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Tradecraft – The Simple Life

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

CHAMPION RACEHORSES all wear blinders, small pieces of hardened leather designed to restrict peripheral vision. The devices keep the thoroughbreds focused on the track ahead and nothing else. It’s a good lesson for investors, who too could use blinders considering the sheer volume of investment information available, from Web sites to newsletters to cable TV. We aren’t just informed; we’re suffocating. Due diligence turns into information overload quickly.

Much of what goes for research these days, so many of the data points that investors consider, is nothing more than superstition and coincidence packaged into feature-length column inches. I’m sorry, but the fact that it’s an election year, or that John Chambers thinks the economy is improving, or that New England won the Super Bowl has nothing to do with what’s actually happening in the market. And because it’s easy to get distracted, most people end up focusing their attention on the irrelevant factors they can’t control, and which have no direct bearing on the market or their position in it.

So while many investors weigh thousands of variables in evaluating the market, I consider a select few. To the best of my ability, I wear blinders, ignoring all the white noise and focusing on what matters. While I’m not always right in my decisions, I’m always well informed. (more…)

Tradecraft – Know When to Fold ‘Em

On May 5, 2010, In Good Articles, by ElfLord

GO TO THE high-stakes tables in Vegas, and you’ll see experienced gamblers fold hand after hand, waiting for that opportune moment to finally put chips on the table. It’s the bachelor party and convention crowd that bets big on every deal of the cards. Is there any wonder they don’t last very long at the table?

The best stock traders are equally selective. There’s no Constitutional requirement that says you must be in the market. As I often point out, if you don’t love your positions — if you don’t feel as if you absolutely have to take them — there’s no real purpose in being in them to begin with. I’ve lost thousands of dollars over the years on investments I made because I was bored, looking for action, and dumb enough to waste money on something less than a high-probability trade. The stock market is a strange game. Sometimes the only winning move is not to play.

So while you were undoubtedly hoping I’ve come equipped with a list of must-own, low-float, about-to-double microcaps, I’m afraid I’ll have to disappoint. As has been my theme over the past few months, my fund’s biggest position these days is still cash. (more…)

Tradecraft – I’m Wearing a Cash Helmet

On May 3, 2010, In Good Articles, by ElfLord

AS A CLERK in Chicago’s commodities pits, I witnessed the wild chaos that erupted any time Greenspan coughed or an economic number was released. Throughout the day there were bodies, trading cards and even fists flying on the tightly packed floor. It’s the colorful tumult often shown as B-roll during market-themed TV reports.

What wasn’t shown — but what I remember just as clearly — were the many dull, quiet and downright boring periods when the market did nothing at all. Sometimes the floor was rock and roll; other times it was decidedly easy listening. No phones ringing off the hook, no screaming brokers and no volatile price action or limit moves that make headlines across the globe. Often, the market was dead. Traders would read the newspaper, nap in the lounge or step out for a drink at one of the neighborhood bars.

The same reality exists off the trading floor as well. From time to time, the markets become something to avoid rather than to trade. I do believe there’s always a bull market somewhere, and from my perspective right now it’s in capital preservation, patience and common sense. Now seems like the most opportune time to park a portfolio in a money-market fund and spend a week at Club Med. (more…)

Tradecraft – The Waiting Is the Hardest Part

On April 30, 2010, In Good Articles, by ElfLord

THE MOST DIFFICULT part of trading isn’t picking stocks, taking losses or even dealing with the IRS. Without question, the toughest part of managing money is knowing when to sit tight — then actually being able to pull it off.

In this game, less is often more. I don’t care how cheap the commission rate is. Trading isn’t like sit-ups: You can’t just do a few extra reps and expect to get a better result. Indeed, in any number of situations, the best move to make is no move at all.

Yet doing nothing is harder than it looks. There’s something about money flying around that prompts an inescapable, almost chemical urge to act — to buy, to sell, to short, to cover, to write options — whether you actually need to or not. And it’s that unfortunate, almost druglike instinct that prompts many to hang themselves with foolish decisions right from the start. Yep, trading is easy; it’s the sitting tight that’s really tough.

Let’s say you did the research, bought a stock and, low and behold, find yourself with a winner on your hands. You jumped into XYZ at $30, and now it’s trading a solid five points higher. Human nature, with which we all must contend, prompts you to sell the stock, grab the profit and move on to another name. It’s a self-destructive instinct that disciplined traders know how to squelch. (more…)

Tradecraft – Reality Bites

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

FORGET “AMERICAN IDOL,” “The Bachelor” or “The Swan.” The ultimate reality show is playing out in every investor’s portfolio. And while I’m not too sure about “The Apprentice,” in my world the emotion is unscripted; the tears are real. I’m a professional money manager, but I’m also a human being. That means when I lose money, it hurts.

So while I didn’t give a damn about the Super Bowl or March Madness, I readily admit that some recent market action has captured my full and undivided attention. And given some of my recently favored sectors, like REITs for one, it has also humbled me a bit. I’m nursing both a bruised ego and a bruised bottom line.

Folks, I’m doing this right along with all of you. And even my years of experience as everything from runner to floor trader to hedge-fund manager don’t keep me from losing money from time to time. One’s know-how and profitability are most certainly correlated, but over fiscal quarters and years, not weeks or months. (more…)

Tradecraft – Got Time?

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

ALTHOUGH I’VE been talking about the bull market in hard assets for the better part of three years, most nonmarket types are just beginning to catch on to the trend. Let’s face it, folks: We live in inflationary times. A hundred bucks ain’t what it used to be.

In recent months, commodities have risen substantially across the board, with everything from silver to soybeans posting dramatic gains. What has received the most attention, for obvious reasons, has been the rise in crude oil. Higher crude means higher gasoline prices at the pump. We’re a nation of drivers. Gasoline is one commodity most of us buy regularly.

Not surprisingly, politicians and journalists have all weighed in on how to deal with the “high” cost of gasoline. Thankfully, they’re not managing your portfolio. Because from a trader’s perspective, thinking of markets as “high” or “low” is a linguistic trap that should be avoided.

As I often point out, a real bull market is built on doubt. And when you get right down to it, nothing is more doubtful than describing a market as being high. There’s a quiet, condescending, passive-aggressiveness about it that seems to suggest that the real move has already been made. After all, if investing is about buying low and selling high, who in their right mind would buy high? (more…)

Tradecraft – Sweat the Small Stuff

On April 23, 2010, In Good Articles, by ElfLord

ON THE MORNING of Jan. 28, 1986, the Space Shuttle Challenger lifted off from Kennedy Space Center. Just over a minute into the flight, the shuttle exploded, after a malfunctioning O-ring allowed highly combustible gas to leak from the right booster rocket. The upshot? A $900 piece of plastic managed to annihilate seven brave souls and a $1.2 billion spacecraft.

It’s the little things — those seemingly insignificant, everyday housekeeping details — that often make the most significant impacts on people’s lives. So I manage what catastrophic risks I can and, in short, I sweat the small stuff.

Most investment discussions inevitably turn to big events like a presidential election, earnings announcements or the economic cycle. But the truth is, it’s the small stuff — the nitty-gritty of how I actually allocate assets — that ultimately matters most. And while I can’t control who wins in November or how many diapers Wal-Mart (WMT) will sell in the second quarter, portfolio technique is under my complete discretion. No matter the size of a portfolio, there are some basic concepts from which everyone can benefit. (more…)

ZF Capital

Tradecraft – The Simple Life

Tradecraft – Know When to Fold ‘Em

Tradecraft – I’m Wearing a Cash Helmet

Tradecraft – The Waiting Is the Hardest Part

Tradecraft – Reality Bites

Tradecraft – Got Time?

Tradecraft – Sweat the Small Stuff

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