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Tradecraft – Eyes Wide Open

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

SOME PEOPLE WON’T miss an episode of “The Practice” but have no idea what their 401(k) has done over the past six months. And there are those who bought Pfizer (PFE) after hearing Leno make a Viagra joke and haven’t looked at the stock since. They know who Richard Hatch is but couldn’t tell you where the Nasdaq closed last week.

These people, many of them college educated and extremely affluent, play the stock market as you play the lottery: Buy a ticket and hope for the best. The market interests them only up to the point that they actually have to put in some effort. And for such people, “buy and hold” has become “buy and blame.” After all…it isn’t their fault they lost money. It’s the hedge funds’, the analysts’ or Alan Greenspan’s.

As we’ve written before, trading, or “active investing” as it’s now called within politically correct circles, is first and foremost an exercise in observation. In order to see the truth, you must first be willing to open your eyes. Despite the misconception that traders pull the trigger from bell to bell, I spend most of my time watching, not making transactions. (more…)

Tradecraft – Got Half a Century?

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

LET’S BE HONEST: Even before the atrocities of September 11th, the widely owned names were in bad shape. Now, given the dramatic declines we’ve seen over just the past few weeks, many strategists are calling the market a bargain. Goldman Sachs’s Abby Joseph Cohen recently raised her equity allocation, as did Tom McManus of Banc of America. Uber-bull Tom Galvin of Credit Suisse First Boston also urged investors to buy, and even Treasury Secretary Paul O’Neill has weighed in with his investment strategy, telling CNN he felt the Dow could approach new records within 18 months.

The country isn’t just patriotic — it’s bullish. From Joe Sixpack to Joe Battipaglia, most people aren’t questioning a rebound, but just waiting for it to occur. As we often point out, two sides make a market. Many investors feel as if the worst is over, while others expect more downside to come.

While I am not a roaring bear, I am a realist. And besides rising or falling, the third scenario for stocks — one it seems bulls and bears alike have completely forgotten about — is that the market might go absolutely nowhere for quite some time.

Most financial planners, market analysts and mutual-fund companies like to harp on the idea that the market returns about 10% a year. And while it’s true that the long-term average return on stocks has been approximately 10%, to suggest that an average year sees the market up 10% isn’t just misleading, but just plain wrong. Indeed, as we first pointed out a few months back, there have been long periods of time where the market has done absolutely squat. (more…)

Tradecraft – All That Glitters

On October 19, 2009, In Good Articles, by ElfLord

AT A TIME when nothing seems certain, there are a few things you can count on that never change. From spending time with friends to seeing a good movie, some pleasures just don’t go out of style. They’re timeless. Personally, I’m a guy who loves the simple things. Happiness to me is takeout sushi, a hot bath and thick flannel pajamas.

To that end, now might be the time to think about another timeless investment: gold. Long the perennial loser, gold has fallen off most investors’ radar screens as anything more than a historical oddity. Those who follow or invest in gold or precious metals are generally thought of not just as “bugs,” but as hysterics — the lunatic survivalist fringe of the investing world.

Even for the few who actually own precious metals or their related stocks, it’s usually a small allocation that serves as nothing more than a portfolio ornament. A percent here, a percent there…never enough to actually make an impact on one’s overall return. It’s just something to hang on the tree. (more…)

Tradecraft – The Man Who Knew Too Much

On October 19, 2009, In Good Articles, by ElfLord

WHETHER IT’S FROM friends, colleagues or the endless stream of televised talking heads, the more analysis I hear, the worse I trade. We all want to be informed investors, but I find that constantly hearing opinions on the market is more of a hindrance than a help.

In fact, as strange as it may seem research, inquiry and due diligence aren’t always what they’re cracked up to be. As with anything else in trading or life, there can be too much of a good thing.

When buying a stock, some people evaluate the economic fundamentals. Others check the charts. Some survey the “experts” or watch what the supposed “smart money” is doing.

As I’ve written before, once I’ve bought a stock I systematically avoid any news or research reports about the company. It’s tempting to seek validation from others about our own positions, but I have found listening to anyone or anything besides the market itself to be a dangerous proposition. Unless you want to be constantly second-guessing your judgment, take your cues from the military: Don’t ask and don’t tell. Trading is tough enough as it is without a squadron of armchair critics squeaking in your ear. (more…)

Tradecraft – Take the Money and Run

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

IF YOU THINK knowing when to get into a stock is tough, try deciding when to get out. While we ideally want to stay with a position for as long as possible, there’s no federal law that says you must hold Intel (INTC) until your dying day. A trader is just like a trapeze artist, who, while swinging high above the circus crowd, must master not only grabbing onto the next bar, but letting go of the one that came before it.

When it comes time to prune your portfolio, the first stocks you should consider selling are your losers. There are the obvious tax advantages of doing so. But even more important is the likelihood that losing stocks will stay losing stocks. Very seldom does one of my holdings come back from the grave.

But what about selling your winners? You might have some. Although the major averages are under water year-to-date, there are actually plenty of stocks that are doing quite well.

So if you are fortunate enough to be sitting on some winners these days, how do you know when it’s time to take the money and run, as Steve Miller puts it? What is the smartest way to turn a paper profit into the real thing? (more…)

Tradecraft – It’s All in the Timing

On October 12, 2009, In Good Articles, by ElfLord

WITH CISCO SYSTEMS (CSCO) down some 70% from its all-time high, analysts are falling all over themselves to divine the next move for the beleaguered stock. At $19 a share and a $140 billion market cap, it isn’t exactly cheap. Some think Cisco is attractive at current levels. Others think it’s a buy way down in the low teens, and still others wouldn’t touch it until the single digits. As always, two sides make a market, and nobody knows the future.

Like my well-pedigreed colleagues, I too have a price at which I’d like to buy Cisco: $81.82 a share. In fact, I would love Cisco at $81.82, its all-time high. I’d adore it. I’d be all over it.

Seem strange? Perhaps. After all, if Cisco ever got back up to the high it reached last March, plenty of people — especially those sitting on losing positions — would sell, anxious to recoup their losses or protect profits before the stock took another dive. It’s what I hear when I talk to prospective clients about reallocating some of their assets away from tech. Everyone is waiting for a bounce.

That thinking is understandable, but flawed: The truth is that if the stock ever did rebound back to its old highs, it would be a signal to increase, not decrease, your exposure. It’s a question of timing, and from baseball cards to Brocade Communications (BRCD), trading is all in the timing. (more…)

Tradecraft – The Case for Bonds

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

WHAT MAKES ME strong in my convictions is that I’m always ready to abandon them. As a trader, I have no allegiance to one stock, sector, analyst, idea or asset class. My only loyalty is to the bottom line.

And while we are influenced by the past, we live and trade in the present. TV’s talking heads have an explanation for everything, but the truth is there are no rules for how the market “should” act.

So in positioning my portfolio, I start by erasing any preconceived notions about how a trade might turn out. It’s a technique that entails keeping not only your eyes open, but your mind as well. In short, assume nothing. When everybody knows something is so, it usually ain’t.

One of the things everybody knows is so: When the Federal Reserve cuts interest rates, the stock market rises. But after six rate cuts and seven months, the big caps are still underwater year-to-date. Fighting the Fed hasn’t exactly been that bad a strategy lately. (more…)

ZF Capital

Tradecraft – Eyes Wide Open

Tradecraft – Got Half a Century?

Tradecraft – All That Glitters

Tradecraft – The Man Who Knew Too Much

Tradecraft – Take the Money and Run

Tradecraft – It’s All in the Timing

Tradecraft – The Case for Bonds

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