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.
Generally, 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.
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.
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.
“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”
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
“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.”
“Once we realize that imperfect understanding is the human condition, there is no shame in being wrong, only in failing to correct our mistakes.”