Tradecraft – A Rite of Spring

FOR MANY PUNDITS, investment tips exist in a fantasy world with no capital constraints, margin limits or time horizons. Because pundits focus on stocks picks, and not portfolio management, most of their work centers on where to put new money rather than how to deal with existing positions.

So while in a perfect world we’d always have a clean slate to work with, in the real world most of us travel with baggage. And in your portfolio, that boils down to existing positions. As we’ve written before, that’s always the starting point for smart financial decisions. More than anything else, your existing positions should influence how you invest. Since it’s always preferable to maximize an existing position rather than open a new one, I suggest looking at what’s already happening within a portfolio instead of focusing on what might happen in the market.

The best way to begin evaluating a position is to determine whether you own it as a gain or a loss. But use caution: It’s at this initial step that many investors’ discipline goes horribly awry. Why? Because people tend to get rid of stocks that have made money, yet hold on to shares that have gone down the drain. (more…)

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Thought of the Day (February 24, 2010)

Trading is like any other job. You work hard, put in the time and effort, and make your own luck. I was lucky that the first 100-lot I sold was a winner. But why was I lucky? Because I stood there all day for over six months, developing and honing market feeling. When the opportunity occurred, I didn’t hesitate.

– Tom Baldwin, Market Wizards

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Thought of the Day (February 23, 2010)

Don’t take action with a trade until the market, itself, confirms your opinion. Being a little late in a trade is insurance that your opinion is correct. In other words, don’t be an impatient trader.

– Jesse Livermore, Reminiscences of a Stock Operator

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EVEN IMPORTED TRUFFLES and filet mignon can be ruined by a bad cook. Likewise, in investment portfolios, even the best trading ideas mean nothing without good technique. When you get right down to it, most people just want stock picks. But we’ve always tried to emphasize that it’s not what you trade, but how you trade that counts. No matter how skilled your stock-picking prowess, bad technique will prove ruinous every time.

As we wrote a few weeks back, investing is a game of speculation. No stocks come with guaranteed results. I’m from the school that says if you’re bullish on XYZ, buy it — mostly because the most influential decision isn’t necessarily which stock to buy, but how much of it to buy. Your position size shouldn’t be too big or too little, but just right.

The most obvious gaff investors make is betting too big. Even the best stocks fluctuate. Investors who put 10%, 15% or 20% of their assets in a single stock at a single price are just asking to get stopped out, most likely at a significant loss. There’s a difference between risk and recklessness; the point of trading is to grow big positions, not start out with them. (more…)

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