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Tradecraft – Here’s to the Other Heroes

On November 9, 2009, In Good Articles, by ElfLord

TRADING IS NEVER PERSONAL. Stocks are just pieces of paper. But that doesn’t mean I don’t have strong opinions about the businesses those stocks represent. You can love a company but hate its stock, and vice versa. For example, I think AOL Time Warner (AOL) (now trading at around $37) is a $25 stock in waiting, yet I also think founder and Chief Executive Steve Case is a terrific hero for whom we should be thankful. Apparently, not many agree.

Most people would agree that America’s prosperity is the product of capitalist free enterprise, but few actually acknowledge the capitalist heroes who make that prosperity happen. So in the midst of giving thanks this holiday season — and at a time when we’ve all been thinking about the meaning of heroism — I’m giving my props to the men and woman who run American business, big and small, because they mostly run it very well and for the benefit of all of us.

When an August Harris Poll asked people to list others they thought of as heroes, the most cited names belonged to figures from the worlds of religion, politics or entertainment. While there probably isn’t an individual on this earth who hasn’t benefited from American business, from Henry Ford to Hank Greenberg, Andy Grove to Adolphus Busch, no business leader made the cut. (more…)

Tradecraft – The High Life

On November 6, 2009, In Good Articles, by ElfLord

WHEN IT COMES to the stock market, I must confess to being a bit of an addict. Not 15 minutes pass without my having intimate knowledge of the Standard & Poor’s 500′s latest movements, however tiny they may be.

The market is more than just an occupation — it’s a stimulant. All the research reports, analysis and squawk aside, the truth is that anything can happen between 9:30 a.m. and 4:00 p.m. ET. We gurus blab about Fed policy and price/book ratios to legitimize what most of us are embarrassed to admit: The stock market is little more than a tremendously exciting, highly addictive, real-time, real-money global casino.

But while gambling oops, I mean trading can provide a “high,” its druglike qualities can be quite dangerous. Just like an addict who needs his fix, an undisciplined trader will go to painful lengths to score one big play. He may refuse to take a loss, trade too big, or choose a position that doesn’t offer an attractive risk-reward proposition. (more…)

Tradecraft – The Hard Facts

On November 4, 2009, In Good Articles, by ElfLord

WHETHER YOU’RE MANAGING hundreds of millions or just hundreds, at the end of the day, investing is about making money. And too often we forget that the majority of a portfolio’s return comes not from market timing or security selection, but asset allocation. So for a moment — just a moment — put down your price/earnings ratios, chuck the charts and forget Fibonacci. Don’t think like a prognosticator, but a portfolio manager. As the past few months have demonstrated, consistent returns that outpace inflation are an achievement that only a well-diversified portfolio can provide.

Stocks are one asset class most people are familiar with. And as a result of the recent run-up, more investors are now getting into bonds as well. But there’s another major asset class that’s routinely overlooked even by most financial professionals. Hard assets not only increase diversification, but can boost returns as well.

According to a 1999 study by Ibbotson Associates, adding hard assets to a diversified portfolio has historically increased returns while reducing risk. That’s largely because hard assets are noncorrelated with the stock market. In other words, when the Dow zigs, hard assets tend to zag. And although hard assets are traditionally seen as suitable only for high rollers, the research demonstrates they can benefit both low- and high-risk portfolios alike. (more…)

Tradecraft – The Rewards of Risk

On November 2, 2009, In Good Articles, by ElfLord

DESPITE HOURS OF THOUGHT, scrutiny and research, I’m humbled to report that the majority of my trades are losers. It’s frustrating…but true. Some trades go against me. Others just go nowhere at all. But either way, my losing trades outnumber my winners.

What saves me, however, is that the profits from my winning trades are bigger than the losses from my losing ones.

Simply put, you don’t have to win more often than you lose. You do, however, need to win bigger than you lose. I have found that when it comes to allocating a portfolio, the old “80-20″ rule tends to apply: 80% of your profits tend to come from 20% of your trades. To that end, the point isn’t to search for trades with a high probability of winning, but with a high probability of a large return. (more…)

Tradecraft – Sizing Things Up

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

WHAT MAKES THE market so undeniably fascinating is that at any moment, the bull’s case is just as compelling as the bear’s. So let’s say we’ve hit the bottom, or at least a bottom worthy of trading from the long side. After all, the averages have rallied strongly since September, and given that perky performance and the examples of history, there are plenty of reasons to believe the market’s next move could be higher.

Which way you trade usually isn’t as important as what you trade. And there are choices galore.

You could buy stock in IBM (IBM), General Electric (GE) or any of the other big stocks that make up the Standard & Poor’s 500, or a mutual fund that will do it for you. You could buy options on the index itself, or an exchange-traded fund holding stocks that make up the index. You can even buy options on exchange-traded funds that hold stocks that make up the index. Can you say overkill?

Having a good investment idea is one thing, putting it into practice is another. Think Sun Tzu: Every battle is won or lost before it is even fought. No matter how good your analysis is, choosing the appropriate instrument relative to your capitalization is a big factor in determining the outcome of the investment battle. So here’s a look at what might be the right instruments for relatively small investors with varying portfolio sizes. (more…)

Tradecraft – What’s the Rush?

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

THE BEST INDICATION that the market hasn’t yet reached a bottom is that a vast number of analysts and pundits are still trying to call one.

Markets are a combination of fear and greed — and bottom fishing is, by definition, the product of greed. After all, those who are intent on buying the absolute bottom aren’t satisfied to profit from a portion of a stock’s upward climb…they want to capture the whole shebang.

But like the watched pot that never boils, the bottom — a long-term, sustainable bottom — will come only when people stop looking for it. It’s kind of like the family car trip. As long as the children keep asking “Are we there yet?” the destination will never be reached.

Let’s assume, for a minute, that we’ve reached bottom and a new bull market has begun. Terrific! As we’ve discussed before, the big money is made on the big moves. You want to buy a stock because it’s going to go up 100%, not 10%. The reason to get back into the market, then, isn’t because the Nasdaq is going to 5000, but because it’s going to 15000…or higher. (more…)

Tradecraft – Three Cheers for Short Sellers

On October 26, 2009, In Good Articles, by ElfLord

WHEN THE PUBLIC is in the market, they’re always long the market, and during those periods when the market falls, the masses invariably go looking for someone to blame. Because they appear to profit at the public’s expense, no scapegoat is more popular, or unfairly vilified, than the short seller.

It’s almost as if one of the freedoms inherent in a capitalist democracy, specifically the ability to buy stocks we feel are due to rise and sell those we feel are due to fall, isn’t extended to short sellers. Their activities are often characterized as immoral, unethical and downright un-American.

For a long time, of course, they were just downright unprofitable. During the mid- and late-1990s, short sellers like Manuel Asensio or bears like Jim Grant were seen as old-fashioned heretics, steadfastly refusing to accept the fact that we were in a new paradigm where historical oddities like interest rates or valuation no longer mattered. The fact that the shorts were losing hundreds of millions of dollars as the market rocketed higher didn’t seem to bother anyone. After all, it was their poor judgment to bet against the market to begin with. Indeed, guys like Charles Allmon, Robert Prechter and David Tice were frumpy, charming leftovers from a bygone era that, until last year’s precipitous decline, seemed as if it would never return.

But these days, with short sellers reaping huge profits from declining markets, they have become Public Enemy No. 2. A cursory scan of the popular message boards will yield more than a few examples of antishort sentiment. (more…)

ZF Capital

Tradecraft – Here’s to the Other Heroes

Tradecraft – The High Life

Tradecraft – The Hard Facts

Tradecraft – The Rewards of Risk

Tradecraft – Sizing Things Up

Tradecraft – What’s the Rush?

Tradecraft – Three Cheers for Short Sellers

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