The Ten Trading Commandments

Ok, enough real estate for a given weekend (or lifetime) — we now return to our originally scheduled programming:

I seem to have fallen into the habit of posting a list of "trading rules" from different sources on Sundays. I like the rhythm of that, and I expect this will be a regular feature.

Despite our RE fest, today is no different: These rules come from Todd Harrison. I credit Toddo as bing the first true market/stock related blogger (more on this later) when he was writing the Trading Diary for Todd was previously Jim Cramer’s head trader at Cramer Berkowitz, and has an excellent feel for market conditions.

He now runs an edu-tainment market site called Minyanville.  His 10 trading rules are straightforward and uncommonly common sensical:

With the red seas yesterday, I thought it might be helpful to
walk through my ten trading commandments:

Respect the price action but never defer to it.
The action is an important element when trading but if you
defer to the flickering ticks, stocks would be “better” up and “worse” down—and
that’s a losing proposition.

Discipline trumps conviction.

No matter how strongly you feel on a given position, you
must defer to the principles of discipline when trading. It will differentiate
your performance over the course of time.

Opportunities are made up easier than losses.

It’s not necessary to play every move, it’s only necessary
to have a high winning percentage on the trades you choose to make.

Emotion is the enemy when trading.    
Emotional decisions always have a way of coming back to
haunt you. It’s that simple.

Zig when others Zag
Sell hope and buy despair. In other words, take the other
side of emotional disconnects in the market.

Adapt your style to the market

At various junctures, different approaches to the market are
warranted. Applying the right trading methodology is half the battle.

Maximize your reward relative to your risk
If you’re patient and pick your spots, edges will emerge
that provide a more advantageous risk/reward profile.

Perception is reality in the marketplace.
Identifying the prevalent psychology is a necessary process
when trading.  It’s not what is, it’s
what’s perceived to be that matters.

When unsure, trade “in between”
Your risk profile should always be a reflection of your
thought process. Take what the Minx will give you and don’t press.

Don’t let your bad trades turn into investments.
Rationalization has no place in trading. If you put a
position on for a catalyst and it passes, take the trade—win or lose.


There are obviously many more trading rules of thumb, but
I’ve found these to be the most helpful. Each of you has a unique risk profile
and time horizon, so some (or all) of these commandments may not apply. As
always, my goal is to share my thoughts with the hopes that it adds value to
your process. Find an approach that works for you and always allow for a margin
of error. With a little luck and a lot of discipline, we’ll find our way to
better times. Good luck today. R.P.


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What’s the U.S. Savings Rate Really?



Are we spenders or savers?

That’s a significant question looked at by Dan Gross in the Sunday NY Times. Its an issue that has significant ramifications for the economy, interest rates, and the ongoing social security debate.

Gross references Bear Stearns Economist David Malpass:

"Some say that a flaw may exist not in our national character but in the way the government calculates savings: because the bureau’s method of tallying income and consumption doesn’t take into account structural changes in the finances of Americans, it may systematically understate income and overstate consumption.

For example, income includes wages and salaries, interest on bonds, and stock dividends. But it doesn’t include capital gains on stocks, profits from selling a house, or withdrawals from 401(k) plans. Nearly 70 percent of families own homes, nearly half of all households own stocks and mutual funds, and an increasing number of baby boomers are turning to 401(k)’s for income. Those trends, some say, can make a big difference. "The structure of the household portfolio has changed over time," said David Malpass, chief economist at Bear Stearns.

Convinced that Americans aren’t frittering away all their income, Mr. Malpass plumbed the Federal Reserve’s Flow of Funds data, a trove of information on Americans’ spending and saving habits. In 2004, he found that the net worth of all households – their assets minus their liabilities – stood at $48.525 trillion, up 9.6 percent from 2003. Sure, rising home prices helped. "But even if you take out houses completely, it still shows huge savings," he said.

The problem with Malpass’ analysis is that he is taking a mathematical approach to what is essentially a behavioral issue. (Hey, it happens) Call it a rationalization. We tend to see those from both the Bullish and Bullish contingencies, as way to feel comfortable with those ideologies.

Let’s state this another way:  As a nation, are we spenders or savers?

It raises a host of issues, some net positive, others more troubling. How does our behavior as consumer impact economic downturns? (It seems to smooth them out, at least recently). Why haven’t Businesses been as spendthrift as Consumers this recovery?  (My theory is execs are afraid to see their options go underwater again). And the $64,000 question, how might this low savings rate impact retirees when the Baby Boom generation starts playing shuffleboard?   

I believe we are not savers. The fact that so many pension plans, 401ks and IRAs go unfunded is a big clue as to that. (It also reveals how Tax ignorant all too many people are).

But stop for a moment to contemplate this: That people would rather spend their money consuming, rather than put it into a 401K where their employer does dollar-for-dollar matching is proof positive of our savings mindset.

That’s right, as opposed to GETTING FREE MONEY, many Americans still prefer to shop — rather than save.

I’m curious today iof Malpass is correct. So here’s a suggestion for what would be a signifcant and useful analysis:  Use Malpass’ methodology for calculating the national savings rate — and then apply it to as many countries we can get data for. I’d like to see a list that includes at least: the U.S., Japan, Great Britain, Norway, Sweden, France, South Korea, Italy, Germany, Australia, Canada, Spain, Israel and South Africa. That’s a short list, but we want it as extensive and complete as possible.

The goal is to determine whether or not, as judged against a planet of our peers, we Americans are — relatively speaking — savers or spenders.

Should be a rather interesting discussion . . .


UPDATE May 22, 2005 4:20pm
There’s a long but fascinating discussion on related topics at Whiskey and Gunpowder. You can see excerpts and related graphics below.


Is It a Savings Crisis or a Math Error?
By Daniel Gross
NYT, May 22, 2005


Read More

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