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Tradecraft – A Sirius Problem

On June 9, 2010, In Good Articles, by ElfLord

SUCCESSFUL TRADING BOILS down to good decision-making. There are thousands upon thousands of publicly traded securities, and with one click of a mouse an investor can bet on any one of them.
When putting money to work, I concentrate on those situations in which I think there’s a shot of grabbing the first harvest of gains. Stocks will always fluctuate, but for my money, it’s those precious early moments when an investment theme is just being discovered by the market that present the best chance for actually making money.

The first harvest occurs quietly, before the news breaks and before the fundamentals become clear, sending the herd crashing through the door. A speculator must be able to look ahead and become bullish on a theme that appears to be working without a clear understanding of why it’s working. Some investors wait for certainty; I simply look for strength. The news and confirmation most people wait for almost always come after the fact.

Like most professional traders, my portfolio has its share of losers. But on those rare instances when an idea actually starts to make money, aiming for the first harvest means you’re one of the few already in line with a growing, winning trade. It’s a position of true strength: You’re in the black in a winning hand while everybody else is just beginning to learn the ticker symbols. (more…)

Tradecraft – When the Lightbulb Goes Off

On June 7, 2010, In Good Articles, by ElfLord

GO AHEAD AND SPEND hours analyzing the Fed or counting cars in the Home Depot (HD) parking lot. It’s your time and money. But to me these are exercises in futility. You see, I don’t have opinions — I have positions. And this allows me to focus on the best use of capital, especially important considering that we live in a world of scarce resources. The desire to buy an investment, yet lacking the available capital to execute the trade, is an altogether familiar occurrence to the active investor.

I grew up a bit the day that I began to think in terms of trading positions rather than stocks. It’s an important distinction, even more important if cash is in short supply. That’s when the tough choices are made. It’s crucial to maintain even the slightest advantage that puts the odds in your favor.

The best position to be in, without a doubt, is to have an open winning trade. That’s the strongest hand. As I mentioned just last week, profits come from winning trades. These are the lifelines of a portfolio, so winners must be the absolute last option to consider when looking to raise cash. I know it’s fun to take a profit, but it’s almost always better to maintain a winning position rather than liquidate it for the sake of buying something new. (more…)

Tradecraft – Impulse Control

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

WE’VE ALL SEEN A baby scream and cry when he wants a toy or a piece of candy. Without hesitation, he prepares to throw a full-scale temper tantrum in the aisle of the store in order to get it. A baby doesn’t care if the candy will spoil his appetite, or if his parents can actually afford the toy he so desperately desires. A baby wants what he wants.

You can’t blame him, of course, because children haven’t yet learned to look beyond the scope of immediate gratification and consider the future. Grown-ups, however, do comprehend that life exists beyond the here and now. While the future can’t be predicted, most mature adults understand the need to delay gratification at times. They accept that with a bit of foresight, an even higher level of happiness can be found than by simply giving into immediate whims.

This ability to delay instant gratification and stick with a longer-term focus is especially important when it comes to the markets. As human beings, we operate on a relatively short time frame. But the market, whether it’s bullish, bearish or trending nowhere at all, has all the time in the world. An astute investor needs the patience to think ahead, learning to operate on the market’s schedule instead of attempting to cram it into his own. (more…)

Tradecraft – A Dollar for Your Thoughts

On June 2, 2010, In Good Articles, by ElfLord

THE WORD “CREDIT” IS derived from the Latin verb credere, meaning “to believe.” Indeed, a $100 bill has no more intrinsic value than a $1 bill — or a piece of scrap paper for that matter. The strength of a currency is contingent on a society’s belief that it will hold value.

So the fact that the decline in the U.S. dollar, which more than a year ago we called “the biggest trend in the capital markets — hands down,” continues unabated should give everyone reason for pause. It’s a sobering thought to realize that the dollars we work so hard to earn and save are simply pieces of paper that, given the markets these days, are worth less and less with each passing hour.

Yet old habits die hard. Because the dollar has long been the world’s benchmark currency, we’ve come to take it for granted that it’s a good store of value. And the absence of widespread inflation in more than a generation makes younger investors especially unaware of how debilitating it can become. Even now, as the story starts to get picked up in mainstream media, many still fail to understand that it’s not so much that the prices of gold and other commodities are rising; rather, it’s the fact that the value of the currency in which we use to purchase said commodities is falling. (more…)

Tradecraft – Think Young

On May 31, 2010, In Good Articles, by ElfLord

CERTAIN INVESTMENT APPROACHES have stood the test of time. As I always like to point out, what matters most to the bottom line is technique. To that end, I believe that one’s actions in the market — the discipline by which assets are marshaled, positions taken and trades handled — should be approached with an “old” perspective. Cutting losses and letting winners run are two of the many eternal truths that never go out of style.

But while one’s actions should follow age-old guidelines, when it comes to market analysis it’s imperative to think young. Integral to successful investing is an open and imaginative mind. Believe it or not, analyzing investments is one of those rare times when the ignorance of youth can be an asset and not a liability.

A painful experience can easily cloud investors’ judgment over future trades. Think about it. There are plenty of experienced people who won’t even consider gold after getting burned on the sector in the early 1980s. Others swear off biotech after having lost money on the industry in the early 1990s, or technology stocks in the early 2000s. “Once burned, twice shy” is an old, jaded and rather closed-minded way to walk through life. (more…)

Tradecraft – No News Is Great News

On May 28, 2010, In Good Articles, by ElfLord

THE STORIES THAT interest me most aren’t those found above the fold on Page 1 of The Wall Street Journal. While it might feel comfortable to invest based on something written in a newspaper or magazine, I’m paid to speculate, not to bet on sure things. And because the market doesn’t reflect the news, but rather anticipates it, traders must get used to taking positions without a good fundamental reason.

So when putting my money to work, I evaluate not only stocks themselves, but also the stories that go along with them. At issue is determining if the investment thesis, or “story,” has already been played out and picked over by the herd. Like most things in the market, it’s an imperfect science, but the general idea is that by the time the story is out, you already will have harvested your gains and moved on. Watching the media, the message boards and the market can often provide the telltale signs.

If you follow the market, it also makes sense to follow the media, since that’s where stories live and are primarily disseminated. While I try to avoid monitoring the media for investment ideas, I do keep abreast of the coverage of the stocks in my portfolio. A mention on Cavuto or a write-up in Forbes isn’t enough to prompt me to sell, but it is one sign that word is getting around. My job is to find great stocks before they make it on the cover of Barron’s. (more…)

Tradecraft – What’s the Big Idea?

On May 26, 2010, In Good Articles, by ElfLord

FROM THE HOLLYWOOD PITCH to political talking points, we live in a world of sound bites. Just about everything, it seems, is boiled down to its essence. Smart investing is no exception.

Since you can’t bet on everything in the markets, it’s imperative that an actively managed portfolio be equally focused. That’s because the most economical use of capital comes from homing in on a handful of key investment themes. In the words of Mark Twain, “Put all your eggs in one basket — then watch that basket.”

At any given time, my hedge fund is involved in no more than a half-dozen investment themes. It might be an asset class such as gold, or a particular sector such as utilities or a group like foreign stocks. The point is that the portfolio’s risk is centralized around a few major ideas. (more…)

ZF Capital

Tradecraft – A Sirius Problem

Tradecraft – When the Lightbulb Goes Off

Tradecraft – Impulse Control

Tradecraft – A Dollar for Your Thoughts

Tradecraft – Think Young

Tradecraft – No News Is Great News

Tradecraft – What’s the Big Idea?

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