The Traders Journal

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100% of Investors from Lake Wobegon Are Above Average

Ninety percent (90%) of Americans believe that they are above average drivers.  Multiple studies have corroborated this impossibility over the years.  I’m certain that the equivalent surveys of American investors would yield a similar fanciful number.

It reminds me of Garrison Keillor’s radio show featuring Lake Wobegon — the fictitious midwestern town where all of the children are above average.  My point being that most drivers and investors — like those Lake Wobegon kids — believe they are exceptional.  When you have a Ferrari for a brain but brakes made for a bicycle, you are dangerous — whether driving or investing.  

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Charts I'm Stalking: Action Practice #18

So, how did you stack up the equities of the Dow 30 based on Money Flow in Action Practice #17?

The first question you should have asked yourself is “what is my personal investing timeframe?”  Clearly, a day trader would not analyze money flow the same as a position trader or as an intermediate-to-long term investor.  The second suggestion I would make is to revisit your own knowledge set about Money Flow.  An ideal place to start is the StockCharts glossary.

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How Not to Lose Sight of the Forest (the Market) by Focusing on the Trees (Individual Equities)

Have any of you ever found yourselves so overly focused on your individual positions that you are missing the market’s essential big picture?  For profitable investing, maintaining a birds-eye view is imperative. This is what asset allocation is all about, and from the academics, we know that this provides the “biggest bang for your buck” in the investing arena.

Many investors’ backgrounds are such that they have been trained in their professional lives to focus on the individual details  The downside of this is that by devoting a disproportionate amount of their time and attention to singular equities or by fixating on the narrow specifics of an individual ETF, they might fail to see that it’s only a branch of an individual tree and neglect to realize that it’s part of a larger forest (i.e. the market). You need to step back on a regular basis and maintain a little better perspective from a broader vantage point. 

Something that I’ve witnessed with a number of investors is that they meet a broker they like, and they buy some trees (i.e. equities). They then meet another broker or two, and repeat the same process. Before long, they have assembled a random collection of trees and have no idea what their personal forest exactly looks like and they can’t see any rational investment strategy. 

For precisely this reason, my own ChartPack is organized to encourage and help investors begin their market analysis utilizing the three big picture “Permission to Buy” ChartLists.

The bottom line is that investors must not get enthralled or overwhelmed by the details and minutiae to the point that it obscures their ability to discern overall market shifts, larger trends and the broader money flows of sectors and industry groups. That is where the big money is made. Don’t lose sight of the forest!

Trade well; trade with discipline!
- Gatis Roze, MBA, CMT

Charts I'm Stalking: Action Practice #17

This is all about your fiscal fitness and future financial fate.  Pay attention!

I’ve written before about the indisputable number of academic studies proving asset allocation is the highest leverage activity that individual investors can focus on.  Although this blog will touch upon this, it will be focused instead on the principles of CORE & EXPLORE investing.  Though popularized and championed by Vanguard’s founder John Bogle, its origins actually date back to published research done by Schwab in 2000.

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The Albert Einstein Approach to Stock Market Investing

Albert Einstein famously said, “If I had one hour to save the world, I would spend 55 minutes defining the problem and five minutes implementing the solution.”   If you were in a life threatening situation and had only one hour before it proved fatal, what would you do?   Einstein said he’d spend his time wisely asking probing questions to understand the problem in depth.  Having done that, he’d only need 5 minutes to address the issue. 

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Paul Merriman's Essential Investor Challenge Questions: The Answers by Gatis Roze

At a May 20th presentation to the Seattle chapter of the AAII, Paul Merriman confirmed to me his standing as a respected elder of investment management.  Since selling his multi-billion dollar advisory firm in 2012, he has been running a financial education foundation.  His motto  “knowledge is power” is an accurate portrayal of his mission, and parallels my own efforts to educate and empower individual investors these past 20 years.

What makes Merriman’s motto so unique is that it’s backed up by a depth of experience few have attained and delivered honestly in a philanthropic voice that says “this is what’s best for individual investors.”  My intention here is not to paraphrase his AAII presentation but to highlight two indispensable points he made that day.

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Essential Rules to Share with Your Friends: The Financial Simpletons

I had a shock recently.  I met a couple who was in the midst of what I considered to be a personal financial coronary, yet they were totally oblivious to the perils facing them. Both husband and wife were professionals with advanced graduate degrees. Despite their intelligence and educations, neither of them had ever taken the slightest interest in any kind of financial education or investing. They’d led successful careers, yet they were absolute simpletons when it came to anything financial. For the sake of this analogy, I’ll call them Fred and Wilma — a nod to the Flintstones.  

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Charts I'm Stalking: Action Practice #16

So you’ve heard about Exchange Traded Funds (ETFs).  You’ve heard that they are cheap. You’ve heard that mutual fund managers cannot outperform ETFs. You’ve decided that a chunk of your nest egg should be in Healthcare. A friend suggested XPH because it holds stocks like Eli Lilly, Merck and Johnson & Johnson — companies  you’ve heard of. Buy, Buy, Buy!!  Whoa — slow down, partner.

Action Practice #15 was about exactly this scenario. I presented you with six options from which to choose. Yes, these six are all Healthcare ETFs, but a closer examination will point out that they are vastly different creatures.

The six candidates were XLV, IXJ, IYH, XBI, XPH and VHT. There are infinite ways to research these ETFs.  Here’s the step-by-step process that I suggest.

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My 3-Prong Recipe for the Safe Growth & Outperformance of Your Portfolio

There is a seismic generational displacement happening in the investment landscape. Many investors are shifting their assets into indexes and ETFs as they move away from stocks and mutual funds. Due to this shift, a number of investment firms are having to make enormous changes themselves in order to remain relevant and profitable.

I maintain that these investors’ misplaced beliefs that individual investors cannot outperform indexes and that active managers are incapable of outperforming passive managers (after fees) will cost these investors dearly in the long run. Let me label it for what it is. This new mantra for lazy investing by lethargic investors will produce meek unassuming gains in the 6-8% range over the long term.  

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This Investor's 5 Personal Passages

I’d like to paraphrase a fishing analogy.  Show someone how to invest by following a winning trading methodology and he/she will be happy for awhile.  Teach someone how to think effectively about trading and he/she will be profitable for a lifetime. 

All too often as investors, our focus is on indicators, price action and our interpretation of fundamentals.  We enter our trades based on data, but if we see our position move against us and we lose money, what then?  We go back and review our system.  The missing link here is that we must figure out ourselves before we can trade competently.  Lack of that will destroy any trading system.  A true understanding of your personal motivations is more essential than any indicator.

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