ZF Capital > Avoiding Herd

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 – Corralling the Herd

On April 12, 2010, In Good Articles, by ElfLord

THE KEY TO INVESTING is to not lose money. If you focus on avoiding the losses, the gains tend to take care of themselves. While there isn’t a strategy that always works in the market, there is one I know that always fails. It doesn’t involve tracking a stock, but rather a group that never seems to get it right.

As regular Tradecraft readers know, few things are as financially dangerous as following the uninformed mass of investors to which we often refer to as “the herd.” While nobody makes money all the time, the herd has an undeniable knack for losing it again and again, in almost every conceivable fashion. Following the herd’s movements, therefore, is a worthwhile endeavor. The more I study what the herd is doing, the better I’m able to avoid following in its footsteps.

When it comes to investing, what matters isn’t what we say, but what we do. So it’s not too surprising that, when opining on the market, the herd tends to talk in generalities or about things that have no impact on the bottom line. When you’re uninformed and just part of the pack, it’s a lot more convenient to talk about the economy, Bush, jobs or some other piece of non-tradable minutia than actually commenting on what’s happening in the market itself. When you hear someone talking loud (but saying nothing), chances are they’re part of the herd. (more…)

Tradecraft – Listen Up!

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

I DON’T NEED to see my stocks recommended in print or talked about on message boards to be confident about their prospects. If I’m bullish on XYZ, it doesn’t matter if the analysts haven’t heard of it or if my talk-show colleagues think I’m insane for venturing off the well-beaten path of the S&P 500.

The name of the game is making money, not making friends. So when I pick stocks in this column or on TV, I don’t need email kudos or pats on the back to reinforce my professional self-esteem. When something in my portfolio is working, the profits are my payoff.

The reason it’s called speculation is that, when it comes to the market, there’s no sure thing. Yet most people won’t put money in a stock unless they have a perfectly clear reason for doing so such as an upgrade, breaking news or investment hook. But that need for certainty and assurance often trips us up, because by the time the story is out, the stock’s real move is usually over. (more…)

Tradecraft – I’m So Bored With the U.S.A.

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

IN THE MARKETS, we’re all dumb money. But the dumbest among us constitute “the herd,” the mass of slow-moving sheep that always seem to buy too late and sell too early.

My strategy has always been to watch the markets and steer clear of the herd. While I’m certainly not profitable in all of my trades, the herd rarely gets it right. So when it comes to choosing investment strategies, my goal is to find out where the herd is, and go somewhere else.

Generally speaking, the biggest component of the herd is probably mutual-fund investors. While there are plenty of razor sharp individuals out there using mutual funds, as a group they tend to have less-than-perfect timing. For example, as we’ve pointed out before, the biggest net inflow into equity mutual funds came in the first quarter of 2000, just around the time the Nasdaq began its historic decline. (more…)

Tradecraft – Out of Their Flocking Minds

On March 24, 2010, In Good Articles, by ElfLord

THERE ARE PLENTY of investors who in 1996 swore they’d never buy a tech stock — only to end up owning Cisco Systems (CSCO), Sun Microsystems (SUNW) and Qualcomm (QCOM) near the Nasdaq peak in March 2000. And there are just as many investors who promised they’d stay in it “for the long haul” only to end up puking their positions and abandoning stocks a few months back. The market tends to test our resolve both on the way up and on the way down.

Our mantra here at Tradecraft: Technique is everything. That is, it’s not so much what you trade, but rather how you trade that ultimately makes a difference. And because the market will test your biases, it seems the best move is to not develop them in the first place. Without an open mind, even the best stock pickers won’t bend in the wind — they’ll break.

That’s why I think too much formal education in the markets is dangerous. As we wrote a few months back, the most educated traders tend not to think, but to assume. Yet the real challenge sometimes is to be able to forget history as easily as you remember it. In the market, anything can happen. (more…)

ZF Capital

Tradecraft – The Simple Life

Tradecraft – Corralling the Herd

Tradecraft – Listen Up!

Tradecraft – I’m So Bored With the U.S.A.

Tradecraft – Out of Their Flocking Minds

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