ZF Capital > Managing Losers

Tradecraft – Mr. Green Jeans Goes to Wall Street

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

AS A LIFELONG CITY-DWELLER, the closest I get to agriculture is the produce section of Whole Foods Market (WFMI). So while I’m not a gardener and have spent virtually no time on a farm, I do believe those who cultivate plants and those who manage money have much in common.

Consider that both planter and money manager need to periodically prune away dead wood. Beautiful gardens aren’t simply grown, they’re continuously clipped and shaped. To raise a healthy garden, experienced horticulturists will rotate crops, clip old foliage and manage the sun. It’s not just about planting the seeds, but tending to the crop along the way.

Same goes for the market, where investment success doesn’t end with simply picking a stock. Ever wonder why most analysts are lousy traders? It turns out there’s a big difference between evaluating an investment and profitably guiding a portfolio. Call me crazy, but in my world there’s more to it than just buy, sell or hold. (more…)

Tradecraft – Winners Hate Losers

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

WE LIVE IN A WORLD OF scarce resources. So from time to time most traders will find themselves anxious to put money to work, yet find that cash is in short supply because all of their capital is already committed to other positions. This is the heart and soul of trading — not guessing the market, but marshalling assets and deploying them in the most strategic fashion. Money managers big and small grapple with the same issues: What stays? What goes? How can investment dollars be stretched to generate the maximum return?

For most active traders, margin is the best first choice for stretching their dollars. But as I wrote last summer, debt should be limited to high-probability trades, and not to try and pull a half point out of the Nasdaq-100 Trust (QQQQ) or take a flier on some bulletin-board tout. I’m apt to only use margin to add to a position of strength; that is, to support a winning trade in a dominant market trend.

Let’s say, for example, that I’m holding a profitable position in Equity Office Properties (EOP). With real-estate investment trusts continuing higher in today’s market environment, I’d readily use margin to buy a unit of Simon Property Group (SPG), which would diversify the winning exposure but keep capital focused on a major, timely trend. (more…)

Tradecraft – Dealing with Loss

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

LIKE THE RING toss at the carnival and rollerblading at the beach, investing always seems easier than it really is. You can be correct on the sector but wrong on the stock. You can be correct on the timing but wrong on your position size. This is a game where there’s slim margin for error and plenty of opportunity to do the wrong thing.

When it comes to stock picking, I’m hit or miss. No matter how much research or analysis I do, many of my stock picks end up going exactly the wrong way. Although it’s tempting for investors to brag about gains, it’s how they deal with losses that really matters.

During the 1990s bull market, losses were a problem that nobody seemed to have. After three years of a bear market, however, most investors are now aware that not every investment goes according to plan. To that end, they’ve become more sophisticated: Hedging and stop-loss orders are a few of the strategies that have become part of many investors’ repertoires.

But dealing with emotions can be just as difficult as wrestling with the market itself. Perhaps even tougher. Trading, even when done right, can really mess with a person’s mind. (more…)

Tradecraft – A Rite of Spring

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

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…)

Tradecraft – Out With the Old

On December 11, 2009, In Good Articles, by ElfLord

I MUST ADMIT to being a bit of a pack rat. Even if I can’t remember why I owned it in the first place, I’m loath to part with any prized possession, from concert T-shirts to stacks of Clinton-era copies of Wired magazine.

These days, however, I’m giving some spring cleaning a try. And with your portfolio, just as with your closets, you should always start with the old and broken junk that you never use. In short, let your winners run, but cut your losses.

It’s a common misconception that the best traders always pick winning stocks. Every portfolio will have a healthy share of losing trades. And while nothing satisfies the ego like cashing in some chips, the correct way to cleanse your portfolio means starting with the losers.

Buying a stock is easy the real skill comes in having the ability to get out. Tell yourself it’s a tax loss if you must, but the real reason to “toss the loss” is that losing trades tend to stay losing trades, and usually for much longer than anyone ever expects. The best move isn’t to keep the faith with long-term losers, but discard them altogether. (more…)

ZF Capital

Tradecraft – Mr. Green Jeans Goes to Wall Street

Tradecraft – Winners Hate Losers

Tradecraft – Dealing with Loss

Tradecraft – A Rite of Spring

Tradecraft – Out With the Old

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