ZF Capital > Your guide to financial world

Tradecraft – Chicago’s Mob Rule

On August 30, 2010, In Good Articles, by ElfLord

IT MIGHT SURPRISE you that Chicago, known for its rough-and-tumble futures pits and passionate support for free-market capitalism, has been slowly morphing into a borderline socialist society where every aspect of private life is tightly controlled by the state.

We first noticed it a few years ago, when we outlined the Chicago City Council’s attempt to ban smoking at all bars and restaurants. Of course, smoking in any large buildings and workplaces had already long since been outlawed.

Score one for the socialists. Thanks to opportunistic local politicians and an aggressive lobbying effort from liberal think tanks, the smoking ban passed, making it illegal to smoke cigarettes — a legal substance — in any bar or restaurant within city limits. Public-health advocates have heralded the move as a major score for the best interests of smokers and nonsmokers alike. (more…)

Tradecraft – Love Stinks

On August 27, 2010, In Good Articles, by ElfLord

MORE THAN WEED, cocaine or crystal meth, love is the ultimate drug. No other human emotion is capable of so effortlessly elevating your heart above the clouds or dragging it through the thorns of despair. Love is a powerful, uncontrollable, and in most cases, a dangerous force. Sometimes I wonder if life wouldn’t be a lot easier without it.

The problem is that falling in love is easy. It doesn’t take much energy or critical thinking to quickly find oneself completely head-over-heels for a beautiful girl. The attraction is usually immediate and irresistible: Without warning, she becomes the sun who brightens up your entire world. In your mind, you quickly make plans to share a future and can’t imagine another day without her by your side. That’s love. And that’s where the trouble begins.

Love is equally as hazardous when it comes to your investments, where we often find ourselves falling for a particular stock and, thus, utterly devoid of the rational objectiveness that’s required to successfully manage a position or portfolio. Love in relationships can break your heart, but love in your finances will devastate your bottom line. (more…)

Tradecraft – Tale of the Tape

On August 25, 2010, In Good Articles, by ElfLord

IN THE STOCK MARKET, everybody’s got a system. Some people use the charts, others follow the fundamentals. Others invest based on the seasons or stars. Over time, some approaches work more than others, but of course, nothing works all the time.

There is no sure thing. But after trading everything from stocks on the screen to futures on the floor, I’ve come to believe that the most simple and effective way to put the odds on your side when allocating assets is to follow what I believe is the golden rule: Don’t fight the tape.

Deciding whether a stock is “overvalued” or “undervalued” is totally subjective. Price, on the other hand, never lies. The tape is the tape and determining weather a security is strong or weak is easily visible to even the uneducated naked eye. When a market is strong, you might not want to invest in it, but I think you’re a major fool to stand in its path. (more…)

Tradecraft – Money in the Middle

On August 23, 2010, In Good Articles, by ElfLord

I DON’T PICK TOPS or bottoms…and for good reason. Although investors spend an inordinate amount of energy talking about them, like stock market crashes, there are actually barely a handful of days when tops and bottoms actually occur. In the past 100 years of trading, there’s been — what — maybe four or five stock market crashes? The reality is that, in the price lifetime of individual stocks or securities, tops and bottoms are equally rare.

A market spends the vast majority of time rising, falling or trending nowhere. So I start with the notion that, out of the hundreds of days in which I’ll hold a trade, there’s only going to be one or two of them that actually constitute a top or bottom. From a purely statistical perspective, an investment strategy that banks on being able to pick those few days has the odds stacked against it from the start.

In truth, you don’t need to sell the top or buy the bottom in order to make money on a trade. The real scratch isn’t made on the top or bottom 20% of a move, but within the vast middle 60%. To that end, the disciplined investor should always opt to play for the big moves — essentially, an overall valuation shift — much more than a simple three-point pop in Google (GOOG) or Amazon.com (AMZN). (more…)

Tradecraft – The New Diversification

On August 18, 2010, In Good Articles, by ElfLord

SIX YEARS AFTER Nasdaq’s peak, most people have now picked up on the importance of diversification. Few investors still have their entire portfolio in the S&P 500. Small stocks, foreign stocks and even some commodities or foreign exchange have become commonplace in accounts big and small.

But for the active trader, the notion of diversifying should move beyond simply spreading around your assets to more than a solitary fund. There are a number of smart ways to use a diversified approach that you might have never even considered.

The most basic way to diversify your portfolio is by time. Most people invest as if they were burying a time capsule. They commit their entire risk capital in one day, usually as soon as the check clears or the brokerage account is actually opened. If they have $50,000 on March 1, they invest $50,000 on March 1. Six months later, they dust off their IRA statement from the bottom of a pile of mail and see if there’s any buried treasure to be found. (more…)

Tradecraft – Hidden Opportunities

On August 16, 2010, In Good Articles, by ElfLord

IT’S QUITE FITTING that Christopher Columbus discovered the New World while looking for a trade route to the Far East. The value of a society can, after all, be best judged by the vibrancy of its markets. Markets bring together willing buyers and sellers to conduct voluntary, mutually beneficial exchanges. While those in socialist countries like North Korea are plagued by scant inventory and buyers with little disposable income, free countries have active markets that are the manifestation of liberty in our time. Just look at the Amsterdam flower market or New York Stock Exchange for proof.

Unfortunately, the effort to develop new markets in recent years has been severely hampered by the regulatory tentacles of overreaching government. Between Sarbanes-Oxley, the SEC and the Commodity Futures Trading Commission, just to name a few, bureaucratic red tape has slowed innovation even as technology has pushed trade far past the Buttonwood tree. Thankfully, a few pioneers have created exciting new marketplaces in which I see gobs of profit opportunity. These are two of my favorites. (more…)

Tradecraft – Rethinking the Thought Process

On August 13, 2010, In Good Articles, by ElfLord

TO PARAPHRASE PHILOSOPHER Arthur Schopenhauer, the real trick is not to see what nobody has seen, but to think what nobody yet thought about that which everybody has already seen. Indeed, from the smallest individual trader to the most well-capitalized funds, by and large we all look at the same data. The difference is how we’re trained to interpret it. And while good information, especially good price data, is critical, if you think irrationally, you’ll trade irrationally just the same. Successful traders discipline themselves to look at markets in a specific and often seemingly unnatural way.

For example, although you’ll never hear this at Wharton or Kellogg, one of the biggest ways investors trip over themselves is through the altogether pointless exercise of trying to determine if a company is “overvalued” or “undervalued.” And while I know the implication is that undervalued stocks will eventually rise as the market discovers their worth and that overvalued stocks are bound to come crashing down, friends, if you want to make money…and that’s your shtick, I can unequivocally promise that you’re barking up the wrong tree.

What this sort of fundamental analysis misses is the obvious reality that a company and its stock are two different entities altogether. The truth is that oftentimes perfectly lousy companies have outrageously bullish stocks. CMGI (CMGI), for example, was $160 back before the company had anywhere near the revenue it enjoys today, when it trades near $1.50 a share. Conversely, it’s not uncommon that a highly profitable firm’s stock is downright moribund for years. Wal-Mart Stores (WMT), for example, is a venerable money machine, yet the stock rests not far from where it did back in 2000. (more…)

ZF Capital

Tradecraft – Chicago’s Mob Rule

Tradecraft – Love Stinks

Tradecraft – Tale of the Tape

Tradecraft – Money in the Middle

Tradecraft – The New Diversification

Tradecraft – Hidden Opportunities

Tradecraft – Rethinking the Thought Process

Your guide to financial world

Categories

Tags

Looking for something?

Visit our friends!

Archives