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Tradecraft – It’s a Point-and-Click World

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

ALTHOUGH MANY PEOPLE still consider “timing” the market to be sacrilege, the truth is that it’s no use to be in the right place at the wrong time. In the market, just as at a party, it’s always better not to be early, but fashionably late.

There are plenty of good ideas about what to buy, but a slim number of real opportunities in which to buy them. Things have really changed from the 1990s, when it pretty much didn’t matter whether you bought value, growth, old tech, new tech, bio-tech, high tech, low tech or no tech. In the 1990s, you wanted to be long stocks. Every dog had its day.

In a free economy, you can put your money in any number of potentially profitable places. Knowing a good opportunity for risk capital isn’t lucky — it’s smart.

As a clerk (and later, a floor trader) at both the Chicago Mercantile Exchange and the Chicago Board of Trade, I often wondered why certain pits were bustling, others empty. For example, I used to walk by the Mexican IPC pit at the Chicago Mercantile Exchange — and “pit” was actually being a little generous. The IPC pit wasn’t really a pit at all. It was more of a post — just a CPU for the market reporter who actually keys the trades into the exchange’s system. There weren’t many trades in the IPC index. Two or three contracts a day, tops. (more…)

Tradecraft – Time Is Money

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

WE CAN TALK about valuations, earnings and cash flow until we’re blue in the face. We can listen to the bears, the bulls, economists and the Federal Reserve ad nauseum. We can watch the technical charts, fundamentals and everything in between.

But in the final analysis, all that matters is the bottom line. Everything else is just conversation.

Folks, I hate to break it to you, but we’re all going to die eventually. The trick is to have lots and lots of money right up until the very last moment. No, money won’t buy happiness — but it can make you more comfortable. Whether it’s a top-notch suite at Memorial Sloan-Kettering Cancer Center or an endless supply of premium prunes, money buys peace of mind. It’s one of the few things I don’t want to be without in old age.

When you invest, you invest time as well as money. More than earnings, hot mutual funds or a promising IPO, time is the biggest factor in producing wealth. Not necessarily time in the stock market, mind you, but time over which money can compound if managed with a goal toward absolute return. We’ve been talking about the importance of absolute return since early 2001, when we first pointed out how real money is made as a result of compound interest more than security selection. The idea is simple: Even low levels of positive return will eventually create wealth as a result of consistent compounding over time. (more…)

Tradecraft – How to Make a Market

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

WHEN LOOKING AT a stock — or any security, for that matter — most people are content to focus on the price at which it last traded. And for investors with the patience to wait for a really big move, that’s generally sufficient.

But in reality, there are three prices in any given market. Market makers — those who make a living buying and selling at lightening-quick speeds — succeed or fail by looking not at stock XYZ’s last trading price, but at where it is bid and offered right now.

A quick refresher: The “bid” is the highest price to buy at any given moment; the “ask” is the lowest price to sell. So if the Dow Jones Industrial Average futures contract is quoted at 8838 bid, 8848 ask, it means the lowest offer to sell (the “ask”) one contract is 8848. If you entered a market order to buy (as most of the public does), you’d most likely be filled at the “ask.” The same applies for a market order to sell, which in this case would likely be filled at 8838.

The bid/offer is critically important to market makers because they don’t bet on direction. Unlike investors or discretionary traders, market makers profit merely by adding liquidity to a market. They bid at the bid (or slightly better) and offer at the offer (or slightly lower) and hope someone will trade with them. They aren’t out to find the next Cisco (CSCO) or Microsoft (MSFT), but rather to consistently buy and sell small price fluctuations. They want to make the spread, or the difference between the bid and the ask. In the Chicago futures pits, this is called the “edge.” (more…)

Tradecraft – Start Making Sense

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

GO ON ENOUGH blind dates or business meetings and you’ll soon realize what this world really needs is something to talk about. Whether it’s a New Year’s Eve bash or a dinner party, we all tend to gravitate toward our safe list of well-rehearsed topics. They’re our “go-to” funny stories; those handy little anecdotes that always seem to pass the time during an uncomfortable pause.

The same goes in the market, where Web sites, cable news networks, message boards and always amusing analysts provide a steady stream of insight (read: banter) on everything from seasonal trends to insider buying. The problem is that while all of the cocktail chatter can be entertaining, it can also be quite distracting as well. Why? Because market experts have a knack for discussing everything besides what matters: What they’re actually doing in the market.

As we’ve written before, pundits and analysts will opine for hours on everything from the savings rate to Saddam Hussein. The idea, of course, is to seem highly credible and intelligent without actually committing to a particular point of view. Like a practiced political candidate, they excel at giving a soundbite without actually giving information. (more…)

Tradecraft – The Real World: Wall Street

On January 20, 2010, In Good Articles, by ElfLord

FOOTBALL MIGHT have my Sundays cornered, but the real drama in my life occurs over an exhausting 120-hour stretch that starts Sunday night in New Zealand and ends late Friday afternoon in San Francisco.

There is no greater sport than the financial markets. The action in baseball, football, even BattleBots pales in comparison with the tick-for-tick drama of the QQQs (QQQ), Spiders (SPY) and, lately, even the long bond’s TLTs. I don’t care how many ESPN channels there are — who needs another highlights show when you’ve got 24-hour biz cable or Webfn? When you’ve got money at work — even just a little bit — it’s March Madness, the Super Bowl and “Survivor” all wrapped up into one.

Trading is exciting, emotionally draining work. Just as athletes go to the gym and lawyers study for the bar, good trading requires discipline. And more often than not, if it hurts, it means you’re doing it correctly. Whether you’re managing hundreds of your own dollars or millions of other people’s dollars, trading is the worst job you’ll ever love. (more…)

Tradecraft – Death by Doubling Down

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

THE MARKET DOESN’T slit our throats — we do it to ourselves. The Martingale, gambling lingo for what experienced traders call “doubling down,” is perhaps the quickest means to a bloody end. I got my first gray hair the day I understood why the Martingale system, despite all its attractions, simply doesn’t work.

The gambling system, which dates back to a London gaming house in the late 1700s, is completely irrational, yet incredibly seductive. The thinking: If you keep doubling your losing bets, eventually a winning trade will make up for the losses. Like making a deal with the devil, the Martingale system will always comes back to haunt you — and often more quickly than you might expect. (For a more detailed history of the Martingale, I’d recommend Nicholas Dunbar’s wonderful book, “Inventing Money.”)

Unlike Jim Cramer or Arch Crawford, I don’t give out a list of stock picks each week. My philosophy is that trading technique, not security selection, is what ultimately determines success. We of the Tradecraft prefer not to give a man a fish so that he may eat for a day, but to teach a man to fish so that he may eat everyday. (more…)

Tradecraft – Hey, Socialists! In Your Ear!

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

THE CIRCUS CAME to Chicago last week — not Ringling Brothers, but a colorful band of anticapitalist protesters armed with megaphones, placards and enough eco-unfriendly pamphlets to papier-mache the Sears Tower.

Protesting capitalism, mostly outside meetings by corporate leaders or the WTO, is ultra-chic among the alternative crowd these days. Last week, their target was the Trans-Atlantic Business Dialogue, an annual meeting of corporate and government officials from the U.S. and Europe working to ease trade restrictions. The event just happened to be held in my hometown.

Although I enthusiastically support the right of peaceful assembly, I’m of the mind that capitalism shouldn’t be protested, but rather celebrated. While “greedy executives” always make an easy target for disaffected youth, the reality is that nothing better exemplifies our national spirit than American business — the thousands of corporations big and small that benefit us all.

First off, let’s not forget just how “big business” gets so big. As Ayn Rand writes in her book “Capitalism: The Unknown Ideal,” “The sole means by which a government can grow big is physical force; the sole means by which a business can grow big, in a free economy, is productive achievement.” (more…)

ZF Capital

Tradecraft – It’s a Point-and-Click World

Tradecraft – Time Is Money

Tradecraft – How to Make a Market

Tradecraft – Start Making Sense

Tradecraft – The Real World: Wall Street

Tradecraft – Death by Doubling Down

Tradecraft – Hey, Socialists! In Your Ear!

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