ZF Capital > Good Articles

Tradecraft – First Thinks First

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

JUST NINE DAYS after the most horrific attack on the U.S. since Pearl Harbor, President Bush posed a crisp challenge to the world’s 190 countries and six billion residents. “Every nation, in every region, now has a decision to make,” he said. “Either you are with us, or you are with the terrorists.”

And while the president’s point was to stress the vigilance with which the U.S. would fight the war on terrorism, the truth is that he committed a common logical fallacy that plagues even the smartest individuals, from politicians to portfolio managers.

His rhetoric was a perfect example of what logicians refer to as a “false dilemma,” or fallacy of distraction. By limiting the number of options, we forget the reality that, truth be told, there are actually more than two choices in this highly complex scenario. And whether you are coping with terrorism or Tyco (TYC), that’s usually the case.

This sort of black-or-white thinking, a topic we first touched on a few weeks back, is just one of a handful of common trading traps that can affect your performance. (more…)

Tradecraft – The Bottom-Fisher’s Tackle Box

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

THE MARKET’S WEAKNESS over the last two years has been chalked up to everything from election jitters to energy prices, the economy to Enron (ENRNQ). Likewise, in the early 1970s, there was an equally daunting list of fundamental factors, from Vietnam to Watergate, Cambodia to communism that got blamed for dragging stocks down.

On May 21, 1973, U.S. News & World Report featured an enthusiastic cover story called “Brighter Days Ahead for Stock Market?”

“Conditions are shaping up for a sustained rise in stock-market prices,” the magazine suggested, citing analysis from a number of then well-known pundits, who almost universally expected better times ahead. “The market is ready to move up” predicted Ian Cramer of Kohnmeyer and Co. “We are buying stocks.” Pundits, it turns out, have been missing the boat for years.

The Dow, which at 900 had already been in a trading range for the better part of six years, went on to drop another 35%, hitting new bear-market lows and, for a period, trading at levels that hadn’t been seen since the late 1950s. The recently introduced Nasdaq went on to drop 50%. (more…)

Tradecraft – It’s a Big World After All

On November 20, 2009, In Good Articles, by ElfLord

THERE’S A CERTAIN swagger that goes along with being an American. We’ve won the cold war, the Gulf war and so far the war on terrorism. Our currency is the international standard by which all others are judged and our companies are the most highly valued and actively traded in the world.

But along with the swagger comes myopia. Like many Americans, I too often fall prey to the fallacy that that world news is American news, world culture is American culture and the world market is the American market.

This Western-centric bias is echoed among the various economists, analysts and taking heads who are paid to pontificate on the state of the world economy. There’s a general consensus that whenever the world’s economy does turn around, the United States will once again be leading the charge higher.

These days being patriotic isn’t just popular, but hip. But as we always like to point out, the purpose of investing is to make money, not make a political statement. And for a number of factors, when it comes to putting new money to work these days, my sights are increasingly set outside U.S. borders. (more…)

Tradecraft – Less Is More

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

ALTHOUGH MCDONALD’S (MCD) has since tried everything from cafes to chicken joints, the company’s foundations (and real growth) came from Ray Kroc’s original, stunningly simple concept: a burger joint that was cheap, efficient, consistent and, most of all, fast.

And while the company already had a solid footing, Apple Computer’s (AAPL) real growth came in 1984 with the introduction of the Macintosh. Even though the machine was more expensive and less powerful than its PC rivals, the computer “for the rest of us” succeeded because of one solid premise: You could actually understand how to use it.

Today, Ford Motor (F) is a large car conglomerate of brands encompassing everything from Mazda to Mercury, Lincoln to Land Rover. But Ford became the largest car maker thanks to the Model T, a mass-produced, reliable, cheap auto with no bells, whistles or variations whatsoever. As Henry Ford supposedly said, you could have it any color so long as it’s black.

The point is that each of these magnificent enterprises succeeded by focusing on a relatively narrow goal. Get that right, and everything else usually just falls into place. (more…)

Tradecraft – The Trouble With ETFs

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

TRADERS BELIEVE THERE’S money to be made, somewhere, in any market environment. You’ve got to be where the action is. And because there are numerous times in which individual sectors trend while the broad market treads, sector allocation has become a hot concept among investors and money managers alike.

To suit the sector-allocation crowd, Wall Street has developed a number of sector-based exchange traded funds, known broadly as ETFs, which give you exposure to an entire sector or industry simply by buying a single share. Marketed as iShares, Sector SPDRs or StreetTracks, the products are essentially open-ended mutual funds that trade throughout the day, just like stocks. These sector-based ETFs have all sorts of interesting advantages over both individual stocks and mutual funds. But they also aren’t quite what they appear to be, and that can pose problems for investors who buy them thinking they’re getting something they aren’t.

First introduced in the early 1990s with the successful listing of the Standard & Poor’s Depositary Receipts (or SPDRs, pronounced “spiders”) on the American Stock Exchange, ETFs have become some of the hottest investing products on the Street. The American Stock Exchange, where most ETFs trade, has become virtually dedicated to supporting and developing these rapidly growing tools. There are well over 120 ETFs now trading, with more being introduced almost on a daily basis. (more…)

Tradecraft – It’s All in the Follow-Through

On November 13, 2009, In Good Articles, by ElfLord

LIKE A NEW LOVE, the beginning of a journey or a fresh hand of cards, the first trade in a particular stock is exciting and seemingly rife with possibilities. But the toughest and most important trade you make is actually the second one. Happy relationships, smooth travel or winning blackjack all require skillful reaction to changing circumstances — and so does successful trading. What matters is the all-important follow-through. In every market and with every product, managing a trade is even more important then making it in the first place.

Anybody can buy a stock. It’s how you manage the fallout that matters. Lots could happen: The economy could slump. Or interest rates could rise. The company’s sales could falter, or its CEO could get run over by a bus. This is the problem with following the fundamentals. It means concerning yourself with things that are far out of your control.

What really matters ultimately is the price action of the stock itself. When you buy XYZ at $50, there are only a few possible outcomes. XYZ could go up, down or go nowhere at all. We will briefly outline what I believe to be the time-tested rules for what to do next.

Let’s assume XYZ rises to $55, whether thanks to prayer, skill or just plain old luck. Even in a tough economy with soggy stock indexes, there’s always a bull market somewhere. You’ve got a winner on you’re hands, so forget the headlines. You’re up five points on XYZ…what’s your next trade? (more…)

Tradecraft – Don’t Buy Me

On November 11, 2009, In Good Articles, by ElfLord

“IT’S NOT WHETHER you win or lose, but how you play the game.”

Most of us understand that old saw to be about style — about winning or losing with equal aplomb and sportsmanship. But to a trader, it’s a lesson in technique. It reminds us that whether you win or lose is a function of how you play the game.

I can’t say it often enough: It isn’t what you trade, but how you trade, that ultimately determines success. And nowhere can this be seen better than in the case of energy giant Enron (ENE), whose spectacular 99% decline has left more than a few investors out in the cold.

Most pundits would suggest that Enron’s woes first became apparent in mid-October, when the company took a $1 billion charge and reduced its shareholders’ equity by $1.2 billion as a result of a number of questionable off-balance-sheet partnerships. But from a trader’s perspective, the problems for Enron and its investors actually started much earlier. While Enron’s collapse was stunning, good trading technique could’ve limited the damage to investors’ bottom line.

Many are now blaming the company for their losses, but regardless of any alleged corporate wrongdoing, following a trading discipline would’ve prevented a position in Enron from hurting your portfolio too badly. That’s the essence of investing. You win a few, you lose a few, you keep on fighting. (more…)

ZF Capital

Tradecraft – First Thinks First

Tradecraft – The Bottom-Fisher’s Tackle Box

Tradecraft – It’s a Big World After All

Tradecraft – Less Is More

Tradecraft – The Trouble With ETFs

Tradecraft – It’s All in the Follow-Through

Tradecraft – Don’t Buy Me

Categories

Tags

Looking for something?

Visit our friends!

Archives