A Bad Teacher August 26, 2010

More good stuff from Dave Landry’s new book, “The Layman’s Guide To Trading Stocks”:

The World’s Worst Teacher

The market often rewards bad behavior. You exit a stock because your stop is hit. You are okay with this because you followed your plan. The market then immediately reverses. You begin to think, “If only I stayed with the position.” The next time the market goes against you, you decide you are not going to get tricked again. This time though, the market does not reverse and what started out as a small manageable loss is now huge.

The market will give you loss after loss forcing you to abandon a methodology right before it takes off without you. On the flip side, the market will lull you into a false sense of confidence. You trade larger and larger, taking on excessive risk. You print money until your risks become so excessive that one or two bad trades wipe you out.

Learn from the market, but realize that sometimes it can be a lousy instructor.

They Don’t All Work August 17, 2010

There’s a not-so-subtle difference between a trading ‘mistake’ and a trade that just doesn’t work.

A ‘mistake’ is when you do something you shouldn’t, or don’t do something you should. On the other hand, you can do everything ‘right’, and have the trade go against you anyway — that’s just part of trading.

Mark Wolfinger at Minyanville:

We all make decisions that could have turned out better. Many times such decisions aren’t “mistakes” in the true sense of the word. It’s a mistake to make a large investment in a business when you know nothing about that business. It’s a mistake to turn a small loss into a large loss by being stubborn.

But it’s not a mistake to make a trade and then see the stock market behave in a manner that wasn’t anticipated. Believing that you can consistently predict where the market is moving, and when it will get there — that’s a mistake.

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Please don’t assume that every time you lose money it’s because you made a mistake. But don’t always blame it on bad luck. Analyze your trade decision and decide whether it was appropriate. When you make a mistake, that’s a learning experience. However, it’s important to recognize the difference between a true mistake and a situation in which a trade didn’t work.

More from Dave Landry in his new book, The Layman’s Guide To Trading Stocks:

There is a saying in rocketry, usually said in a strong Forrest Gump accent: “If you ain’t crashin’ rockets, you ain’t flying any.” Another common saying is “you don’t learn nothing from a successful flight” (We are “rocket scientists” not English majors).

Although I firmly believe trading is not rocket science, if you ain’t taking losses, you ain’t trading. The more you trade, the more likely you are to have losses. Good traders make a lot of money, but they also lose a lot too. They know that losses are part of the game.

You must learn from your losses. If you did everything right and you still lose on a trade, then pat yourself on the back for doing the right thing, knowing that consistently doing the right thing will pay off in the long run. If you did something that you should not have done and created a large loss, then learn from it!

The Waiting August 12, 2010

Yes, waiting around for things to happen in the market sucks. But losing money because you couldn’t wait, and tried to make things happen, sucks even more.

More trading wisdom from Dave Landry’s new book, “The Layman’s Guide To Trading Stocks” — in today’s market conditions, I found this to be quite appropriate:

THE WAITING IS THE HARDEST PART

Tom Petty got it right. The waiting is the hardest part. Trading is an active verb. However, the irony is that there are many times when you should not be doing anything. Doing nothing is difficult if not impossible for most. Yet, it is exactly what you should be doing during these times, nothing.

In dull, choppy markets I often preach that we are more wait-ers than trade-ers. This is another snag for successful people. More than likely, prior success in life came from action. In trading, we often find that the best thing to do is nothing unless there is something to do.

Jesse Livermore, one of the greatest Traders of all time, said it best, “Remember this: When you are doing nothing, those speculators who feel they must trade day in and day out, are laying the foundation for your next venture. You will reap benefits from their mistakes.” The next time the market becomes choppy, write that quote on a Post-It and stick it to your monitor.

See? I told you we could fill up our ‘Trading Wisdom’ section with stuff from this book…

Expect To Be Wrong August 12, 2010

Some good trading advice over at Barry’s site this morning, in “6 Billion Errors Per Day, Minimum”:

The reason I bring this up was to share with you two reactions I got when describing these recent trades and cash holdings. I had two separate conversations in July — one with a well known Trader, the other with a Fund Manager (known in the industry, but not a household name) — about our posture prior to yesterday’s drop.

The two responses were polar opposites, 180 degree apart.

The trader respected the discipline of honoring stop losses. Good traders know that opportunistic speculation is a process. Ignore any one single outcome, focus on the methodology that can consistently avoid catastrophic losses, manage risk, preserve capital. A good process can be replicated, a random spin of the wheel cannot.

The fund manager, who was having a decent year being long high vol names (at least before Wednesday), was having none of it. “Stops are for losers” is a quote I shall long remember (and email him after he blows up). Apparently, real men have the courage of their convictions.

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Rather than fight our foibles, people should admit this error stream is real, and repair the errors of our ways as soon as we discover them. I have noticed over the years the difficulty some people have in cutting losses, admitting an error, and moving on. Way back in 2005, I wrote a piece advising investors that they should Expect to Be Wrong (originally published 04/05/05). I noted that “I am rather frequently — and on occasion, quite spectacularly — wrong.” However, if we expect to be wrong, then there will be no ego tied up in admitting the error, honoring the stop loss, and selling out the loser — and preserving the capital.

—

This is a recipe for investing disaster. We humans make 6 billion errors per day, at the very least. The biggest one is not acknowledging this simple truism.

Stops are not for ‘losers’. Stops are to keep small losses from turning into BIG losses that can wipe you out. If you don’t use stops, then you will be the real loser.

That’s Bull August 11, 2010

In his new book, The Layman’s Guide To Trading Stocks, Dave Landry says that Cramer’s claim isn’t true:

Wall Street Myth 11: There is always a bull market somewhere

“There is always a bull market somewhere” implies that if you look hard enough, you can find stocks to buy regardless of market conditions. 2008 busted this myth. From the beginning of the year to the low hit on November 20, 2008, the S&P 500 lost nearly 50 percent of its value. During this same period, all sectors, as tracked by the Morningstar Industry Groups, were down. The majority of these sectors (64 percent) were actually down much more than the market itself. Further, those that were down the least had suffered much worse losses earlier in the year. It is true that occasionally selected areas, usually commodity related stocks, can trade counter to the market. However, there is not “always a bull market somewhere.”

Hot Commodities August 11, 2010

Hot Commodities : How Anyone Can Invest Profitably in the World’s Best Market by Jim Rogers

Jim Rogers, author of Adventure Capitalist and one of the smartest investment minds around, offers up his opinion that the next secular bull market is already underway. But this bull market isn’t in stocks — it is in commodities.

There have been bull and bear markets in commodities through the years just as there have been in stocks – and interestingly enough, the cycles in the two asset classes tend to occur opposite one another. The last bull market in commodities ended in the early 80s, when no one wanted to have anything to do with stocks. Now, a couple of decades later, we find ourselves in a transitional period following one of the biggest bull markets that stocks have ever seen – and very little attention is being paid to commodities.

What are commodities? Commodities are things – food, fuels and raw materials that are either cultivated and grown, or extracted from the earth. Unlike stocks, commodities are things you can actually touch and feel, and they’re becoming more and more valuable every day. Why? As Rogers explains, the reason is simple: the age-old economic principle of supply and demand.

During the stock bull market of the 80s and 90s, commodities were in their own bear market. As prices of commodities were dropping, many people and companies that were in the business of supplying those commodities were getting out of the business – the lower prices just didn’t make it worthwhile.

In Hot Commodities, Rogers says those days of low prices are over, at least for the next 15-20 years (he presents evidence that the bull/bear cycles last approximately 18 years). He says, particularly with the growth in certain areas of the world like China, that demand for commodities is increasing — but supply remains low, due to the lack of investment in exploration and production during the 80s and 90s. Increased demand and reduced supply means higher prices, and price increases in commodities like precious metals (gold, silver), base metals (copper, aluminum), and crude oil over the past year or two give ample proof that the author is right.

Rogers describes the futures markets where commodities are traded worldwide, and lays out the supply and demand case for a few specific commodities, things like oil, gold, lead, sugar and coffee. He gives the investor some ideas on how best to play the commodities markets, be it through one of a very few commodities mutual funds (including Rogers’ own commodity index fund), investment in the futures markets or a managed futures account, or by buying stocks of commodities related companies. He also points out that the lack of investment vehicles available to the public, like commodity mutual funds, is evidence that this asset class has been completely ignored, and likely has a long way to run!

If I were you, I’d listen to what Jim Rogers has to say. Highly respected among those in the investment community, he was able to retire while still in his 30s. Seems to me, he probably knows what he’s talking about!

There’s more to investing than just stocks and bonds. As an investor, you owe it to yourself to read the book, learn about commodities, and decide which method of investment in this asset class might be best for you. Don’t ignore the bull market that no one is talking about…

Just Because August 9, 2010

Another nugget from “The Layman’s Guide To Trading Stocks”:

Wall Street Myth 7: There is a reason the market is going up or down

It amazes me that the media will tell you daily exactly why the market went up or down. They infer that there is always a direct reason as to why stocks rise and fall. By this logic, all you have to do is learn the correlations. The problem is, often there aren’t any. On Monday, the market dropped “because oil prices rose.” On Tuesday, oil prices reverse, but stocks ignore this and continue to slide. The media quickly comes up with a new reason. On Wednesday, oil prices soar, but stocks ignore this and have a big rally. The media finds another reason to explain this, once again ignoring the fact that stocks rose in spite of rising oil prices. On Thursday, oil trades only marginally higher and stocks implode. The media then returns back to the rising oil reasoning.

More often than not, there is no reason why stocks rise or fall. They trade on emotions, period. Don’t confuse the issue with the facts.

Not A One Way Train August 8, 2010

More words of wisdom from Dave Landry’s new book, The Layman’s Guide To Trading Stocks:

Wall Street Myth 1: The market always goes up longer term

It seems to be universally preached that the market “always goes up longer term.” And, all you have to do is buy a diversified mutual fund or index fund and wait. The problem is that markets do not always go up longer term. Well, I suppose it all depends on what you mean by longer term.

Suppose you bought stocks in 1929 at the market peak. Provided you could have held through a 90% loss, it would then have taken you a quarter of a century just to get back to breakeven.

Let’s say you bought stocks in the mid-1960’s. Your return would have been almost zero until the market finally broke out in 1983, which was 17 years later.

When I began this chapter, I was concerned that there might be a “that was then, this is now” mentality. After all, the benchmark S&P 500 wasn’t far below breakeven from the 2000 peak. I thought I was going to have to make a strong case for not buying and holding. Unfortunately for the buy and hold crowd, the market made my case for me. The bear market that began in late 2007 would turn out to be the worst since 1929. By March 2009, the S&P was at 13-year lows. From these lows, the market will have to rally over 200 percent just to get to breakeven.

At more than one cocktail party, I have had people laugh in my face when I tell them that the market can go 25 years or more without going up. This has made for some heated discussions and awkward social situations. I have since learned from Dale Carnegie and my wife Marcy to just nod my head and enjoy my drink. Do not take my word for it, just look at the charts and grab me a Black and Tan while you are at it!

It Is Not Logical August 7, 2010

Ain’t that the truth…

As we mentioned yesterday, Dave Landry’s new book, The Layman’s Guide To Trading Stocks, is now available. And we’ve also been promising to bring you some excerpts from the book. Enough with the talk — let’s get started!

So, you think you’re smart? Of course you do. Don’t we all?

Unfortunately, being ‘smart’ may be hazardous to your trading health. Here’s Dave on learning to be a trader:

Wall Street Truth 6: If you are smart, it is going to take a lot longer

“I haven’t seen much correlation between good trading and intelligence…..
Many outstanding intelligent people are horrible traders. Average intelligence is enough.”
- William Eckhardt

“You are nothing but a trend following moron”
- name withheld

If you are reading this book, you are of above average intelligence. How do I know this? First, fields with the potential for large gains attract the brightest of minds. The second reason is not as flattering. When it comes to the markets, the vast majority of the population does not read. They depend on the television media for their education. Unfortunately, the aforementioned unrelenting positive bias and constant “logical” correlations to news and fundamentals can make for very costly lessons. But I digress. My point is that since you’ve gone one step above watching TV for your trading education, I can say with a high degree of certainty that you are above average intelligence.

Before you start patting yourself on the back, I have some bad news. Since you are smart, it is going to take a long time to become successful in the markets. Unless you happened upon oil in your back yard, every success in your life has likely been approached with logic. In trading there often isn’t any. You are dealing with the fear and greed of market participants. Markets trade on human emotions, not logic. Trying to figure out the reasons is an exercise in futility.

I guess Spock would have a rough time of it. Heck, we ALL have a rough time of it…

How to Make Money in Stocks August 7, 2010

How to Make Money in Stocks by William J. O’Neil

While at times you might think this book is simply an advertisement for Investor’s Business Daily (ok, it is – it just so happens that O’Neil is the founder of IBD), that doesn’t really diminish the message the book intends to get across: buying stocks that are both fundamentally and technically strong is a good way to make money!

O’Neil presents the CANSLIM system: CANSLIM is an acronym – each letter stands for a particular rule that a stock must satisfy to qualify as a good buy under the system. I agree, the whole thing sounds a little funny, but it’s hard to argue with. The CANSLIM method looks for stocks that have strong earnings histories, are acting well technically, are leaders in their industries and are in strong markets. Seems obvious to you? I’ll bet you don’t do that much research on every stock you buy!

And there’s more: O’Neil lays out the nineteen common mistakes most investors make (at the very least, every investor should read that!), helps you to understand when to sell your stocks to either cut losses short or preserve profits, and teaches you how to read charts to help you improve your trade timing.

Even if you don’t follow the method exactly, the investing principles presented in this book are extremely sound. You would do yourself a great deal of good by reading this book – it will give you some important questions to ask yourself the next time you’re comtemplating a stock purchase.

For more on the CANSLIM system, check out Canslim.net.