Know Your Customer Rule:
Everyone in the asset management business should know FINRA’s Know Your Customer (“KYC”) Rule – Here. The rule basically states that it is the portfolio manager’s responsibility to pick investments that are suitable for each client (that is why it is necessary to know your client). I also apply this rule when buying/sell stocks.
Know How Your Stocks Behave:
From where I sit, it is behooves anyone who makes their own buy/sell decisions (individual and professional) to know how the stock (or market) they are interested in behaves (before they buy/sell). This way they can familiarize themselves with normal/healthy action vs, unhealthy action. Failing to take the time to properly study how leading stocks behave could cause you to zig when the stock zags and vice versa (which might cause you to mishandle/lose money – even in a monster stock).
Why >20% Corrections are Healthy In Leading Stocks:
Over the past few weeks, leading stocks (mainly momentum, biotech, and growth stocks) have been smacked, most falling >15% from recent highs (which is not an insignificant sum). Interestingly, when you study history, there are countless examples of leading (monster) stocks that correct (>20%), within a broader multi-year advance.
Trends Bend & Break:
Essentially, a few steep pullbacks/corrections can be healthy in leading stocks, early in their move. Here is an excerpt from this week’s FindLeadingStocks.com’s weekly report which takes a closer look at two leading stocks: Tesla (TSLA) & Facebook (FB). Both stocks are monsters and have experienced sharp declines of over 20% 4 times over the past year. Interestingly, each decline was followed by a massive advance. Keep in mind, trends (uptrends and downtrends) break- but the move is not over until they break.
Will this time be different? As always, we’ll let the market decide. Bottom line, in both bull and bear markets, you will do much better if you study how your stock behave. The same way a portfolio manager should “know their customer,” you should know your investments.
S&P 500: Past 5 Pullbacks:
Has copper lost its importance? The basic premise is that for the past few years, copper and other industrial metals, no longer play a critical role for global economic growth. Don’t take my word for it; the proof is in the charts. Since 2011, copper prices have been steadily falling while US stocks have been steadily rising. In order to better understand why this is happening let’s take a quick look at the evolution and history of the global economy.
A Brief History of The Global Economy–
I have studied every major economic cycle going back to the 3rd century. The economy has evolved tremendously over the past several hundred years.
Here is a brief look at the evolution/history of the global economy.
1. Agriculture Age:
For centuries, the global economy was almost fully dependent on agriculture. Then in the mid 1700’s things changed. Thanks in part to a concurrent/explosion in technology, communication, and transportation, the Industrial Revolution was born and changed the global economy -forever.
2. Industrial/Services Age:
The Industrial Revolution began in the late 1700’s and lasted for about a century to the mid-1800’s. The transition was a paradigm shift for the global economy. People migrated in droves to large cities and the age of mass-production was born (copper and other industrial metals played an integral part during this period because they were used to build “stuff”). The main driver for most developed economies during that time was goods and services. As each country’s economy developed it invariably moved more towards services and away from goods.
3. Information Age:
Then in the late 1900’s, another major paradigm shift occurred – Information become the primary engine of the global economy and quickly became the most valuable commodity on the planet. For the last several decades, more money has been created than the entire history of the world & most of it is based on buying/selling information/ideas (that is why copper/other industrial metals are not as important as they once were to global economic growth).
Information Is Power
I can go on and on but that is beyond the scope of this article. Suffice it to say, in today’s economy, information is power. Additionally, people, rightfully so, are willing to pay for it. In fact, my entire business (and most of the financial service sector) is based on buying and selling information. If I provide my clients with “intelligent” ideas they will be happy and stay with me for life (or until I stop providing them with good information). So each day my job is simple: Provide you with intelligent ideas in the market. I hope I did my job today. If you want powerful ideas delivered directly to your inbox, Join FindLeadingStocks.com
Attention is the brain’s currency. We all have a limited amount of it (scarce resource) and we are all free to use it anyway we like. Most people don’t think about how they “use” their attention and end up spending it, instead of investing it.
Invest, Don’t Spend Your Attention.
Most people spend most of their time reliving the drama of their past or worrying about their future. Doing either of these events, takes you away from the present moment or forces you to spend your attention on something that has a very low ROI. For a better ROI, I’ve learned that if I invest my attention on the now (focus on finding new opportunities and properly managing my existing positions) I will do much better in the long run. Focusing on the now, helps me invest my attention, not spend it.
The Only Time You Can Find New Opportunities Is…
I learned that the only time I can find new opportunities (in life or in the market) is in the now. In fact, the only time I can make any decision, large or small, is in the now. Even if I decide to do something next week, or at any other point in the future, when that time comes, I will do it in the now. What happens most of the time is that I found myself unconsciously thinking of the past or worrying about the future and that prevented me from having a “clear head” when looking for new opportunities. I read somewhere that worrying about the future is like praying for what you don’t want.
Learn From The Past, Prepare For The Future & Focus On The Now:
It is important to learn from the past and prepare for the future but I do my best to make sure that it doesn’t consume me and take up all of my attention- all the time. I used to spend the most of my day thinking about how I got stopped out of XYZ or missed that monster stock (or any other drama of my past), but found out that doing this would prevent me from finding new opportunities that exist right now.
Now, before I start my “research” or make a decision, I do my best to focus my attention on the present moment. I do this by taking a mental inventory and make sure my head is clear before I engage in that activity- large or small. This helps me shift my thinking to the now and opens me up to finding/receiving new/big opportunities. It also helps me to invest my attention and not spend it – which yields a much higher ROI.
The Perils of Chasing Hot Stocks
People love hot stocks, those names that are making big gains on strong volume and attracting a crowd of speculators which continue to drive it higher. Invariably what happens? They end up losign money in monster stock? Why because they made an emotional decision, listened to the story, and ignored the chart. Chasing stocks means that you buy in to these stocks too late, paying a price that has more downside risk than upside potential at the time of your purchase.
Ask Yourself: Am I late to the party?
Even if you are not an expert at reading stock charts, taking the time to check the chart before you buy a stock. When looking at the chart, you should evaluate how far the stock has moved from its most recent area of support. The farther a stock moves from its floor, the closer it gets to its ceiling- or a temporary pullback that will stop you out for a loss.
How Far Is The Stock From Support?
To see where the relevant price floor is, look at the chart and determine the last time the stock traded sideways before it started to show strength. Draw a line across the bottom of that sideways trading range.
Are You Chasing?
Now, look at where the stock is now. How long has it been going up? How far up has it moved relative to the normal trading volatility of the stock?
All Boils Down To Risk vs Reward:
I don’t like to chase stocks that have moved far up from their price floor because the downside risk is too much for the upside potential. If a stock is destined to move from $10 to $15 but there is a risk it could go down to $9, you don’t want to buy it at $14. It makes sense to pay $10.50 because your downside is $1.50 while the upside is $4.50.
Keeping this concept in mind, it may be ok to pay a higher price for a stock if it has just recently moved up from a period of sideways price movement. That sideways price movement is a foundation for a trend, it gives you a well-defined floor for risk management.
One Problem With Buying Breakouts:
It is ok to buy breakouts as long as they are not too extended from support. Remember most breakouts fail or at least negate the breakout and then take off. This could stop you out for a loss whereas the advanced entry point (closer to support) buyer would still have a lofty cushion. When buying stocks, buy them when they are just starting to behave abnormally, getting in as close to their price floor as possible. The higher the stock goes, the riskier it gets.
Based on: SCweekly commentary
Most untrained (a.k.a unsuccessful) people wing it and do not know what they are doing on Wall Street. They spend all their energy trying to find the next big idea and then stumble because they ignore all the other ingredients needed to be successful on Wall Street.
I have studied the greatest investors and speculators in recorded history and have found that regardless of their investment style, market opinions, or the years they operated, they all shared one important characteristic: they all had and closely followed a successful plan. A successful plan requires deep knowledge of your subject (past and present), possess a statistical advantage, and answers the following questions:
What To Trade?
When To Trade?
How Much To Risk?
Do you have a plan?
If you want help developing a plan, send us a msg on our contact pg. We are here to help!
Intro When to Sell – The Technical versus Fundamental Approach
Selling your stocks at the right time is the most emotionally challenging step in the trade. A few common scenarios: There are times when we are wrong and we must exit at a loss – that is hard. There are times when we buy strong stocks that perform very well which we tend to sell too early because we doubt that the strength can last. Then there is the pain of watching a winning trade turn in to a loser because we fail to exit at all.
Tested & Proven Approach:
This makes it important to have an approach to selling that allows the trader to maximize profits over time. A tested and proven approach can help the trader take the emotion out of this difficult decision. Should the investor use fundamental or technical analysis to tell them when to sell?
Fundamental Exit: Price Targets
Those who use the business fundamentals to make their investment decisions will typically set a price target based on their determination of fundamental value. If their fundamental analysis determines that a stock trading at $10 is really worth $15 then it makes sense to buy it at $10 and sell it when it hits $15. This is why you often hear fundamental analysis include a price target.
Technical Exits: Sell Signal
A technical analyst will wait for the market to give a sell signal, either by a loss of momentum, reaching an overbought state or by suffering a breakdown on the stock chart. Technicians may set price targets based on price ceilings that the market has defined in the past or they may simply wait for the market to give a signal that the buyers are losing their enthusiasm.
Whether you use a fundamental or technical approach, there are countless varieties that can be applied, making it a challenge to arrive at an answer to which approach is better. However, if we stick to a very basic set of competing definitions, it becomes possible to see the strengths and weaknesses of each.
Fundamental Exits: Pros & Cons
Let’s define a fundamental approach to selling as exiting a trade when the stock’s price is greater than its fundamental value. Put that up against the technical approach which is to sell a stock when there is a signal from its trading activity that the stock is more likely to go lower than higher.
While the notion that we should sell a stock if its price is higher than its fundamental value makes a lot of sense, there are major problems in its application.
First, do stocks only rise to their fundamental value?
History is filled with stories of stocks that have enjoyed amazing upward trends that go far beyond any fundamental analyst’s estimation of value. Consider shares of Tesla (TSLA), the electric car manufacturer. This company makes about 20,000 cars a year (as a comparison, Ford makes about 2 million cars a year). TSLA has a market cap of about $20 billion dollars (that is $1 million of market cap per car for a company that sells its cars for around $100k). No matter how you crunch the fundamental valuation models, it is not possible to justify the price that TSLA shares trade at. Even the company founder, Elon Musk, has said that he thinks the shares are overvalued. Yet, the stock has continued to enjoy a strong upward trend. A shareholder that used fundamental valuations would have sold the stock very early in that upward trend and left a LOT of money on the table.
The second major issue for using fundamental analysis to determine an exit point is the actual assessment of what fundamental value is. There is no rule book which determines how the pricing model should look. Even if fundamental analysts use the exact same pricing model they could still arrive at very different valuations if they use different information to arrive at price.
If you believe in market efficiency then you have to believe that the price a stock is trading at today is correct given the information that the public has to work with. The stock’s price in the future will not depend on what the market knows today, it will be determined by what new information the market learns in the future.
A good fundamental analyst has the ability to predict what the company’s value will be in the future because they have information that the general public does not have. To be a good fundamental analyst requires the use of private information.
That is where good technical analysis comes in.
Technical Exits: Pros & Cons
Most technical analysis uses market activity to assess what investors think of the company’s fundamentals. Momentum indicators like the MACD or moving averages judge whether the buyers or sellers are in control of the stock. Oscillators like the Stochastic or RSI determine whether the buyers or sellers have been too aggressive, pushing the stock up or down too quickly. While these indicators have some use in analyzing the stock, they are like most fundamental analysis – they don’t provide an edge.
Since most of us do not have the expertise or insight to gather private information on a lot of stocks, it is easier to use technical analysis to figure out what the people who are doing really good fundamental analysis know.
What Are The Big Institutions Doing?
From the sell side, we need to look for evidence that those with the best information are selling for a reason. It is normal for stocks to have up and down moves in a long term trend. What is key is to be able to figure out the difference between a pull back and a trend reversal. That is where good technical analysis comes in.
A stock that is trending higher will form an upward sloping trend line that can be drawn by placing a line across the bottoms on the stock chart. As long as that line is not violated, the buyers are in control of the stock and the perception of fundamentals is improving over time.
Sell Signal: Broken Trendline
A trend line that is broken implies that some investors have information which justifies aggressive selling. We have to listen to those investors so sell your winners when their upward trend line is broken.
Sell Signal: Support Is Breached
The second approach to technical selling is to establish a range of price volatility that is normal for the stock and plan to sell if the stock moves down more than that price volatility range tolerates. This is a sort of trailing sell signal concept which allows the investor to lock in more profit as the stock moves higher by establishing a higher floor price. If the stock pulls back to hit the floor it is time to exit.
Sell Signal: P&L Based Exit
Other people sell when a stock drops below their pre-determined risk level. Meaning they say I don’t want to lose more than X% on this stock from entry to exit and then raise the stop as the stock rallies.
Trailing stops can be used and adjusted for any of these strategies.
There are many other sell signals but this is just an intro to some of the most common.
This approach is not without its faults. The most common mistake that traders make is taking too short term a view for the trading style that they are applying. If you are a longer term trader looking for entry signals on a daily chart then you should not be looking for trend line breaks on an intraday chart. It is probably best to look for a longer term entry signal using a weekly chart. As good traders say, the profit is in the patience.
Source: Based on Stockscores Perspectives for the week ending October 15, 2013
1. Christian Siva-Jothy On Idea Generation
No one gets paid for originality – you get paid for making money. I am happy to take other people’s good ideas and run with them, as long as I understand exactly why I am in the trade.
2. Dwight Anderson On When To Increase Your Position
What did you learn from Julian Robertson? – One thing that Julian did very well, which we do poorly, is pay up when fundamentals start to develop as anticipated. A trade he used to like to talk about was Citibank in 1990 and 1991. He bought it at 10 and it went to 20. When one of his analyst wanted to sell the position, he doubled it instead, because he felt it was cheaper at 20 then that it was at 10. When he first bought it, there were real estate problems that were resolved by the time it got to 20, so it was clear that City wasn’t going bankrupt. It ended up going to 100, split adjusted.
3. Scott Bessent – Pressure to give investors what they want can compromise any trading style.
The biggest mistake I made was not taking the advice of Robert Wilson: “If you have as much money as I’ve read you do, you are an asshole if you manage anybody’s money except your own. To go up 100%, you have got to be willing to go down 20%, and you cannot go down 20 with other people’s money”
4. Yra Harris on Patience
Anytime something is too good to be true, I now recognize that it probably is and that it’s there for a reason because someone knows more than me. Where I used to rush in, I now step back and wait for a move to develop. I don’t feel I have to be at the start of every move anymore.
Money is always going somewhere no matter what, so I Just have to stay attuned. But I am more patient in letting moves develop before I get in. As I’ve gotten older, my patience has improved.
Recognizing when you are right is as hard for some people as recognizing when you’re wrong. I find it comical to see people cut their profits and run their losses, but happens all the time.
“Traders have a very hard time buying something at a greater value than what they just took profit on, so they look for a proxy or relative value.” – as a result they miss on the real move.
All the crap rallies at the end of a bull market, which is how you know it’s near the end.
6. Jim Leitner
Options take away the whole aspect of having to worry about precise risk management. It’s like paying for someone else to be your risk manager. Meanwhile, I know I am long XYZ for the next six months. Even if the option goes down a lot in the beginning to the point that the option is worth nothing, I will still own it and you never know what can happen.
7. Jim Rogers- Human Nature
I don’t know if the markets are smart enough to say “Let’s test the weak hands,” but history has repeatedly shown that sort of thing happens. It is human nature…The smart money always loses money shorting bubbles because they cannot comprehend that it could go as high as it does.
8. Dr. Andres Drobny: Talk Is Cheap
I also learned early on that talk is cheap in the markets. Everybody runs around with a view, but what leads to success is not having a view but coming up with a direct trade idea.
Source: ST & Inside the House of Money: Top Hedge Fund Traders on Profiting in the Global Markets, Steven Drobney, Wiley 2006