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Tradecraft – Don’t Be So Cocky

On February 15, 2010, In Good Articles, by ElfLord

OVERCONFIDENCE DOESN’T LAST long in the markets. Cocky investors trade too big, too often and are usually too stubborn to take a loss. When the market is moving against them, it’s overconfidence that keeps them holding and hoping and doubling down, even when it’s painfully clear that it’s time to jump ship.

There’s a fine line between feeling confident and acting cocky. When I’m not at least a little concerned about a position, that’s generally the best time to think about getting out. Stocks climb a wall of worry, and healthy doses of skepticism, doubt and fear are actually a positive sign. When I feel butterflies in my stomach, I’m usually on the right track.

Research and due diligence are a must, but when you get right down to it, the market doesn’t know if you’re a warehouse worker or a Harvard grad. Although a fancy degree might look terrific on a resume, it means nothing when it comes to knowing how to trade. (more…)

Tradecraft – Hot Stock Tip? I’ll Pass

On February 12, 2010, In Good Articles, by ElfLord

WHEN IT COMES TO the Kentucky Derby, the Final Four and the stock market, everybody’s got a hot tip. Most portfolio managers still focus on what to trade, not on how to trade.

Yet when I lose money in the market, it’s poor technique, not bum stock picking, that’s always to blame. Despite all the emphasis on independent research and proper due diligence, I lose money not when I’m wrong in my analysis, but when I’m undisciplined in my approach.

For example, when a stock of mine is doing well, generally speaking, I get stupid. I scour the message boards looking for praise. I comb through the headlines. I daydream about potential acquirers. I browse the online company store. I look for favorable mentions in the business press. I fall in love.

And when the stock starts to sink, and my profit begins to disappear, I foolishly listen to everything else but the market itself — despite my years of experience as a hedge-fund manager. (more…)

Tradecraft – I’d Rather Be Rich Than Right

On February 10, 2010, In Good Articles, by ElfLord

LAST WEEK, I MADE another elaborate case for bonds over stocks. I combed through historical data, made pretty graphs. It was passionate, well-reasoned and sound research. And last week, it didn’t mean a damn thing. The bond market got clobbered. At least for this moment, I’m dead wrong.

While I believe my analysis that bonds are historically cheap is correct, the fact is, the point of investing is to make money, not to be “right.” When a market moves against me, good technique dictates that I look to reduce exposure, no matter how good my research is.

My analysis hasn’t changed, but the market has. And whether I was early, or just plain wrong, the recent weakness in bonds can’t be ignored. While I still remain a bull on bonds, let the record show that I’ve been stopped out of several positions, many at a loss. My overall exposure is still long bonds, but for now, it has been reduced (as has my capital). Fresh stop loss orders have been set.

OK, I’ve got egg on my face. But that’s all part of the game. No matter how good the research is, you’ve got to be flexible. When the wind blows, you’ve got to bend in order not to break. (more…)

Tradecraft – Know Your Bond History

On February 8, 2010, In Good Articles, by ElfLord

THE HARDEST THING ABOUT having money is knowing what to do with it. But in my experience, the best trades feel mandatory, like an act of self-preservation. There’s no time for thinking, considering, waffling. There’s no decision to be made.

That’s why, while bonds might seem risky given their strong run during the last few years, I’m compelled to be a bull right now, no matter what happens in Iraq.

First, and most important, the trend in bond prices is still up (with bond yields heading down). Regardless of the news cycle, the market moves in trends, which tend to persist longer than most people tend to believe. Indeed, more than any other reason, the best argument to be a bond bull is that the bond market itself is strong.

Second, as we pointed out last week, the prevailing attitude toward bonds these days is doubt. Talk to most pundits, and it’s just a matter of time before cash “on the sidelines” goes rushing back into stocks. Recent rallies have been just “safe haven” buying — nothing substantial, just a temporary “flight to quality.” Given the long bull market in bonds, buying them these days (and thus betting on lower interest rates) seems, well, a bit stupid. From a contrarian’s perspective, this is bullish for bonds. (more…)

Tradecraft – There’s No Bubble in Bonds

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

THIS JUST IN: You want to be long in a bull market. When a bull is running, stocks enjoy long tradable advances, not one-day jumps. Shares post gains in the triple digits, rather than the single digits, and they tend to move as a group. Think back to 1998 or 1999: It didn’t much matter which tech stock you bought — the majority of them went up and went up big. A rising tide lifts all boats. This is the nature of bull markets.

These days, the rising tide continues to be in bonds and other income-oriented instruments. We’ve been talking about bonds for quite a long time here, most recently in January. Although I admit that I’ve been repeating myself on this issue, I also know that this is the nature of bull markets: They move in trends, and trends often last a lot longer than most people expect.

The rise in bonds, and their continued outperformance relative to stocks, has been so dramatic that many market players are speculating that we’re in the midst of a bubble. But from my perspective, it’s not a bubble at all. It’s simply a bull market. (more…)

Tradecraft – Managing the Manager

On February 3, 2010, In Good Articles, by ElfLord

MANY INVESTORS, ESPECIALLY those with significant sums, prefer money managers to oversee their assets. While there are some advantages — namely more control over your tax liability — the problem with separately managed accounts is that, from what I’ve observed, very few are actually managed. So even if you decide not to manage your money, you might need to take some steps to manage your manager.

Let’s define our terms. “Managing” an account doesn’t mean constantly trading it. In fact, one of the primary, yet oft-overlooked, responsibilities of an asset manager is to make sure a client’s portfolio matches his particular risk tolerance. This is usually done when the account is set up, but often stops there. The truth is that this should be an ongoing process.

Like many elements of investing, the concept of “risk tolerance” is often made a heck of a lot more complicated than it need be. Instead of actually focusing on hard numbers, advisers toss around vague descriptions of how much risk they plan to take. Let’s be frank: What exactly does being “aggressive” mean, anyway? (more…)

Tradecraft – Let Freedom Ring

On February 1, 2010, In Good Articles, by ElfLord

LIKE THE ANTIGLOBALIZATION forum I wrote about last year, the Iraq issue has brought out global protestors en masse.

While I support the right to peaceful assembly, the imagery that associates Bush with Hitler and the swastika with the American flag makes me gag. Despise George Bush’s environmental record? Fine. Want to give UN inspectors another decade? Fine. I don’t care which god you pray to or which language you speak. Associating America with Nazism isn’t merely ignorant — it’s disgustingly stupid.

The United States is the furthest thing from Nazism the world has ever known. Our global leadership isn’t a result of brute force, or political intimidation, or terror. America’s vast wealth, advancements in technology, culture and influence aren’t a result of sacrificing individual rights, as the Nazis did, but of protecting them.

While the right to free speech is most associated with America, I believe our property rights, and our commitment to free-market capitalism, are the truest sources of American strength. For many people, the concept of “property rights” has come to mean quaint suburban squabbles about four inches of the backyard lawn. But property isn’t just your stuff — it’s your life. Your property is the product of your labor, and the brilliance of American democracy is that we’re all free to toil away in any profession we choose. And keep the products of our labor. (more…)

ZF Capital

Tradecraft – Don’t Be So Cocky

Tradecraft – Hot Stock Tip? I’ll Pass

Tradecraft – I’d Rather Be Rich Than Right

Tradecraft – Know Your Bond History

Tradecraft – There’s No Bubble in Bonds

Tradecraft – Managing the Manager

Tradecraft – Let Freedom Ring

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