The Traders Journal

Gerald Loeb’s Timeless Wisdom (1899-1974)

2013-05-17T13:15:00-04:00

I’m sure you’ve heard the expression, “the more things change, the more they stay the same.” Gerald Loeb used this phrase frequently. I’ve always had great respect for Mr. Loeb. True, he was an extraordinary investor and a best-selling author. But what I most respected him for was his business acumen. As one of the founding partners of E.F. Hutton, he was often quoted preaching to investors about the need to approach investing as a business and with a business mind.

Early on, I took his advice to heart. From the very beginning, I always made certain that I organized my investing activities in a manner that yielded timely investment reports and minimized taxes. I also sought out the best professional accounting, legal, tax and estate planning advice because this is what Gerald Loeb advocated.

Personally, his advice has been validated over the decades. Having known a large number of traders, I’ve observed that the most profitable ones have seldom been the smartest or boldest. They are usually organized individuals who are willing to focus on the small details. They are those people who are comfortable with routines and have the discipline to follow them. I’ve often noticed that they’re unpretentious as well – even humble at times.

If you stop and think about this, being free from pride and willing to be subservient to something like the market – which is so much bigger than any of us – allows one to remain open to listening to the market and letting the market itself show us the way. This same mode of openness is a common denominator in the management styles of many of America’s greatest business models. Gerald Loeb simply challenged the broader spectrum of stock market enthusiasts – from traders to hobbyist investors – to adopt this business mindset in their speculative activities.

With a sincere and abiding respect for Loeb’s many contributions to the investing arena, I also want to recognize just a few of my favorite market wisdoms from the “most quoted man on Wall Street” according to Forbes magazine.

“You don’t need analysts in a bull market, and you don’t want them in a bear market.”
“The most important single factor shaping security markets is public psychology.”
“A willingness and ability to hold funds un-invested while awaiting the real opportunities is a key to success in the battle for investment survival.”
“There is a saying, “a picture is worth a thousand words.” One might paraphrase this by saying a profit is worth more than endless alibis or explanations…prices and trends are really the best and simplest “indicators” you can find.”
“Accepting losses is the most important single investment device to insure safety of capital.”

In closing, I remind you that the market is notorious for its cyclical emotional discord and all its event-based intrigue. But much like Gerald Loeb, I too challenge you to continue to trade with a spirit of tenacity, organization, business acumen and always a sense of controlled risk.

Trade well; trade with discipline!
-- Gatis Roze

Secret Sauce: The Other 50% of Investing

2013-05-10T08:30:00-04:00

Over decades of training and teaching, it’s been my experience that the majority of both investors and traders are data driven, first and foremost. Their mantra seems to be “better living through numbers” or a hundred variations on this theme. But I’ve always wondered: with so much data out there, are the numbers the only thing that matters? Or is there some other secret sauce to investing success?

I recently delved into my trading journals trying to ascertain the reality of my own emotional status versus trading results and the connections within. What I discovered was quite an enigma. It was baffling at first, but it became much less perplexing the more history I reviewed. The periods of my greatest investing success were invariably tied to positive times when my life was on an even keel. As a passionate car devotee, I might call this a “turbo boost” in investing because financial rewards seemed to be the highest when I didn’t just follow my methodology but was able to align it with positive equilibrium in my personal life. The flip side: there were clearly instances where I nailed the methodology portion, but my personal life was somewhat discombobulated. In those periods of disharmony, I inadvertently created my own ISHTAR – my synonym for the 1987 movie that turned into an expensive blunder!

Coincidentally, at about the same time I was exploring this subject, I happened to attend a presentation by Dr. Fred Luskin, who is one of the world’s leading researchers on the subjects of forgiveness and happiness. Listening to his talk, I felt like a starving beggar being given food. While I’d tacitly acknowledged the circle of equilibrium and its importance in my trading, Dr. Luskin was able to shine a special spotlight that helped bring together my somewhat fragmented notions. In presenting his latest research, he challenged me to find my own story while allowing me to be driven in my personal quest as a successful stock market trader.

Among other concepts, Dr. Luskin talked about the inner hollowness that Buddhists call “the hungry ghost”. He warned about the dangerous consequences when people are driven to achieve success and stay on top at all costs. Perhaps one recent biking champion comes to mind?! As studies show, success and achievement do not generate personal happiness. People do not find more joy in life just by moving up the rungs of a ladder. It is only when you reach the very pinnacle that this begins to change. Research indicates that corporate CEOs at the very top do seem happier than their subordinates mainly because they’ve finally achieved the ultimate control over their time and work.

As individual investors managing our financial lives, we also have that kind of ultimate control. With no one telling us how to spend our investing time, it’s only logical that we, too, should be happy in this realm of our lives. This reminds me of the cliché “Happiness is wanting what you have, while stress is wanting anything else.” I ask you to dwell on this a bit from your perspective as an investor. Just don’t let yourself fall into our culture’s trance that says “more will make you happy.” For myself, I’ve fine-tuned my own personal mantra so it focuses on achieving a higher percentage of wins, not more money. The money takes care of itself.

In any event, I gleaned some key pearls of wisdom from Dr. Luskin’s talk. Here are a few essential elements for being a happy, healthy person – elements that have a high probability of making you more successful as both a person and an investor.

Do something you love. Have meaning in your life. Don’t be greedy.
Savor your experiences in both good times and trying times. Learn to relax and be reflective about the moment at hand.
Relationships matter – big time. Appreciate other people and cultivate a circle of friends. Carefully listen to their needs and be sincere in caring about them. Reciprocate when people care for you.
Make a positive difference in some way in the global community. Have compassion. Give to others, whether it’s your time, tutoring or legal tender.
Appreciate what life brings you, and be thankful for all the good things in your life. Learn to verbalize your gratitude. Expressing your gratefulness to others contributes mightily to your own happiness.
Suppress your anger. Focus on the 99% that’s good in people and in situations, instead of only seeing the 1% that isn’t. Acknowledging the best in others and staying positive will have immense benefits for your own psychology and physiology.

As I’ve always maintained, the “secret sauce” for stock market success is comprised of two basic portions. One part obviously involves the technical aspects of investing – all the numbers, charts and methodologies. The other 50 percent, however, is the investor self. Learning how to achieve and maintain equilibrium in this arena is critical. Trading the stock market is tough, and for all of us, it is emotionally charged. Research has proven beyond a shadow of doubt that investors perform better when they acknowledge this and when they can anticipate how their emotions will affect their trading behavior. Nurturing both parts while staying happy is crucial to profitability. It’s as straightforward and simple as that.

Trade well; trade with discipline!
-- Gatis Roze

Personal Note: I want to thank my readers for all the kind comments and encouragement. Your responses most definitely motivate me. For those of you who are not yet using the automatic delivery feature, please check it out. This feature makes it easy to receive fresh content every Friday by various delivery methods of your choice. See the options under the heading “Subscribe to this blog” on the right.

Peter Lynch: How He Helped My Evolution as an Investor

2013-05-03T08:30:00-04:00

Peter Lynch started managing the Fidelity Magellan Fund in 1978 with $20 Million in assets. When he retired in 1990, the fund had ballooned to $14 Billion largely as a result of his 29.2% average annualized return. Peter Lynch’s mantra was to “invest in what you know” and his primary investing approach was based on simple research, patience and resilience. He captured my attention while I was still in graduate school, and his reign continued for a decade after that. In those years, I found encouragement and inspiration in Lynch’s famous saying “Everyone has the brainpower to follow the stock market. If you made it through 5^th grade math, you can do it.”

My trading journal is jammed with many of his pithy observations. Here are a few of my favorite Lynch truisms, each followed by my own insights.

"It’s human nature to keep doing something as long as it’s pleasurable and you can succeed at it, which is why the world population continues to double every 40 years.” My takeaway: if you aren’t getting pleasure from investing, you’re doing something wrong. If you stop enjoying it, it’s probably time to step away.
“In this business, if you are good, you’re right 6 out of 10 times. You’re never going to be right 9 out of 10.” Think of investing as baseball. Novice investors have the most trouble here. Often coming from successful professional careers, they’re used to batting 80% or better – suddenly hitting less than 50% is emotionally difficult.
“You can find good reasons to scuttle your equities in every morning paper and on every broadcast of the nightly news.” This relates back to what Peter Lynch said about needing to be resilient and patient. I’ve always maintained that Wall Street is the world’s most sophisticated disinformation machine. The so-called experts on the Street are always trying to get you to do the opposite of what is best for your investing returns. You must believe in what your charts tell you, not the talking heads.
“Gentlemen who prefer bonds don’t know what they’re missing.” Peter Lynch was an advocate of staying fully invested in a portfolio of stocks and equity funds, and he derided those who kept their assets in bonds or money market accounts. He famously said, “I’m always fully invested. It’s a great feeling to be caught with your pants up.” What’s the point here? If you hope to have more money tomorrow than you have today, you have to be willing to put a fair chunk of your assets into stocks.
“There seems to be an unwritten rule on Wall Street. If you don’t understand it, then put your lifesavings into it.” This is clearly a tongue-in-cheek comment. Both Peter Lynch and Warren Buffett preached to their respective shareholders about the importance of understanding a company’s business and products. How many investors truly understood the inner workings of Enron and AIG? Clearly, they paid dearly for their oversight.
“As I look back now, it’s obvious that studying history and philosophy was much better preparation for the stock market than studying statistics. Investing in stocks is an art, not a science, and people who’ve been trained to rigidly quantify everything are at a big disadvantage.” My own belief is that reading stock charts is indeed an acquired art. Being able to accurately listen to what the charts are telling you requires a very personal understanding of psychology, history and who you are as an investor. Rigidity is kryptonite to a trader. As Peter Lynch aptly noted, “the natural born investor is a myth.”

Although I read Lynch’s books, followed his career and learned his investing approach, I eventually formulated my own investing methodology and evolved into a very different type of trader than Peter Lynch. I believe deeply that the education of any investor commands an openness of mind and spirit that allows consideration of other perspectives. But this openness must be balanced by the need to emerge true to your own investment principles, tendencies and emotional nature.

Trade well; trade with discipline!
-- Gatis Roze

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Trading Secrets from Baseball & the Game of Thrones

2013-04-26T08:30:00-04:00

It’s spring and the baseball season is upon the Kingdom. The Mariners are playing at Safeco Field again, and I happen to be watching the first season of HBO’s medieval fantasy series, GAME OF THRONES. Is it just me or are both of these pastimes bursting at the seams with investor insights?

I was living in Seattle in 2004 when Ichiro Suzuki won the American League crown with a batting average of .372. He was not known as a home run slugger, but gosh was he consistent in getting on base. He only hit 8 home runs that year. I’ve always considered Ichiro my kind of trader. In GAME OF THRONES, the House of Lannister has two brothers. Ser Jaime Lannister, the “Kingslayer” and older brother, is the bold swordsman. His younger brother, Tyrion, is a clever dwarf with a keen mind. In my reckoning, Tyrion is the Ichiro Suzuki of the miniseries storyline.

The parallel here to trading is that I’ve known investors whose personalities align closely to Jaime Lannister. They are big bold extroverts full of confidence who happen to stumble into the market just at the bottom of a major trough. They execute a couple of ten-banger trades and then, lo and behold, are convinced that they have been touched by the hand of God and are indeed blessed with unique and powerful super hero trading skills.

The challenge and the risk in this scenario is that once having tasted the honey nectar and drunken from the ten-banger chalice, one is never again satisfied with a small victory in the stock market. The bold swordsman’s impulsive and emotionally driven trading has yielded a big prize. He is now only interested in swinging for the fences and taking big risks to replicate his epic victory. Since he never took the time to build a solid foundation of investment knowledge, he doesn’t understand how to prepare for losses. The only tool in his kit is a hammer, and he sees every trade as a nail. Therein lies the bottomless pit and addiction-based downward spiral of the homerun hitting investor.

There is one important question in this little saga that you should ask yourself. Do you want to be in the business of trying to hit epic home runs or are you better suited to be in the business of getting on base and maintaining an epic batting average? Either way, your answer deserves an acknowledgement and an explanation.

Contrast the brash Jaime Lannister to his brother Tyrion who has no aspirations of being the Barry Bonds of the medieval stock market. Being the wise listener and less extroverted, Tyrion has a shrewd mind that he constantly feeds with books. More analytical and rational than his brother, he keeps his eye on the prize of winning the batting average crown. While his older brother is the single hammer player, Tyrion is more like a plumber with a toolbox of useful investing implements. He clearly knows when to use each of his tools. You can see how he carefully navigates the royal court, balancing risk and reward with his every move. His inevitable payoff is down the road, and he’ll no doubt get there taking small deliberate steps. Achieving regular victories – and perhaps even a home run or two along the way – he’s never in doubt of accomplishing the ultimate prize.

There are three lessons to be learned from my little tale.

Even baseball and HBO offer stock market investing insights.
Understand the costs associated with wanting to chase after ten-banger trades.
Keep your eye on the prize but be patient and adopt a longer term perspective – especially if you are a new investor.

Personally, I’ve found that my investment enthusiasm is maintained and lubricated by regular base hit types of trading victories, and that is where I try to keep my focus.

Trade well; trade with discipline!
-- Gatis Roze

UPCOMING SEMINARS WITH GATIS:

Seattle, WA: September 21, 2013. Class at Bellevue College. Tensile Trading: The 10 Essential Steps to Stock Market Mastery.
Dallas, TX: November 10, 2013. Class at StockCharts University. Tensile Trading: The 10 Essential Steps to Stock Market Mastery. To register click here.

How to Make a 100% Return on Your Equity

2013-04-19T08:30:00-04:00

You watch your equity position tear away on a 200% parabolic run and then you allow your greed and fantasies to kick in, hoping that it will go up 300% just as it turns down and erases half of your gain. That’s how you make 100% return on what was once a 200% gain. So how do you profitably trade an equity that is in an extreme uptrend and going vertical? The answer is that you trade it “very differently” than your run-of-the-mill trades.

I have a couple of positions presently that remind me of similar equities in 1999-2000 where panic buying had set in and there seemed to be a complete absence of sellers – a situation which created a sort of buying vacuum. Traders were rushing in regardless of price, fearing that they’d be left behind. Most of my readers are sophisticated enough to know not to be buyers with this kind of price action, but the dilemma presents itself when you already own the stock and your equity becomes the object of everyone else’s lust. The challenge is how to maximize your profits without overstaying your welcome. Here’s how I trade these money machines:

I learned during the tech bubble of 1999 that you could never guess how far and how high these momentum stocks could go. Just hang on and enjoy the ride, but always pay very close attention and be poised to act quickly.
I go into “dual stage” mode. The first stage is to acknowledge that I have a tiger-by-the-tail and that my equity is going parabolic. I recalibrate my emotional meter to accommodate this new mindset. The second stage is to bring out a different set of selling tools appropriate for this particular circumstance.
I have written before about my sell flags checklist which is the normal system I use to close out trades. Parabolic stocks, however, require a unique arsenal of tools because the regular indicators are a bit slow in this new hypertime and space.
In 1999, I had a number of trades where I closed out 50% of my position and the remaining 50% doubled in price again. My point is twofold. Always pyramid out of your position based on market action – not emotions – and don’t be afraid to let your remaining position run if the market turns upward and presents the opportunity.
A parabolic stock enters hypertime – it’s own accelerated space. You must crank up your heart pacer and join in! If you were content to check prices once a day before, you now need to use email alerts and check regularly throughout the trading day.
With normal positions, I follow trends and moving averages, as well as areas of support and resistance. With these high flyers, I use Welles Wilders Parabolic SAR which stands for “stop and reverse”. It’s a non-ambiguous signal that demands my attention and requires a decision.
On minute-to-minute charts, I want to see the big volume trades on up-ticks, not down-ticks. Daily money flow tells me if buyers are still in charge or if the balance of control is shifting to sellers.
I carefully watch the daily range and where the price closes in relation to the day’s high versus the day’s low. If the daily range begins to expand on down days, I’ll take some money off the table.
Lastly, I use Bollinger Bands. Much like SAR, if price closes below the lower band, I’ll take some money off the table.

These are not my normal monitoring tools because these are not normal equities. The mere act of deploying tools I don’t normally use constantly reminds me that the mindset I must bring to these parabolic trades must also be totally unique. The bottomline is that you must keep your finger on the trigger, but let the equity speak to you as to its true intentions and then hang on for the ride for as long as she runs.

Trade well; trade with discipline!
-- Gatis Roze

UPCOMING SEMINARS WITH GATIS:

Seattle, WA: September 21, 2013. Class at Bellevue College. Tensile Trading: The 10 Essential Steps to Stock Market Mastery.
Dallas, TX: November 10, 2013. Class at StockCharts University. Tensile Trading: The 10 Essential Steps to Stock Market Mastery. To register click here.

The Albert Einstein Approach to Stock Market Investing

2013-04-12T08:30:00-04:00

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.

Many new investors I meet in my classes totally flip around Dr. Einstein’s approach. They have an unstoppable inclination to jump right into the market, metaphorically speaking. They’ll trade impulsively for the first 55 minutes and then allocate the last 5 minutes trying to figure out what just happened.

Humor me, please. Just go with this. Place your hands on the table, turn down the lights and let’s invite Albert Einstein to our séance to give us his advice. If it was indeed possible to “channel” him, I suspect he would suggest approaching the market’s first 55 minutes more like this:

You have accumulated certain assets. Ask yourself if they are safe. Dr. Einstein would challenge you to address asset protection, first and foremost. Issues such as insurance, estate planning, identification theft, tax planning, record keeping and the like. You have to secure what you’ve got.
Next, he would ask if you had thought through personal money management questions and committed yourself to a personal trading plan in writing. It’s shocking how few investors actually do this. Einstein’s objective here would be to make certain you grasp the full scope of the problem.
He would then question your organizational skills and ask whether you had the computer, accounting and information tools in placed to take on this moneymaking goal.
His next line of inquiry would focus on your background, beliefs and personal decision-making skills. Do you fully discern the individual traits necessary to take on the markets and profit from the experience?
He would no doubt question you about your market analysis methodology and ask if you’d tested the clarity of your vision. Have you paper traded your approach?
He would then examine the investing routine you’ve devised for yourself and dare you to prove that you’ve really got the discipline to follow it.
Finally, I’d expect Dr. Einstein to interrogate you as to where and how you expect to generate investable ideas. In doing so, he’d want to know how you plan to decipher the best ideas and decide amongst a number of attractive candidates.

Watching the minutes tick away, most investors would probably lose their patience at spending 55 minutes being challenged by Dr. Einstein to see if they correctly understand the investing puzzle at hand. But as one of the greatest minds in history, Einstein knew that success and failure in the last 5 minutes is entirely dependent on the foundation meticulously constructed in the preceding 55 minutes. The markets do not reward investors in proportion to the number of hours spent on investment activities. It only rewards execution. One can reap immense profits in a very short period of time if one’s execution is based on a thorough understanding of the challenges that markets will present. As they say, “You can work all your life to become an overnight success.” Nowhere is this cliché more true than in the investment arena.

Like Einstein, George Washington understood the importance of preparation. Some say that when young George was given 3 hours to cut down that cherry tree, he spent the first 2 hours sharpening his saw! Preparation and foundation are everything. Don’t short-change yourself.

Trade well; trade with discipline!
-- Gatis Roze

UPCOMING SEMINARS WITH GATIS:

Seattle, WA: September 21, 2013. Class at Bellevue College. Tensile Trading: The 10 Essential Steps to Stock Market Mastery.
Dallas, TX: November 10, 2013. Class at StockCharts University. Tensile Trading: The 10 Essential Steps to Stock Market Mastery. To register click here.

Investing with a Cleaner Windshield: The Buyer’s Checklist

2013-04-05T08:30:00-04:00

I have found that if you offer the market your sincere attention – presented on a platter of organized checklists – it will reciprocate by talking to you about its true intentions. Warren Buffett would claim that this offers you a cleaner windshield, albeit one never as clean as the rearview mirror.

At the risk of generating many more questions than I can fully answer in this blog format, I’ll share with you the routine checklist I go thru just prior to hitting the buy/enter button on my keyboard. I present it to you merely as a starting point in hopes that you will assemble your own checklist. There is nothing supernatural about the list. The magic is simply in having a customized list and the discipline to run through it just prior to buying an equity.

This checklist assumes that you have already stepped through all six preceding stages of Tensile Trading’s 10 Stages. That is, it assumes the equity of your desire has been thoroughly vetted, the “buying fire” is in your belly, the market is moving and you’re anxious to jump in. But hold on a minute, cowboy! As your mother told you, show some restraint. Take a deep breath, invest a few minutes and run through your buying scenario one last time. Here’s my checklist:

Review previous journal write-ups. What was your rationale to buy before? Note the source of your idea. Is it still valid?
Permission to Buy – 6 steps. Align the market, sectors, industry and stock. Align Big Cap versus Small Cap, Domestic versus International, Growth versus Value, and Intermarket Analysis. Is the wind at your back?
Revisit your trading methodology. Mine is called “BATTLE V”. B = Breakout, A = Accumulation, T = Technicals, T = Trend, L = Leader, E = Earnings, V = Volume.
Dates – Check earnings dates for stocks and historical distribution dates for ETFs and mutual funds. Don’t get blindsided.
Check out the trend of analysts’ earnings projections and the latest news.
Reward to Risk – has the point and figure chart calculation changed?
Set your stop (hard or soft) and automatic alerts.
Revisit any money management rules that apply.
Look at seasonality and consider the time of the month, week, day and hour (based on the Traders’ Almanac). Once again, ask yourself if the wind is at your back.
Look at the PerfChart (at StockCharts.com) of the equity, its sister stocks, the sector and industry.
Tracking – setup a Chart List portfolio (with the same symbols from #10).
Decide on which brokerage house to use.
Decide on which accounts to buy for.
Calculate how much a 100% position in the equity will cost in dollars.
Intended pyramid buys – you do want to accumulate target position in stages.
What order type will you use? (usually a Limit Order)
Timing – Good till cancel? Fill or Kill? Etc.
What’s the present status of your investor self? Look in the mirror. Are you in equilibrium?
Okay – BUY!

Conclusion: The discipline it takes to quickly review your Buying Checklist pays big dividends over the long run. A major benefit is that it helps you to replicate your success and to understand what needs to be corrected if the trade goes south. And your mother will be proud of you for exercising some restraint and not giving in to an impulse buy!

Trade well; trade with discipline!
-- Gatis Roze

UPCOMING SEMINARS WITH GATIS:

Seattle, WA: September 21, 2013. Class at Bellevue College. Tensile Trading: The 10 Essential Steps to Stock Market Mastery.
Dallas, TX: November 10, 2013. Class at StockCharts University. Tensile Trading: The 10 Essential Steps to Stock Market Mastery. To register for this seminar click here.

Trading the Markets as Black or White

2013-03-29T08:30:00-04:00

Wrong is now right. What I once considered unreasonable is now considered reasonable (and I don’t mean just stock markets). On YouTube, you can watch American Eskimo dogs playing with their natural predators, the polar bear (check it out). Nature and civilization as I’ve known them have changed! As a trader, I have to change too.

Investing demands that you be aware of what is on the stock market’s fashion plate. What is in vogue, so to speak, and what is not. You don’t need to transform yourself into some sort of “fashionista” but, at a minimum, you must pick a side and know which side you’ve picked.

In the most simplistic terms, the investor’s universe is split into two camps: fundamentalists and technicians; right brain and left brain; stuff we like to trade versus stuff we don’t like to trade; and so on in endless progressions. The philosopher Buddha said, “We are shaped by our thoughts. We become what we think.” With deep respect for this religion, I would add my own embellishment that we trade our own beliefs.

Having said that, it’s been interesting to go back over my journals and realize that a number of similar key dichotomies exist which must be acknowledged and understood. Polar opposites, if you’ll forgive the pun. A number of these have recurred over decades, and my beliefs about each one at a particular time had a profound influence on my trading at that moment. I think the challenge is twofold. One is to recognize that these “pairs” actually exist in our personal trading. The second is to appreciate which way you are leaning – or should be leaning – within today’s markets.

In essence, it’s like acknowledging your split personality. It’s one thing to get confused between word pairs like draft (air current) versus draught (fresh beer served from a cask). So you catch a cold standing by the door at the pub – so what! If you fail to acknowledge and itemize personal dichotomies in your trading and then don’t adjust your beliefs to reflect market realities, the consequences are more dire than catching a cold or drinking too much.

As I said earlier, the first step is to recognize what these pairings might be in your trading. Yes, this is an overt sales pitch to keep a personal trading journal. I know of no better way to unearth your beliefs. Once you have accomplished this, you must be brutally honest with yourself and ask if you are leaning in the right direction for the present market. Let me give you a few examples from my own journal:

Bullish / Bearish: I lean naturally to trading the bullish side of the market, but there have been times when I’ve had to consciously lean the other way.
Methodology / Intuition: I am relatively disciplined in my trading methodology, but in the past I’ve had periods of profitability that have been driven more by my intuition than by my methodology.
Strength / Weakness: Once again, I tend to trade strengthening equities, although in a number of past markets, I’ve leaned the other way to buy weakness and have done very nicely – thank you!
Intermediate Term / Short Term: I’m a position trader and will generally hold equities for weeks to months. But when the market presents certain short term opportunities, I will lean the other way temporarily.

The bottom line is that trading has built into it a requirement for personal insight, brutal honesty and an ability to change – all driven by the present market conditions. As John Templeton once advised, “Work at being humble.”

Trade well; trade with discipline!
-- Gatis Roze

Chasing Last Year’s Winners

2013-03-22T08:30:00-04:00

Warren Buffett’s partner, Charles Munger, once said “All I want to know is where I’m going to die so I’ll never go there.” There’s a parallel here with stocks. The year in which certain equities top the performance charts more often than not precedes the year in which they die.

On an annual basis, the press touts the year’s top performing asset category. It’s nearly always a given that it will be different category than the year before. The fact is that parabolic runs do not last. Just refer back to the Internet or housing bubbles for many examples of this. This is somewhat equivalent to retailers’ “bait and switch” strategies. Retailers advertise a door buster price bargain but it turns out to be limited to only a few products for the early bird. Those customers coming afterwards find only a more expensive alternative available – hence, the switch. Last year’s winning equities seldom translate into winning trades this year.

It’s akin to investing in a drug called “hopeium”. As an investor, I can’t lie. It’s nice to earn a door buster trade occasionally, but as an ongoing trading methodology, I’ve never met a top performing trader who was consistent and successful over the long term adopting this “bumper car” approach of chasing last year’s new new thing. Buying an equity breaking out from a basing pattern of accumulation is one thing, but chasing an equity after a parabolic run is a low probability trade. There may be hedge funds with large staffs and superior research that can make money in this fashion, but I’m writing this as an individual trader for individual investors.

My intention is not to put you asleep with clichés but to blend two into one: “you have to know what you know” and “stick to the knitting”. In other words, embracing your own individual methodology, believing in it enough to trade it, and then applying it consistently over the years is the strategy of top performing traders.

Trade well; trade with discipline!
-- Gatis Roze

You Can Talk the Talk but Can You Walk the Talk?

2013-03-15T08:30:00-04:00

I attend investment seminars as half-monk, half-hit man. My time is a precious commodity, so if you are a speaker and see me in the audience, be prepared. My hot button is when speakers show a few elaborate slides, “share” their four favorite tenets to successful investing and then launch directly into their marketing pitch. They act as if they’ve given you the keys to the kingdom, proving their brilliance and justifying your attention. And those four tenets are invariably the same:

The trend is your friend.
Cut your losses short.
Let your profits run.
Use good money management.

God knows, the investment realm is flooded with these sorts of clichés and they have some value, but only if you embrace these tenets and make them your own.

For example, a recent television talking head – who shall go unnamed – gave a brief presentation during which he adamantly repeated the importance of staying on the right side of the trend. He repeated his simplistic mantra some half-dozen times in just a few minutes. If I had been in the live audience, the hit man in me would have been all over him.

My point being that you must take responsibility for unlocking the golden kernel of truth in such a cliché. When my son was ten years old, I had him in front of my class, fielding charts from the audience as he applied trend lines with his big yellow highlighter pen. He was allowed only three choices: up, down or sideways. He usually nailed it.

In my own trading, I do embrace the cliché “the trend is your friend,” but I’ve made it my own in the following ways.

Yes, I still like to draw trendlines by hand on my charts.
I use 3 moving averages. I have optimized these 3 and use different sets for indexes, sectors, ETFs, equities and mutual funds.
The short term moving average is exponential because I think of this as the Shelby Cobra of trends. The intermediate MA is a simple moving average akin to a Toyota Camry, and I view the long term line as a Cadillac Escalade. Each one of these moving average lines has its own particular maneuverability characteristics.
I am very aware of the interplay amongst these 3 moving averages as I consider their peaks, slopes, crossovers and price breaks.
I will admit that when I am singularly focused on one chart, I’ll use Daryl Guppy’s technique of many multiple moving average lines.
I like to have ADX also positioned above the chart I’m considering.
Being in a trend state of mind, I often simultaneously consider the trends of other indicators as well, such as money flow, momentum and relative strength versus its peers.

The key takeaway here is that many of the old familiar investment sayings and clichés have a great deal of built-in wisdom, but only if you are willing to take the time to consider how you personally can apply them within the framework of your own investment methodology. So the next time some guru tells you to “cut your losses short”, challenge him as to how he applies this maxim within his own trading. Ask him how he walks the talk!

Trade well; trade with discipline!
-- Gatis Roze