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Tradecraft – An Ace That You Can Keep

On August 13, 2010, In Good Articles, by ElfLord

BESIDES WYCLEF JEAN and Billy Joel, the most played tune on my iPod is Kenny Rogers’ rendition of the Don Schlitz mega-hit, “The Gambler.” Even if you hate country music, you probably secretly enjoy “The Gambler.” Since its 1978 release, the record has sold more than 35 million copies, won a Grammy for Song of the Year, spawned the longest-running TV miniseries in history and solidified Kenny Rogers as a permanent part of the cultural zeitgeist.

With its infectious groove and pop-country appeal, it’s easy to understand why the song remains a popular tune. And while there’s a big difference between trading and gambling, investors can certainly benefit from the sage advice given throughout the song’s lyrics. Click here to view the song’s entire lyrics.

The story, you’ll recall, involves a young man “on a train bound for nowhere” meeting up with the gambler, a hard drinkin’ and smokin’ legend who scraped a rocky career “out of reading people’s faces.” Although the gambler probably wouldn’t know preferred stock from livestock, many of his tidbits are just as pertinent to corralling the markets as they are the cards. (more…)

Tradecraft – Price Power

On August 11, 2010, In Good Articles, by ElfLord

CONSIDERING MY CLIENTS hire me to manage their money, the very least I can do is actually watch it. And it’s the money — or, more specifically, the markets — from where the best research emanates. A company’s fundamentals, management, sales or new products are all influential on a stock, but they’re not the stock itself. Price is the ultimate arbiter. Price is what we trade. So it’s price that you should most closely watch.

Up until fairly recently, evaluating a stock’s price action wasn’t such an easy task. In the old days, exchange employees would write prices onto chalkboards on the trading floor. The information was then manually input into crude reporting systems and eventually spewed out onto small strips of tickertape in brokerage offices around the country.

In the ’60s and ’70s, active traders frequently kept charts by hand, noting prices out of the newspaper and plotting data each night on large sheets of graph paper. One could also order charts or price data through research firms such as CRB, which would “promptly” arrive weeks later. “Day trading” just didn’t exist. (more…)

Tradecraft – Hedging Your Bets

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

I’M OFTEN ASKED WHY I don’t just take my clients’ money to a casino and try to earn a quick buck. The short answer: If I felt that would make them money, then I would. And while I happen to like the odds a lot more on Wall Street than in Atlantic City, it’s worth noting that managing money is just French for making it. Within the confines of law, I’m fully supportive of exploring every possible opportunity to turn a profit.

Although 2005 was a relatively flat year for the broad stock indexes, there was plenty of upside in foreign stocks, gold, real estate, energy, utilities technology and even industrial names. You simply had to be quick, agile and more active than buying the major markets and holding out on for the long haul.

It’s a wide world out there beyond the Dow or S&P 500, which is why diversifying among strategies makes perfect sense for all portfolios. While manager A is chasing down one area of the capital markets, manager B could be making money using an entirely different approach. (more…)

Tradecraft – The Hottest Trade of 2006

On August 6, 2010, In Good Articles, by ElfLord

ONE OF MY FIRST jobs in finance was working as a clerk in the deutsche mark pit at the Chicago Mercantile Exchange. Compared to today’s electronic markets, trading seemed almost quaint. Whether you were an individual investor or a multinational bank, orders would be written (usually by hand) on small trading tickets, walked over to the roughly 20-foot-wide pit and handed to a particular broker who would then verbally announce it to the crowd. “Five (contracts) at even!” he’d yell. A couple of dozen locals would either take the trade or offer up a competing market.

Now, years later, the deutsche mark is gone, replaced by a single European currency used by 400 million people in 22 countries. The euro is the world’s most liquid and actively traded currency behind the U.S. dollar. It’s also the benchmark for a new New York Stock Exchange-listed security that I believe is poised to become a huge success.

Three years ago, I heralded the launch of fixed-income exchange-traded funds as a major breakthrough. More recently, I covered gold ETFs as a huge development in portfolio opportunity. Last week, Rydex Investments introduced the Euro Currency Trust (FXE), a currency-based ETF that trades on the NYSE. Although only recently launched, this landmark innovation represents a major victory for capital-market participants world-wide. That’s why it gets my vote as perhaps the best trade of the new year. (more…)

Tradecraft – How to Sell a Stock

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

BUYING AN INVESTMENT is easy. It’s determining what, and when, to sell that’s difficult. Yet that’s one of the most important components of investing. A trade isn’t over once the order has been executed — in fact, it has just begun. Prudent risk philosophy and a steady sell discipline are integral to long-term success.

Fundamental analysts would suggest selling a stock when the company’s prospects begin to deteriorate. When the CFO quits, or the new, whiz-bang product fizzles, or if earnings miss expectations, investors should eliminate the holding from their portfolios. It’s a traditional, quaint and money-losing approach.

A company and its stock are two different things. Because it’s the stock that you trade, the company’s performance should be the least influential part of your decision-making process. It’s the stock — and, more specifically, the stock’s position in your portfolio — that should drive the decision-making process. (more…)

Tradecraft – A Mean Left Hook

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

IT HAS BEEN A tough month for the White House, with a botched Supreme Court nomination and a staff indictment among the black marks pushing the president’s approval rating to an all-time low.

The Bush administration’s follies have helped to animate the efforts of political rivals. Consider the misguided and un-American legislation proposed in recent weeks by Senator Chuck Schumer (D., N.Y.).

Schumer has called for a 50% tax on the profits of oil companies, the money being used to help pay for Hurricane Katrina relief as part of a proposal he has dubbed the REPAIR Act, or Recapture Excess Profits and Invest in Relief. According to Schumer, the largest oil conglomerates might reap $80 billion in windfall profits. “If we took half of that, $40 billion, that could go to Katrina relief, and that would be money taxpayers wouldn’t have to pay,” he said at a recent press conference. (more…)

Tradecraft – A Roll of the Dice

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

THE ULTIMATE STOP-LOSS order is zero. Stocks can’t go any lower than that. And now and then, much to our dismay, investments get pretty darn close. Refco (RFXCQ) is the latest name to spiral toward worthlessness, joining the disastrous ranks of WorldCom, Enron and, more recently, Northwest Airlines (NWACQ). Since stocks can fall to zero, stop-loss orders must be part of every trader’s investment philosophy.

There are a million different theories on how to employ stop-loss orders. Some recommend a technical indicator, such as placing stops at the 200-day moving average or trendline support. Others use a percentage stop, selling an investment after it falls, say, 20% below the purchase price or a recent high. As with most disciplines, the key isn’t the approach you choose but rather being able to stick with it.

The main complaint I always hear about stops, and why many traders refuse to use them, is that they believe their stops are indiscriminately targeted by specialists. At the New York Stock Exchange, trading is overseen by firms, known as specialists, that make a market in particular stocks. That involves overseeing trading, matching buyers to sellers, and even buying and selling shares themselves when there are order imbalances. Conspiracy theorists — the same people who believe there was a second shooter in the Kennedy assassination or that rapper Tupac Shakur is still alive — suggest that specialists purposely allow markets to drop to levels where stops get hit, only to then allow prices to rally back almost immediately to previous highs. (more…)

ZF Capital

Tradecraft – An Ace That You Can Keep

Tradecraft – Price Power

Tradecraft – Hedging Your Bets

Tradecraft – The Hottest Trade of 2006

Tradecraft – How to Sell a Stock

Tradecraft – A Mean Left Hook

Tradecraft – A Roll of the Dice

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