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Tradecraft – Beating the Tar Out of the Weak Dollar

On April 5, 2010, In Good Articles, by ElfLord

A POPULAR BUSINESS cable show on which I appear regularly has launched a segment called “Stock of the Week.” The premise: Each pundit names a stock he or she thinks could rise over the next seven days. Viewers love it. Nothing bumps ratings like the promise of quick, easy money.

I’m always preaching the gospel of absolute return. The truth is, a quick pop isn’t the best way to achieve one.

It’s hard to convince most people that they don’t want a quick 10% jump in one of their holdings. But it’s true. The best trades — that is, the ones that tend to be the most profitable — don’t occur over a few days, but over months. They aren’t knee-jerk reactions to an earnings report or a TV tout. Steady, silent price action defines a trend at work.

My philosophy starts with the notion that the market isn’t chaotic. It moves in trends, most of which unfold over time and persist longer than most people think. Therefore, the smartest thing an investor can do is trade with the trend. This means following the market, not fighting it. (more…)

Tradecraft – Confessions of a Human Being

On April 2, 2010, In Good Articles, by ElfLord

ASSET ALLOCATION IS frequently cited as the main determinant of a portfolio’s overall return. And for many investors and advisers alike, this has become the argument for a static, if not a completely passive, approach to portfolio management. These folks allocate some assets to stocks, some to bonds and one year later see if they’ve made any money.

In my world, however, a portfolio isn’t a still-life — it’s a moving image. Because the market changes, so too should a portfolio.

But it’s a messy affair. At any given moment, there are positions I’m on the verge of cutting, others I’m considering doubling. There are sweet gains and heart-breaking losses. And sometimes stocks get shot, positions implode and ideas that seemed foolproof just days earlier have to be trashed. That’s the business I’m in. I win some, I lose some, and if I’m lucky I get out alive having made some money along the way. It isn’t sushi — it’s more like succotash. (more…)

Tradecraft – How Are You Doing?

On March 31, 2010, In Good Articles, by ElfLord

EVERY ELEMENT OF money management, from economics to analysis, security selection to stop-loss orders, comes down to answering one important yet often underappreciated question: How am I doing? Because after all the reports and research, all that really matters when it comes to your investments is the bottom line. Asking “How am I doing?” is a simple reminder that this whole exercise is about one thing: making money.

Of course, the question is always relative. Back in the late 1990s, anything less than a 20% yearly return was seen as downright shameful. Active managers were chided for holding cash, taking profits or deviating even the slightest bit from the index. In those heady times, a single-digit return was an embarrassment.

But when the bubble burst, and indeed up until this year, just staying above water has been perceived as commendable. In fact, plenty of managers have boasted of their good “relative” performance, having lost only single digits, for example, at a time in which the S&P 500 index was down significantly more. Of course, I don’t know many groceries that can be bought using good “relative” performance, if that performance still happens to be negative. (more…)

Tradecraft – In Defense of Capitalism

On March 29, 2010, In Good Articles, by ElfLord

IT’S NO ACCIDENT that the infant mortality rate in Iran is more than six times worse than in the U.S.

Nor is it random that income at the poverty level in America is still significantly higher than the average wage in China, where the per-capita GDP is a mere $4,400, compared with $37,600 in the U.S.

And there’s a reason why people typically live 10% longer in America than in communist North Korea, where the average male dies at 68, an age we in the States now consider the prime of life, not the end of it.

How are such immense differences explained? Is the water in Washington, D.C., so different than that of Pyongyang? Does the sun never shine in Beijing? Are Americans born with magic powers that Iranians don’t possess? Of course not.

The reason is capitalism. And indeed, when pressed, even the diehard socialists would have to agree that capitalism works. From vaccines to video games, the quality of life and abundance of wealth created by a competitive, free-market economy simply can’t be denied. (more…)

Tradecraft – I’m So Bored With the U.S.A.

On March 26, 2010, In Good Articles, by ElfLord

IN THE MARKETS, we’re all dumb money. But the dumbest among us constitute “the herd,” the mass of slow-moving sheep that always seem to buy too late and sell too early.

My strategy has always been to watch the markets and steer clear of the herd. While I’m certainly not profitable in all of my trades, the herd rarely gets it right. So when it comes to choosing investment strategies, my goal is to find out where the herd is, and go somewhere else.

Generally speaking, the biggest component of the herd is probably mutual-fund investors. While there are plenty of razor sharp individuals out there using mutual funds, as a group they tend to have less-than-perfect timing. For example, as we’ve pointed out before, the biggest net inflow into equity mutual funds came in the first quarter of 2000, just around the time the Nasdaq began its historic decline. (more…)

Tradecraft – Out of Their Flocking Minds

On March 24, 2010, In Good Articles, by ElfLord

THERE ARE PLENTY of investors who in 1996 swore they’d never buy a tech stock — only to end up owning Cisco Systems (CSCO), Sun Microsystems (SUNW) and Qualcomm (QCOM) near the Nasdaq peak in March 2000. And there are just as many investors who promised they’d stay in it “for the long haul” only to end up puking their positions and abandoning stocks a few months back. The market tends to test our resolve both on the way up and on the way down.

Our mantra here at Tradecraft: Technique is everything. That is, it’s not so much what you trade, but rather how you trade that ultimately makes a difference. And because the market will test your biases, it seems the best move is to not develop them in the first place. Without an open mind, even the best stock pickers won’t bend in the wind — they’ll break.

That’s why I think too much formal education in the markets is dangerous. As we wrote a few months back, the most educated traders tend not to think, but to assume. Yet the real challenge sometimes is to be able to forget history as easily as you remember it. In the market, anything can happen. (more…)

Tradecraft – The Hot Seat

On March 22, 2010, In Good Articles, by ElfLord

AT NEW YORK’S Four Seasons Hotel, you’ll pay around $700 a night for a room with a city view. And while dining at the exclusive Le Cirque, the chef’s “degustation” menu will set you back a cool $105 — drinks and caviar (at a mere $75 an ounce) not included.

Although there are plenty of lesser-priced options, the truth is that you tend to get what you pay for. So while you could save money by opting for a meal at McDonald’s (MCD) and a bed at the Red Roof Inn, the experience just wouldn’t be the same. In a free economy, the hottest spots command the highest prices.

In the markets these days, the hottest seat in town isn’t for stocks or options, but for commodities, several of which continue a historically significant, yet strangely underdiscussed, bull market. As regular Tradecraft readers know, we’ve been espousing the virtues of hard assets for years now. Just a few weeks back, we made the case that commodities were still cheap relative to stocks using ratio analysis. Now, by examining recent trends in exchange membership prices, we can observe more evidence that hard assets like energy and metals continue to be where the action is in today’s markets. (more…)

ZF Capital

Tradecraft – Beating the Tar Out of the Weak Dollar

Tradecraft – Confessions of a Human Being

Tradecraft – How Are You Doing?

Tradecraft – In Defense of Capitalism

Tradecraft – I’m So Bored With the U.S.A.

Tradecraft – Out of Their Flocking Minds

Tradecraft – The Hot Seat

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