Posts filed under “Apprenticed Investor”
My inbox is deluged with rants and demands from people who are insisting that This. Rally. Must. End. NOW!
A composite of their emails would read something like this: “How can you sit there so blithely while the Fed debases the world’s reserve currency? Why haven’t you commented on POMO?!? The entire game is rigged, and your just another @%$# salesman for Wall Street!”
My day job is working in an asset management firm. From that perch, I look at the world as a series of risks and opportunities. I am not a political analyst, nor a professional Fed critic. If through my research and analysis I come to a conclusion about a given issue — Bailouts, Fin Reform, Foreclosures, Stimulus — I am happy to share them.
But make sure you understand this much: I consider many other factors beyond the macro. This includes sentiment data, liquidity, market breadth, trend, volume, and valuation. And while liquidity can mean many things, this cycle its been pretty much all Fed all the time. That was what hedge fund manager David Tepper was referring to when he noted the Fed was pouring fuel on the fire. When the Fed sends their minions out to discuss the Bernanke Put, they add even more gasoline to the conflagration.
Some people rush for the fire hoses, but my job requires me to grab some marshmallows and sticks and head over to the boy scout jamboree campfire.
If you are constantly fighting the tape, if you missed the run up and are now whining about it, let me steer you to esteemed technician Ned Davis of NDR. In his 1991 book Being Right or Making Money, Davis tells the story of missing trades, investments and rallies because they did not fit some expectations of his regarding the economy or valuations or other factors. The title of his book and of this post comes from a more senior trader, who simply asked him: “Do You Wanna Be Right, or Do You Wanna Make Money?”
As to the present rally, it will end (eventually). I cannot tell you if it ends with a 25% correction (thats my high probability bet) or a 55% 2008-09 like crash, or a Prectorian 90% end of civilization collapse. Regardless of how the rally concludes, the folks who missed an 85% generational run up in equities will pound their chests and say “See, we told you so!” And they will have made absolutely no money in the process.
So for all of you Kremlin Fed watchers, politicos, policy experts and amateur economic wonks, I put Ned Davis’ question to you now: Would you rather be right, or make money?
Michael Steinhardt was one of the most successful hedge fund managers of all time. A dollar invested with Steinhardt Partners LP in 1967 was worth $481 when Steinhardt retired in 1995. The following six rules were pulled out from a speech he gave: 1. Make all your mistakes early in life: The more tough lessons…Read More
This comes from a math blog by a teacher called WITHOUT GEOMETRY, LIFE IS POINTLESS (get it?).
There is a recent post I wanted to reference — Habits of Mind — that was originally written for math students. With a few small changes, it can be readily adapted to thinking about markets, risk, investing, etc.
Have a go at it:
Habits of mind
1. Pattern Sniff
. . .A. On the lookout for patterns
. . .B. On the lookout for shortcuts
2. Experiment, Guess and Conjecture
. . .A. Can begin to work on a problem independently
. . .B. Estimates
. . .C. Conjectures
. . .D. Healthy skepticism of experimental results
. . .E. Determines lower and upper bounds
. . .F. Looks at small or large cases to find and test conjectures
. . .G. Is thoughtful and purposeful about which case(s) to explore
. . .H. Keeps all but one variable fixed
. . .I. Varies parameters in regular and useful ways
. . .J. Works backwards (guesses at a solution and see if it makes sense)
3. Organize and Simplify
. . .A. Records results in a useful way
. . .B. Process, solutions and answers are detailed and easy to follow
. . .C. Looks at information about the problem or solution in different ways
. . .D. Determine whether the problem can be broken up into simpler pieces
. . .E. Considers the form of data (deciding when, e.g., 1+2 is more helpful than 3)
. . .F. Uses parity and other methods to simplify and classify cases
. . .A. Verbal/visual articulation of thoughts, results, conjectures, arguments, etc.
. . .B. Written articulation of arguments, process, proofs, questions, opinions, etc.
. . .C. Can explain both how and why
. . .D. Creates precise problems
. . .E. Invents notation and language when helpful
. . .F. Ensures that this invented notation and language is precise
Linguistical Differences Amongst Market Theorists: Efficient Market Practitioners vs Behavioral Economists*
Ever listen to how people speak? I don’t mean their verbal tics or habits (“um”), I refer specifically to the words and phrases they choose to use. The way they deploy language can be quite revealing about their beliefs, training, and thought process. Consider, as an example, the bond market. The discussion of late have…Read More
Over the past few weeks, I have posted on an eclectic assortment of items. That is keeping with the blog’s sub-title: Macro Perspectives on Capital Markets, Economy, Technology, and Digital Media. A few of you have commented (here and here) or emailed about this recently. I want to take a few moments to explain the…Read More
A few weeks ago, I mentioned we were 50% long, 50% cash (up from 100% cash in May), and were planning on selling into any rallies. Since then, we have sold some winners outright (PWER), cut back other positions, and been stopped out completely of losers; win some, lose some. We are now approximately ~85%…Read More
This was originally published at The Street.com on June 1, 2005 — so this is a 5 year anniversary of sorts.
So far the Apprenticed Investor series has discussed a lot of don’ts. Don’t do this, don’t do that; avoid talking to these kinds of traders; don’t say or think these kinds of things.
Well, it’s time to shift gears, and since trading is an active enterprise, I’ll discuss some things you should do. I plan to expand on these ideas significantly in future episodes.
Taken together, the following 10 rules will not only help you with the philosophical grounding necessary for thoughtful — and successful — investing, they will help you avoid some of the more common mistakes made by investors and traders early in their careers.
This is the “Zen of Trading;” It is more than an overview — it’s an investment philosophy that can help you develop an investing framework of your own.
1. Have a Comprehensive Plan: Whether you are an investor or active trader, you must have a plan. Too many investors have no strategy at all — they merely react to each twitch of the market on the fly. If you fail to plan, goes the saying, then you plan to fail.
Consider how Roger Clemens approaches a game. He studies his opponent, constructs his game plan and goes to work.
Investors should write up a business plan, as if they were asking a Venture Capitalist for start-up money; just because you are the angel investor doesn’t mean you should skip the planning stages.
2. Expect to Be Wrong: We’ve discussed this previously, but it is such a key aspect of successful investing that it bears repeating. You will be wrong, you will be wrong often and, occasionally, you will be spectacularly wrong.
Michael Jordan has a fabulous perspective on the subject: “I’ve missed more than 9,000 shots in my career. I’ve lost almost 300 games. Twenty six times, I’ve been trusted to take the game-winning shot and missed. I’ve failed over and over and over again in my life. And that is why I succeed.”
Jordan was the greatest ball player of all time, and not only because of his superb physical skills: He understood the nature and importance of failure, and placed it appropriately within a larger framework of the game.
The best investors have no ego tied up in a trade. Those who refuse to recognize the simple truism of “being wrong often” end up giving away unacceptable amounts of capital. Stubborn pride and lack of risk management allow egotists to stay in stocks down 30%, 40% or 50% — or worse.
Category: Apprenticed Investor
Hey, I managed to track down all of the Apprenticed Investor series from the Street.com. Some of these really stand the test of time: In this special series of articles from RealMoney contributor and market strategist Barry Ritholtz, learn about becoming a better investor — not just a better stock picker, but someone who knows…Read More
Category: Apprenticed Investor
I love this quote: “Overestimation occurs, in part, because people who are unskilled in these domains suffer a dual burden: Not only do these people reach erroneous conclusions and make unfortunate choices, but their incompetence robs them of the metacognitive ability to realize it.” I have to work that into my presentation today: “unfortunately. their…Read More
This is a reprint from 2003, originally published at MarketWatch:
NEW YORK (CBS.MW) — The Duke of Wellington once observed: “What makes a great general? To know when to retreat; and to dare to do it.”
The same thinking applies to investors. They must understand when to “retreat,” and have the self-discipline to do so. This is especially true in the present environment. The pre-war “spike” last month shows why. Eight straight up days, with gains of more than 13 percent, makes it too easy to become complacent and forget about risk management.
Once the market lurched into rally mode, I’ll bet many investors let their emotions get the better of them. Ask yourself these questions: Did the best week in over 20 years suck you in without a coherent exit strategy? That stupendous run was followed by the single worst day in over a year. Was it only then you discovered that you had no contingency plan?
Perhaps, then, its time you developed a risk management strategy – including a sell discipline.
A Strategy for Every Market
Bulls and bears alike need to preserve capital and manage risk. These tactics are crucial regardless of whether the market is crashing or rallying, whether there’s a war on or the economy is in recession.
Take the present environment. From studying market history, I believe that major crashes (think 1929 and 1972-74) are followed by years of range bound trading. Until I see otherwise, I expect growth to be anemic, deficits to keep increasing, and business spending and hiring to remain weak. There’s still too much capacity, too much debt, and the increasing possibility of deflation. Despite this, stocks are not at historically cheap valuations. On the bright side, interest rates are at 40-year lows, and that makes present equity valuations a bit more sufferable.
These crosscurrents make it all the more imperative to have a reliable plan – before you run into trouble.
Risk management methodologies are designed to help you avoid devastating losses. The stop loss is the most basic tactic in your arsenal. Stops work because they define losses in advance. They provide an investor with an objective set of criteria for selling any position. This allows an investor to exit a holding before becoming emotionally involved.
Whenever I review a portfolio down 50 percent or worse, I know I’m seeing the handiwork of an investor who lacks a sell discipline.
Why are stop losses effective? Simply stated, there’s only so much any stock can do. It can go up a little or down a little. It can go up a lot — and here’s what is so devastating to portfolios — it can also go down a whole lot.
Investors who avoid the last scenario spare themselves the kinds of losses that are difficult to recover from.
Let’s look at some specific stocks to see how individual investors can apply different types of stop loss principals.