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Tradecraft – Sorry, the Position Has Been Filled

On December 28, 2009, In Good Articles, by ElfLord

LIKE ESPRESSO AND chocolate truffles, investment advice comes in small doses these days. Even after watching the stock market crumble over the past few years, a positive mention in Business Week or analyst comments on CNBC still satisfies most people’s criteria for “research.”

But the truth is that, when considering a stock — or any financial instrument, for that matter — factors like the company’s earnings, the Federal Reserve, the economy or Abby Joseph Cohen simply aren’t that important. More than anything else, your existing position should influence how you invest and allocate your assets.

There is a bullish and bearish argument for every investment, and nobody knows the future. For every reason the stock market might now be at a bottom, there are just as many signs suggesting the worst is yet to come.

The thing to remember is that, as participants in a free market, we aren’t trading stocks as much as we are trading our positions. It’s a subtle difference that’s lost in the “buy, sell or hold” ethos that continues to dominate most people’s financial planning. The real question isn’t whether or not I want to buy XYZ, but whether I want to buy XYZ — and how much — considering my current positions and all the alternatives to buying XYZ, including buying nothing at all. (more…)

Tradecraft – It’s Time to Cut Your Losses

On December 25, 2009, In Good Articles, by ElfLord

“CUT YOUR LOSERS and let your winners run.”

It’s a trading rule as old as the market itself. But while amateurs and pros alike are familiar with the saying, few have thought about the logic behind it. A few weeks ago we talked about the importance of letting your winners run. This time, we’ll focus on the first and more difficult half of the formula: taking losses.

The human mind is a powerfully manipulative beast, and the biggest problem most people have is that their inner beast interprets losing trades in exactly the wrong fashion. Simply put, we ignore the reality of losses while simultaneously counting our winning chickens before they’re hatched. Within our portfolios, we too often treat a paper loss as a temporary phenomenon, while a paper gain is wrongly seen as money in the bank. This is a logical fallacy to which almost all of us fall pray. But the truth is, a gain is only a gain once you’ve taken it, while a loss is a loss whether it’s realized or on paper.

The stock market, like many areas of our lives, moves in trends. Weak stocks tend to get weaker or, at least, stay weak. If you’re in the enviable position of being able to take a risk, with more than 10,000 publicly traded securities out there, why opt for an already losing trade? As we pointed out over the past few months, there’s always a bull market somewhere — even if it’s not in Microsoft (MSFT), Merck (MRK) or the washed up names of the Standard & Poor’s 500. When a stock is declining, it’s telling you something — don’t buy me. (more…)

Tradecraft – The Triumph of Free Markets

On December 23, 2009, In Good Articles, by ElfLord

GIVEN THE PERFORMANCE of most Americans’ investments over the last few years, big business makes an easy target for the ratings-hungry news media and a bloated government eager to prove it does more than take up two channels on my local cable system.

But while the media relish the chance to spin the recent scandals at WorldCom (WCOME), Enron (ENRNQ), Xerox (XRX) and the rest into splashy “trend pieces,” and while some pols shake their heads with righteous indignation, the real story behind the recent financial scandals isn’t the failure of the free market, but rather its triumph.

Fraud isn’t a way of life — it’s a fact of life. Go to any grocery store and you’ll see a handful of bounced checks taped on the wall. In business large and small, there will always be a tiny minority intent on not playing by the rules. In fact, I would even suggest that there’s less fraud in American business than there is sexual abuse in the clergy or embezzlement in politics, largely because American business is by far the most transparent and honestly analyzed of the three. (more…)

Tradecraft – When the Buyers’ Strike Becomes a Fire Sale

On December 21, 2009, In Good Articles, by ElfLord

A FEW MONTHS back, we outlined some of the basic logical fallacies that can lead your investment thinking astray. One that I’ve been hearing quite a bit of lately is that of false attribution. In trader talk, it’s putting the ass in assume.

Even among experienced professionals, there’s a rather surprising ignorance of the factors that really move markets. Every high-school economics class starts with the basic law of supply and demand, but pundits, media commentators and even market professionals who should know better choose to focus on just one side of that irrefutably important concept.

Turn on any newscast and you’ll hear the same shockingly ignorant analysis: If the market drops, it’s because investors sold their shares. If the market rallies, it’s because everybody bought. After all, buyers make a stock go up; sellers force a stock’s price down, right?

But while most commentators are quick to interpret a market trend as the result of some action of investors, it’s often their inaction that’s ultimately responsible for the move. (more…)

Tradecraft – Don’t Be a Fashion Victim

On December 18, 2009, In Good Articles, by ElfLord

I’M A CHILD OF the 1980s, and while I’m no Mr. Blackwell, I can safely say that the mullet haircut, Izod shirts and The New Kids on the Block aren’t terribly representative of today’s popular style.

Knowing that styles come in and out of fashion over time, most of us buy clothes on a rolling basis. We don’t get a whole new wardrobe every year, but rather a garment or two every few months that reflect the contemporary look. The same approach should be taken within an investment portfolio, where asset allocation should be viewed as an ongoing process, not a one-time affair.

Come January of each year, media outlets from Business Week to Barron’s publish their “Where to Invest” issues. And although the past few years have demonstrated just how much the world can change in a short amount of time, many people go right ahead and dump their assets into the hot strategist du jour’s top 10 picks come Jan. 1. One year later, they see how they’ve done and roll the dice again.

That isn’t investing it’s a carnival ride. (more…)

Tradecraft – Incoming!

On December 16, 2009, In Good Articles, by ElfLord

MENTION A STOCK to my 97-year-old (and still shrewd) grandmother, and the first question she’ll ask is, “Does it pay a good dividend?” It’s only in recent years we’ve become so obsessed with capital gains. But although income-oriented investing is usually associated with retirees set on preservation of capital, it’s actually a strategy employed by professional investors, many of whom will often keep the majority of their assets in cash while focusing on a small number of more risky situations. Investing with an income focus is a portfolio approach we first outlined a few months back.

Yet income remains the Rodney Dangerfield of the investment world, and among many traders, dividends, interest and other income-oriented returns are often dismissed altogether. It’s much more adrenaline-pumping to buy XYZ at $50 and sell it at $55 than buy a 10% bond and wait patiently for a year.

The real advantage of hedge funds or other advisers focused on absolute return is that they realize real money is made over time — and is made by the effect of compound interest, not capital appreciation. (more…)

Tradecraft – Don’t Be So Passive

On December 14, 2009, In Good Articles, by ElfLord

MORE THAN 14 months ago, I pointed out how, despite the weakness in the familiar market averages, many lesser-followed and smaller-capitalized companies weren’t just outperforming index favorites, but posting solid results in their own right.

These days, many investors are starting to understand that it’s not the entire market that has been weak, but rather a relatively narrow (albeit widely watched) contingent of large-cap stocks.

Yet, as irrational as it may seem, large-cap U.S. stocks remain the “go-to” investment for both institutional and individual investors. Whether it be large-cap ETFs like the Nasdaq-100 Trust (QQQ) or the good old Vanguard 500 index fund (VFINX), most people’s assets are tied to one or another of the major indexes. But as we’ve pointed out over the last few months, the “broad” indexes aren’t really that broad at all, since they’re focused on large-cap U.S. stocks. (more…)

ZF Capital

Tradecraft – Sorry, the Position Has Been Filled

Tradecraft – It’s Time to Cut Your Losses

Tradecraft – The Triumph of Free Markets

Tradecraft – When the Buyers’ Strike Becomes a Fire Sale

Tradecraft – Don’t Be a Fashion Victim

Tradecraft – Incoming!

Tradecraft – Don’t Be So Passive

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