Five Market Insights from Jim Leitner

The right trading mindset

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 markets the next day. To this day, my wife never knows if I’ve had a bad day or a good day in the markets.

Learning never stops

I am really humble about my ignorance. I truly feel that I am ignorant despite having made enormous amounts of money. I calculated the other day that I have taken over $2 billion out of the market for my investors and employees so far. That seems like a lot of money and yes, I am relatively wealthy and happy to be independent, but there’s never a day when I feel a lot smarter than everybody else.

An advice to aspiring traders

Aspiring traders should be open to the entire spectrum of market experiences. I never locked myself down to investing in one style or in one country because the greatest trade in the world could be happening somewhere else. My advice would be to make sure that you do not become too much of an expert in one area. Even if you see an area that is inefficient today, it’s likely that it won’t be inefficient tomorrow. Expertise is overrated.

On the benefits of using options

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 it is worth nothing, I will still own it and you never know what can happen.

I once owned a one-year option on the euro swap rate that became worthless soon after I bought it. Then, with two weeks to go to expiry, the swap rate came back my way and blew through my strike. After being worthless for 11 months, I ended up selling it for five times what I paid for it.

Short-dated volatility is too high because of an insurance premium component in short-dated options. Longer-dated options are priced expensively versus future daily volatility, but cheaply versus the drift in the future spot price.

Every Friday, we go out and buy one-year straddles. We admit that we’re ignorant but we expect that sometimes, over a year, there will be enough trend that we will make money. So, yes, we overpay for options but that doesn’t mean that we don’t make money. If the option maturity is long enough, trends can take us far enough away from the strike that it’s okay to overpay.

Hedge fund money is not the smart money

The big thing that distinguishes the real money world from the hedge fund world is redemptions. Universities don’t have redemptions, nor do family offices. Both are going to be around for years so they invest for the long-term. Meanwhile, the hedge fund world industry invests for the one to three-month time horizon, which subjects managers to taking inefficiency risk and missing out on opportunities that are longer term in nature.

Source: Inside the house of money, Steven Drobny

Jesse Livermore on Why You Don’t Have to be Active Every Day in the Stock Market

First, do not be invested in the market all the time. There are many times when I have been completely in cash, especially when I was unsure of the direction of the market and waiting for a confirmation of the next move….Second, it is the change in the major trend that hurts most speculators.

Always remember; you can win a horse race, but you can’t beat the races. You can win on a stock, but you cannot beat Wall Street all the time. Nobody can.

There is the plain fool, who does the wrong thing at all times everywhere, but there is also the Wall Street fool, who thinks he must trade all the time. No man can have adequate reasons for buying or selling stocks daily– or sufficient knowledge to make his play an intelligent play.

Remember this: When you are doing nothing, those speculators who feel they must trade day in and day out, are laying the foundation for your next venture. You will reap benefits from their mistakes.

The Biggest Winners Are Usually A Pleasant Surprise

Peter Lynch has given the investment world a lot of market wisdom. Here is one of his most insightful thoughts:

The point is, there’s no arbitrary limit to how high a stock can go, and if the story is still good, the earnings continue to improve, and the fundamentals haven’t changed, “can’t go much higher” is a terrible reason to snub a stock. Shame on all those experts who advise clients to sell automatically after they double their money. You’ll never get a ten-bagger doing that.

Frankly, I’ve never been able to predict which stocks will go up tenfold, or which will go up fivefold. I try to stick with them as long as the story’s intact, hoping to be pleasantly surprised. The success of a company isn’t the surprise, but what the shares bring often is.

I am not a long-term investor like Peter Lynch. I am a swing and position trader and yet I agree with his statement. This is why I have never been a fan of hard price targets. I believe in having a time stop for swing trades – giving a stock a certain number of days to prove that it deserves to be held. I believe in having exit strategies in both, my swing and position trades. Those exit strategies are never based on a hard price level. They are based on price cycles and invalidation of trends on different time frames. My reasoning is simple:

  1. I don’t know which particular trade will end up being a winner. I know that I’ll be right at least 50% of the time and my average winner is bigger than my average loser.
  2. I don’t know what profit will a particular winner deliver. It could be 5% or 50%. I know the average size of my winners, but never what the individual return will be in advance.

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3 Questions Every Trader Should Ask

Preparation is the key to success in any field of life. Trading is not different. Here are three major questions every active trader should ask him/herself every morning/week.

1. Is it time to be short, long or on the sidelines and how aggressive should I be?

Are indexes overbought or oversold, do we see any momentum divergences, is there a good number of long setups.

What is the market reaction to earnings reports – do we see stocks selling off after strong reports or stocks rallying after weaker than expected reports. Nothing reveals the true market sentiment better than market reaction to earnings reports.

How aggressive should I be will define our risk per trade, the types of setups we will trade, how tight our stops will be and what our exit tactic will be.

What percentage of capital should I risk: for me it between 0.5% and 1% depending on the market environment. 0.5% in faster markets that change directions frequently. 1% in trending markets, up or down.

2. What type of setups should I focus on and why?

Do we buy strength (breakouts), do we buy weakness in established uptrends (pullbacks to rising moving averages), do we focus on recent IPOs, do we play a certain industry, should we look for mean-reversion setups, should we primarily look for short setups? Should we buy breakouts or could we afford to front-run and buy in anticipation of a breakout?

Holding period – should we be taking profits quickly (in 1-3 days) or let them run longer. How much room should we leave to our stocks? Where should we put our stops – make them tighter or leave them more room so we don’t get shaken out from normal pullbacks or rips.

Should we focus on intra-day trades or swing and position trades? For example, during deep market corrections volatility rises significantly and moves that typically happen in a month could happen in a day or two. This is the perfect trading environment for intra-day trades, because they allow us to risk very little to make a lot and we don’t risk to be on the other side of an overnight gap. During trending markets, we trading a market of stocks environment. Volatility is low and declining. The big moves happen over a period of multiple days and weeks. It makes a lot more sense to ride trends – be it with swing trades, which aim to capture 2 to 10% moves or position trades, which goal is to ride multi-week trends.

What industries are currently hot, if any? In a bull market, industry momentum accounts for half of a stock’s move. A crappy stock in a hot industry will outperform a great stock in an out of favor industry.

3. What are the three-four priority setups that we have lined up for the next day/week?

 

3 Insightful Concepts from “The One Thing” Book

Multitasking is bad. Prioritize and focus on the one thing that matters the most for achieving your goal.

Always ask yourself the question “what is the one thing I can do today that will make everything else easier or unnecessary”. Focus on that one thing. If you don’t know what that one thing is, then your one thing is to find out.

Don’t focus on being busy; focus on being productive. Allow what matters most to drive your day. If you chase two rabbits, you will not catch either one.

When you try to do two things at once, you either can’t or won’t do either well. If you think multitasking is an effective way to get more done, you’ve got it backward. It’s an effective way to get less done. As Steve Uzzell said, “Multitasking is merely the opportunity to screw up more than one thing at a time.”

Don’t get trapped in the “check off” game. If we believe things don’t matter equally, we must act accordingly. We can’t fall prey to the notion that everything has to be done, that checking things off our list is what success is all about. We can’t be trapped in a game of “check off” that never produces a winner. The truth is that things don’t matter equally and success is found in doing what matters most.

“With research overwhelmingly clear, it seems insane that—knowing how multitasking leads to mistakes, poor choices, and stress—we attempt it anyway Maybe it’s just too tempting. Workers who use computers during the day change windows or check e-mail or other programs nearly 37 times an hour. Being in a distractible setting sets us up to be more distractible. Or maybe it’s the high. Media multitaskers actually experience a thrill with switching—a burst of dopamine—that can be addictive. Without it, they can feel bored. For whatever the reason, the results are unambiguous: multitasking slows us down and makes us slower-witted.”

Distraction undermines results. When you try to do ”. “too much at once, you can end up doing nothing well. Figure out what matters most in the moment and give it your undivided attention.

In order to be able to put the principle of The ONE Thing to work, you can’t buy into the lie that trying to do two things at once is a good idea. Though multitasking is sometimes possible, it’s never possible to do it effectively.”

We make bad decisions when our willpower is low. Learn to manage your willpower. It is a finite, but a replenishable resource.

“Think of willpower like the power bar on your cell phone. Every morning you start out with a full charge. As the day goes on, every time you draw on it you’re using it up. So as your green bar shrinks, so does your resolve, and when it eventually goes red, you’re done. Willpower has a limited battery life but can be recharged with some downtime. It’s a limited but renewable resource. Because you have a limited supply, each act of will creates a win-lose scenario where winning in an immediate situation through willpower makes you more likely to lose later because you have less of it. Make it through a tough day in the trenches, and the lure of late-night snacking can become your diet’s downfall.”

“Everyone accepts that limited resources must be managed, yet we fail to recognize that willpower is one of them. We act as though our supply of willpower were endless. As a result, we don’t consider it a personal resource to be managed, like food or sleep. This repeatedly puts us in a tight spot, for when we need our willpower the most, it may not be there.”

“The studies concluded that willpower is a mental muscle that doesn’t bounce back quickly. If you employ it for one task, there will be less power available for the next unless you refuel. To do our best, we literally have to feed our minds, which gives new credence to the old saw, “food for ”

“So how do you put your willpower to work? You think about it. Pay attention to it. Respect it. You make doing what matters most a priority when your willpower is its highest. In other words, you give it the time of day it deserves.”

Think big. Act bold.

“Think big. Avoid incremental thinking that simply asks, “What do I do next?” This is at best the slow lane to success and, at worst, the off ramp. Ask bigger questions. A good rule of thumb is to double down everywhere in your life. If your goal is ten, ask the question: “How can I reach 20?” Set a goal so far above what you want that you’ll be building a plan that practically guarantees your original goal.

Don’t order from the menu. Apple’s celebrated 1997 “Think Different” ad campaign featured icons like Ali, Dylan, Einstein, Hitchcock, Picasso, Gandhi, and others who “saw things differently” and who went on to transform the world we know. The point was that they didn’t choose from the available options; they imagined outcomes that no one else had. They ignored the menu and ordered their own creations. As the ad reminds us, “People who are crazy enough to think they can change the world are the only ones who do.”

Act bold. Big thoughts go nowhere without bold action. Once you’ve asked a big question, pause to imagine what life looks like with the answer. ”

“You may be asking, “Why focus on a question when what we really crave is an answer?” It’s simple. Answers come from questions, and the quality of any answer is directly determined by the quality of the question. Ask the wrong question, get the wrong answer. Ask the right question, get the right answer. Ask the most powerful question possible, and the answer can be life altering.

Voltaire once wrote, “Judge a man by his questions rather than his answers.”

 

Source: The One Thing by Gary Keller and Jay Papasan