ZF Capital > Position Size

Tradecraft – Investing Without a Safety Net

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

I KEEP A PILE OF worthless stock certificates on my desk to remind myself at all times that investments are tools to make money — nothing more. They’re not your friend, your lover or your family. Stocks are simply pieces of paper, of which, no matter how much research we’ve done or how much we like the stock, it’s our job to sell. In my portfolio nothing is sacred. Even favored names can quickly get kicked to the curb.

As regular readers know, it’s my belief that the best way to dump stocks is via the use of stop-loss orders, a basic investment technique I’ve been espousing long before Martha Stewart made it famous. To review, a stop-loss order is placed below a stock’s current market price. Should the specified price (or anything below) get traded, the order is immediately executed at the market’s best available bid.

Regardless of whether you take a fundamental or technical approach, stop-loss orders should be an integral part of every trading discipline. They succeed simply by design: By placing one, you’re quietly acknowledging that, yes, even great stock picks can end up as lousy trades. (more…)

Tagged with: avoiding news • focusing on best • group analysis • position size

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…)

Tagged with: avoiding herd • information overload • mental health • position size

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…)

Tagged with: asset allocation • being debt-free • position size

Tradecraft – God Sends Meat, the Devil Sends Cooks

On February 22, 2010, In Good Articles, by ElfLord

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…)

Tagged with: good technique • position size

Tradecraft – Less Is More

On November 18, 2009, In Good Articles, by ElfLord

ALTHOUGH MCDONALD’S (MCD) has since tried everything from cafes to chicken joints, the company’s foundations (and real growth) came from Ray Kroc’s original, stunningly simple concept: a burger joint that was cheap, efficient, consistent and, most of all, fast.

And while the company already had a solid footing, Apple Computer’s (AAPL) real growth came in 1984 with the introduction of the Macintosh. Even though the machine was more expensive and less powerful than its PC rivals, the computer “for the rest of us” succeeded because of one solid premise: You could actually understand how to use it.

Today, Ford Motor (F) is a large car conglomerate of brands encompassing everything from Mazda to Mercury, Lincoln to Land Rover. But Ford became the largest car maker thanks to the Model T, a mass-produced, reliable, cheap auto with no bells, whistles or variations whatsoever. As Henry Ford supposedly said, you could have it any color so long as it’s black.

The point is that each of these magnificent enterprises succeeded by focusing on a relatively narrow goal. Get that right, and everything else usually just falls into place. (more…)

Tagged with: KISS • position size • specializing

Tradecraft – Don’t Buy Me

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

“IT’S NOT WHETHER you win or lose, but how you play the game.”

Most of us understand that old saw to be about style — about winning or losing with equal aplomb and sportsmanship. But to a trader, it’s a lesson in technique. It reminds us that whether you win or lose is a function of how you play the game.

I can’t say it often enough: It isn’t what you trade, but how you trade, that ultimately determines success. And nowhere can this be seen better than in the case of energy giant Enron (ENE), whose spectacular 99% decline has left more than a few investors out in the cold.

Most pundits would suggest that Enron’s woes first became apparent in mid-October, when the company took a $1 billion charge and reduced its shareholders’ equity by $1.2 billion as a result of a number of questionable off-balance-sheet partnerships. But from a trader’s perspective, the problems for Enron and its investors actually started much earlier. While Enron’s collapse was stunning, good trading technique could’ve limited the damage to investors’ bottom line.

Many are now blaming the company for their losses, but regardless of any alleged corporate wrongdoing, following a trading discipline would’ve prevented a position in Enron from hurting your portfolio too badly. That’s the essence of investing. You win a few, you lose a few, you keep on fighting. (more…)

Tagged with: position size • technical analysis

ZF Capital

Tradecraft – Investing Without a Safety Net

Tradecraft – The Simple Life

Tradecraft – Sweat the Small Stuff

Tradecraft – God Sends Meat, the Devil Sends Cooks

Tradecraft – Less Is More

Tradecraft – Don’t Buy Me

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