Recently, I was at a money manager round table dinner where everyone was talking about ”my stocks this” and “my stocks that”. Their attitude was that it doesn’t matter what is going to happen in the world because their favorite stock is generating free cash flow, buying back shares, paying a dividend and doing XYZ. People always forget that 50% of a stock’s move is the overall market, 30% is the industry group, and then maybe 20% is the extra alpha from stock picking. And stock picking is full of macro bets. When an equity guy is playing airlines, he’s making an embedded macro call on oil.
Scott Bessent on what matters in investing
October 30, 2009
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Posted by ivanhoff
Christian Siva-Jothy on Discipline
October 27, 2009Generally, I can’t see more than a year ahead because things change so rapidly it’s very difficult to have a 5-to 10-year view. I have a rolling one-year view of the world and I impose discipline on myself by keeping a trading diary. Every morning, I go through the same process: If I have any positions on, I ask why do I have the positions? What has changed?
I wish I could say I follow my own rules 100%. It seems one is constantly relearning the same trading lessons. The market is always there to keep you in check and is a totally objective judge of your performance. The P/L at the end of the day is yours with no one else to blame.
One of the most difficult things about trading is not to trade. That’s probably one of the most common mistakes that people starting out in this business make. Overtrading is as bad as running a losing positions for too long.
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Posted by ivanhoff
Irrationality
October 22, 2009
In terms of valuation, no matter how cheap you think something is, it can always get cheaper. No matter how much you think something is overvalued, it can become more overvalued.
You also have to be very careful of strategies that rely on historicals. When people say things like, “This has never traded above X” or “This has never happened before” or “It’s never moved more than three standard deviations,” it often does just that.
Marko Dimitrijevich, Everest Capital
Markets have consistently experienced “100-year” events every five years.
I see the younger generation hampered by the need to understand and rationalize why something should go up or down. Usually, by the time that becomes self-evident, the move is already over.
There is no trading – classroom or otherwise – that can prepare for trading the last third of a move, whether is the end of a bull market or the end of a bear market. There is typically no logic to it; irrationality reigns supreme, and no class can teach what to do during that brief volatile time. The only way to learn how to trade during that last third of a move is to do it, more precisely, live it.
Paul Tudor Johnes
Overvalued, undervalued, expensive, and cheap are the most overused and abused terms in the stock market. For the most part, growth stocks couldn’t care less about valuation, and the people who buy the fastest-growing companies do not focus on valuation either.
Stocks that are trending up will always be considered “expensive”. In both good markets and bad, there is only a limited supply of good companies.
Howard Lindzon
All bubbles tend to reach extremes not expected by most people.
Market can remain irrational longer than you can remain solvent.
You can go broke by being right. Have an entry and exit strategy.
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Skilled investment
October 21, 2009“During its 31.5 year history, Quantum provided its shareholders with an annual return in excess of 30%. An investment of $100,000 in the fund at its inception would be worth approximately $420 million today”
George Soros
April 28, 2000
“The social objective of skilled investment should be to defeat the dark forces of time and ignorance which envelop our future.”
John Maynard Keynes
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Having a clear mind
October 21, 2009“I was absolutely unemotional about numbers. Losses did not have an effect on me because I viewed them as purely probability-driven, which meant sometimes you came up with a loss. Bad days, bad weeks, bad months never impacted the way I approached the markets the next day.”
Jim Leitner
“Once we realize that imperfect understanding is the human condition, there is no shame in being wrong, only in failing to correct our mistakes.”
George Soros
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Posted by ivanhoff
Fast moves
October 15, 2009
I am starting a new sequel of posts that will look at stocks that gained/lost more than 20% in a week. Was there something common among them, just before they started their move.
As of today’s close there are 61 stocks that gained more than 20% during the last 5 trading day. 37 of them were up more than 100% before they started their 20%+ move. It is true that we are experiencing an abnormal year, during which SPY is up 61% from its March’s lows, but the relative strength is a phenomenon that for the most part has always worked (stocks that outperformed during the last 6 months/1 year tend to outperform during the next 6 month/1year).
As of today’s close there are 3530 stocks that are priced above $1 and trade more than 100k share per day. 537 of them (or 15.2%) more than doubled during the last 6 months. As I mentioned already, out of the 61 stocks up 20%+ during the last week, 37 ( or 60.6%) have been already doubled before their last week’s move. One day is not statistically representative to declare that I have found a way to improve the odds of finding a fast moving stock. I have been following “the 20%+ in a week list” for a while and I can tell you that the stocks that had a 6 months gain of more than 100%+ before the fast move, were consistently north of 50% of the list.
In other posts I will point out other common characteristics among the fast movers.
Some trading ideas from my momentum screen for the next several days:
RVI NTWK JAZZ ROIAK GTN IGOI CBI AHCI PCX
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How big moves happen
October 13, 2009
All markets cycle endlessly between contraction and expansion. But congestive phases use up many more price bars than trending moves. This suggests why making money in the markets can be so difficult. A trend may already be over by the time most participants see a sharp rally or sell off. At the least, risk escalates dramatically as advancing price can reverse or enter new congestion at any time.
Alan Farley
Case #1: ASTC
On September 29th, ASTC gained 176% after 5 months of boring sideways action. The traded volume that day was an all time high for ASTC. The company reported Q4/09 net income of $2.6 million or 0.15 per diluted share on revenue of 10.4 million compared with Q4/08 net loss of 1.5m or (0.11) per diluted share on revenue of 6.1m. Astrotech announced that it has engaged investment banking firm Lazard Ltd to advise the Company in exploring strategic alternatives.
A gigantic, earnings’ related one day move. What to do if you did not catch it intra day? Often such enormous one day moves tend to consolidate time-wise and price-wise before they continue.
A time-wise consolidation will look like a bullish flag. The big range day is followed by several small ranged days, located in the upper one third of the first day range. A break-out above the high of the big range day is then buyable.
In a price-wise consolidation, the stock often retraces big part (if not the whole) of the big range day move. It is not unusual to see the stock to come back to the bottom of the big range day candle. This is not the place to buy. You don’t buy blindly on weakness, because you don’t know how far the decline could actually continue. Instead you are looking at the bottom of the big range candle day only as a potential support. If it is, you are likely to see a sideways action, which gives time to the rising 10 DMA (this is the one I use) to catch up with the price. Several days of sideways, low volume action will form a tight range, which could be looked as a sign of accumulation as buyers are defending the opening range of the gap. Then you buy on the break-out from that range or on 5%+ move on at least 2 times the average volume. Actually here volume has secondary importance as in such moves, volume often tends to follow price.
Another recent example of Case #1 that I recently played was LEE:
Case #2: TLB
Went from 9 to 12 during the last 6 trading days as actually only 2 days accounted for the bulk of the move. What was interesting for me was that the stock was already up 156% in the 6 months preceding this 9 to 12 one week move. TLB had a quick run from 6 to 9 in September, followed by 3 weeks of sideways consolidation. The buy was on the day of the 5%+ move above rising 10 DMA. I am constantly looking intraday for 5%+ moves among the stocks that at least doubled during the last 6 months. Most of my trading ideas come from this screen.
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Making things your own way
October 13, 2009It is not whether you can be a good trader, it is whether you can find the trading that is good for you.
When you have found your niche, you don’t need discipline to do the right things. You won’t want to do anything else.
Dr. Brett Steenbarger
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Posted by ivanhoff
Stocks traded below cash
August 21, 2009In November 0f 2008, there were over 300 stocks that traded below cash. Today this number is significantly lower. If a stock has a current Price/Cash ratio of under one, it means that the value of its high liquid assets is higher than its current market cap.
Some say that tha market is a discounting mechanism that tries to look 6 months ahead and therefore companies that are traded below cash are at that level for a reason. While this is a valid opinion and I respect the actions of the market, I can’t help but look for underappreciated stocks with potential for future price growth:
I scanned for stocks with P/C < 1 and EPS > 0
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Posted by ivanhoff
After hours action
November 4, 2009How did I spend my day? (how can I be more productive and happier)
What did I trade and why? (the method behind the entry and the reason behind the exit)
What did I learn today? (for the market and for me as a trader and human being)
What will I do to improve my perceived strengths and eliminate perceived weaknesses? (create a specific plan how to do it and start implementing it the very next day)
A typical strength could be precise risk management due to which your portfolio has never experienced a significant drawdown. Think about how to become even better at it? Is it worth it to use different trading horizon or apply tighter stops? Is that going to make you more profitable, without having to take on an excessive risk beyond your “sleep level”.
A typical weakness could be bad timing. You enter long position blindly on weakness, because you want to make 30-40 cents more, without realizing that by doing that, you are depreciating your odds of success. You buy when a stock is entering in consolidation, effectively locking capital in an underperforming position. How could you overcome that weakness? You have two options:
- turn to someone who knows and is willing to share his/her knowledge;
- find the cure yourself by experimenting.
The first approach makes much more sense for me. You will be learning from other people’s mistakes in an attempt to shorten your learning curve. Unfortunately in trading you often have to experience it first hand in order to appreciate what your friends were trying to teach you.
There are 3 major trading (investing) skills that everyone should work on:
1. Equity selection methods (save time and improve the odds of success)
What is your entry criteria and is there a statistical edge behind it, based on research or experience); time horizon (find out your niche – is it intra-day trading, swing trading, value approach, momentum approach. There are thousands different ways to make money in the market, but you have to find yours)
2. Risk management (tight stops or wider stops, position sizing, how to exit)
3. Timing (know when to be long, when to be short, and when to stay on the sidelines; enter your position at the right time and the right spot, so if wrong, the damage is minimal)
Work on one core skill at a time.