad bold decisions. But on most days, I’m chomping at the bit to get rolling. I’ve learned to take a deep breath and quickly eye-ball the list of trading rules tacked on a bulletin board above my desk, and off I go…and yes, the trading rules change with every new lesson the market teaches me.
For a warm-up to ease me into my routines, I gather momentum by breezing through my “Permission to Buy” checklist. (For more details on this, see my blog entitled “The Buyers Checklist” dated April 5, 2013.) It’s a top-down paradigm I designed which reviews the markets, breadth, key asset categories, sectors, industries and top performing stocks. I’m looking for equities that align all of these attributes to thereby produce a high probability trade. I also take special note of all those areas where I already own equities, but more on these in a minute.
At this juncture, I feel it’s critical to note that I designed this checklist for my daily routine. I strongly suggest you mock up a matrix of your own, populated by your own priorities. Once you’ve decided (1) what to do, then you can decide (2) how often you will do it. Some items clearly need your attention daily, but others don’t change as quickly so perhaps weekly or even monthly will make more judicious use of your time. (See my blog dated January 11, 2013 entitled “How to Become a Successful Investor Over All 12 Months”.)
Now that I’m in the groove, I shift my focus to what I own because an attention to protection takes precedence over searching out fresh new purchases. That comes later. Stay with me here because I’m about to share with you a tool I designed and have used for years that’s akin to the Holy Grail. Over the years, this approach has provided me with many profitable early warning signals to take money off the table, as well as offered me the confidence to keep money on the table and let a winner run. I call it the “sisters strategy”.
Perhaps an example is the easiest way to understand this approach. When I bought Johnson & Johnson (JNJ), I created a dedicated JNJ chartlist. I then labeled it with a number that properly positioned that chartlist amongst my entire universe of chartlists. Here’s the key, however. I have a deeply committed belief that as a person, you become the company you keep. If you hang out with winners, more of the good stuff is likely to rub off on you versus if you choose to hang out with a shadier crowd. Exactly the same is true with stocks. The probability of my making a profit on JNJ is directly tied to the company it keeps. The wind is at my back, so to speak, as long as the healthcare sector (XLV) – to which JNJ belongs – is in favor and trending up. In addition, the same is true when the pharmaceutical industry group ($DJUSPR) – to which JNJ also belongs – is in favor and trending up as well. Note that pharmaceuticals are a subset of healthcare and included in that sector.
The simple cliché you’ve heard before is that a rising tide lifts all boats. This is a perfect metaphor for what I’m describing here. The reason I call this approach the “sister’s strategy” is that having populated my JNJ chartlist with both the sector (XLV) and the appropriate industry group ($DJUSPR), I also add a number of Johnson & Johnson competitors, such as PFE, NVS, MRK and GSK. It’s a discipline thing. Now when I check on my JNJ position, I’m forcing myself to evaluate in parallel the company it keeps because the probability of my making money on JNJ is directly tied to how well its sector, industry and sister stocks are doing.
The intention here is to provide some background and clarity. How I allocate my time during this part of the day is really my objective in describing the sisters strategy to you. The meat and value of such an exercise is this. From these chartlists of equities that I own, I produce Perfcharts. I then save these Perfcharts as favorites (or bookmarks) in my browser making it very easy to access and reproduce these charts. Each day at this time, I review JNJ and all the other positions I own. I have embedded this sisters strategy and the discipline of considering an equity’s entire family each time I review my positions.
Experience has taught me that the likelihood of a solitary naked stock levitating all by itself – apart from its sector, industry and sisters – is so rare as to not warrant consideration. I use exactly the same sisters approach with mutual funds and ETFs. For mutual funds, Morningstar.com makes it easy with its “Similar Funds” tool. With ETFs, my chartlists include both the sister ETFs as well as the top 5 individual equities that comprise the ETF I own.
The “sisters strategy” I’ve described here is within the context of monitoring positions during my trading day. At other times of the trading day, I apply the same approach. Whether it’s during my stalking, buying or selling efforts, I apply the same sisters principle to those routines. I’ll have more on that in following weeks.
The bottom-line is that once your chartlists are assembled and your Perfcharts saved, all your analysis can be executed quickly, efficiently and, for the most part, purged of any love affairs or single emotional attachments to your individual equities. You are therefore more likely to trade based on the balance of the evidence and the collective realities of your charts, as shown by the company they keep, versus a single snapshot chart of one equity.
I close out this segment of the day by reading John Murphy or Arthur Hills’ Market Message. By now, I have a good handle on the markets and can settle down to write in my personal Traders Journal. More on that next week. In the meantime, I’d like to encourage my readers to share any feedback you might have. If writing a comment seems ominous, I’d be grateful for a thumbs-up click if you feel the blog offered you helpful insights. The feedback simply lets me know if the particular direction I’ve taken is of interest to the readership.
Trade well; trade with discipline!
-- Gatis Roze