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Tradecraft – Do the Right Thing

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

AMERICANS MAKE dangerous, delusional and self-destructive decisions on a regular basis. Just look at the statistics: Plenty of us smoke, overeat, unbuckle our seatbelts, use drugs and have unprotected sex, just to name a few acts of random idiocy performed by seemingly intelligent and well-educated people every day.

Here’s the thing: Sooner or later, we pay for our stupidity. Whether it’s cancer, a car crash, a heart attack or herpes, most people who tempt fate end up losing. George Burns is the exception, not the rule.

And so it goes in our portfolios. More than any other endeavor, trading comes down to a series of choices made over time. The best advice I can come up with is also the simplest: Do the right thing.

Of course, that’s easier said than done. Navigating our place within the financial markets is quite a challenge.

Most of us follow a religion, or at least have a general philosophy that governs our actions. Indeed, from Christians and Muslims to atheists and anarchists, most of us have strong feelings about how best to approach the world. In the markets, some advocate growth investing while others put their faith in value. Some buy only large companies while others swear by the small caps. Technical traders trust only the charts while most purists follow the fundamentals. (more…)

Tradecraft – Only the Strong Survive

On January 11, 2010, In Good Articles, by ElfLord

PEOPLE LIKE TO ASK ME questions about the markets, whether I’m appearing on cable television or gabbing at a cocktail party. Is Dow 7000 cheap, or are we heading for a capitulation low? Is it time to buy tech stocks like Oracle (ORCL) and Cisco (CSCO), or short them even further into the single digits?

Here’s the thing: It doesn’t really matter what I think. It matters what they think.

As we’ve pointed out before, good trading is built more on sober technique than hot stock tips. Investors must be confident enough to take a position, yet humble enough to abandon it just the same. After all, the market is constantly changing, and no matter how good our analysis might be, we can always be wrong. Whether you’re Abby Joseph Cohen or Ms. Cleo, the future is always unknowable and largely out of our control.

But while we can’t change the market, we can alter our position within it. And I can’t stress enough that the most important aspect of any trading decision is never the condition of the market, but rather that of your own position. For active managers not content to buy and hope, the trick is to be constantly moving toward a position of strength, both within an individual trade and within the marketplace at large. Just like basketball, chess or any other activity that requires focus, you know you’re in the “zone” of trading when you start playing for position, not for points. (more…)

Tradecraft – A Dollar Saved Is a Dollar Earned

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

BANKING IS THE MOST competitive and lucrative business in the world. It always has been. But here’s something you might not realize: Whether you’re a teacher, an executive, a construction worker or a salesman, the reality is that you are a banker, too — in charge of thousands of dollars of liquid assets every month.

Nowadays we think of banks simply as electronic accounts on which we can draw checks and earn interest. But historically, banks’ main purpose has been to protect assets. Years ago, one needed a local bank to store valuables in a safe deposit box, and depended on a bank to earn steady (if unspectacular) returns that would at least keep pace with inflation. Despite the once-per-generation stock market mania that sweeps over America, investors historically have been far more concerned with holding on to their wealth than with striking it rich with their investments. Rightfully so.

Before you can invest, you must save. And regardless of what the market does over the next few months, I predict the Depression-era savings mentality I first wrote about a couple of months ago will make a far bigger comeback than most people realize. The truth of the matter is that, right now, as much as it hurts to admit it, most people aren’t investors as much as they are aggressive savers — willing to take risk, but on a much more limited scale. And although stocks have historically been the highest-returning asset class over the long haul, for the first time in memory investors are unwilling to stick around to see if history repeats itself. (more…)

Tradecraft – Good Investors Pay Attention

On January 6, 2010, In Good Articles, by ElfLord

A MARKET WATCHER should watch the market.

I suppose I could fix my car, do my own dentistry or reshingle my roof. But since I have neither the expertise nor the time to devote to these critical tasks, I hire professionals to do these jobs for me.

The same holds true for managing money. Just because you can trade for pennies on the web doesn’t mean you necessarily should. The markets aren’t rocket science, but they can be a full-time job. And while most people are perfectly capable of managing their own account, many simply don’t have the interest or the time to do it properly.

In investing, picking the jockey is almost as tough as picking the horse. There are literally hundreds of thousands of mutual funds, financial planners, account executives and investment advisers eager to grab their 1%. Where do you begin?

A good accountant is invaluable, but insufficient — after all, you’ve got to make money before you pretty it up for Uncle Sam. And while the best stock analysts might be able to tell you how many Huggies Wal-Mart (WMT) is going to sell in the third quarter, what can they tell you about improving your portfolio’s bottom line?

While I can appreciate the value of an attentive financial planner, I find that far too many are wet behind the ears. Somewhere along the line, their version of “analysis” became hypothetical, pretax profits based on a 12% annualized return from stocks. We see how well that turned out. (more…)

Tradecraft – On Golden Bond

On January 4, 2010, In Good Articles, by ElfLord

IN THE LATE 1990S, the equity culture reigned supreme. Employees wanted stock options, CEOs got ‘em by the boatload, and nothing seemed more lucrative than owning a piece of corporate America.

While the market has swooned, the public fascination with stocks as an asset class has barely budged. Even after another tough year in equities, by and large, stock ownership is still seen as the golden goose. Fund flows have slowed, but make no mistake: The herd is still in stocks.

Meanwhile, precious few have any indication of what’s been going on in the bond market, which continues an unprecedented bull run. Yes, the stock market has rallied from the lows of late July, but I would suggest the huge move we’ve seen in bond prices is the real capital-markets story since last Sept. 11.

As regular readers of this column know, I first started talking about bonds and the importance of portfolio income more than a year ago. Yet even given the dramatic outperformance of fixed-income securities since then, most investors are still apathetic at best. Even the recent introduction of bond ETFs hasn’t encouraged a more active approach to this oft-misunderstood asset class. (more…)

Tradecraft – Risky Business

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

I USED TO BELIEVE that being a good trader meant that I’d always be correct in my analysis of the market. Now, after trading everything from stocks on the screen to futures on the floor, I know better. As I’ve learned, just about anybody — from pundits to politicians to portfolio managers — is willing to chime in with an opinion of where the economy or the stock market might be heading which is all well and good. But while the talking heads will yak for hours about corporate scandals and Saddam Hussein, they are conspicuously silent about the act of trading itself. There’s a reason.

Trading isn’t black and white, it can’t be bundled up into a nice package, and it rarely makes for a good sound bite. Let’s be frank, no matter what size account you’ve got, trading it is filled with uncertainty. But while investors might hate uncertainty, markets can’t exist without it, plain and simple. Although we attempt to put the odds a little bit in our favor through diligent analysis, we can never eliminate the risk involved in any investment decision. After awhile, even when you’re right, it can really start to get on your nerves.

Up until a couple of years ago, the biggest risk in the market seemed not to be losing money, but losing out on the seemingly limitless upside of growth stocks. Like a roller coaster, many were expecting a bumpy, albeit ultimately profitable, ride. Then the bubble burst and the major averages nose-dived. Reality reared its ugly head in a painful reminder of the market’s inherent uncertainty. (more…)

Tradecraft – Another Weapon in the Arsenal

On December 30, 2009, In Good Articles, by ElfLord

FROM MUNICIPAL BONDS to futures, options and warrants, there are literally thousands of financial instruments that can be traded on a daily basis. Whether you’re an aggressive trader gunning for capital gains or a lower-volatility investor looking for income, there are many choices out there besides money-market funds and Standard & Poor’s 500 index funds.

Like a four-star film, a successful trade is carefully planned, meticulously researched and delicately executed. And when it comes time to put money on the line, investors should not only like the trade, but also the product they’re trading. Making the right trade at the right time using the right product well, it feels like heaven on earth.

Despite the paternalistic tone coming from nervous regulators these days, new investment products continue to be developed at a speedy clip. Keeping abreast of the latest innovations is critical so that, like Batman, you can pull them out of your utility belt at just the right time.

Some products are outright flops. Folios have been moribund since their much-heralded inception a few years back. The same goes for the Chicago Mercantile Exchange’s bankruptcy futures and the Chicago Board Options Exchange’s options on mutual funds, neither of which gained sufficient volume to justify their existence. (more…)

ZF Capital

Tradecraft – Do the Right Thing

Tradecraft – Only the Strong Survive

Tradecraft – A Dollar Saved Is a Dollar Earned

Tradecraft – Good Investors Pay Attention

Tradecraft – On Golden Bond

Tradecraft – Risky Business

Tradecraft – Another Weapon in the Arsenal

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