Ten Lessons from Michael Batnick’s Book ‘Big Mistakes’

I ran a search on Google for the expression “mistakes are”. The results:

In his first book, Michael Batnick outlines the big investing and trading mistakes of some of the most successful investors and brightest minds that are known to humankind. Most mistakes revolve around the same themes:
– being overleveraged and building too big positions in assets that were illiquid or suddenly became illiquid;
– venturing outside of expert zone when having to manage a much bigger amount of capital;
– overconfidence and hubris;
– normal mistakes that cannot really be prevented; they are part of the investing process;
– fear of missing out.

I enjoyed reading Michael’s book . It is not a how-to book. It is an interesting dive into market history and psychology. Here are some of the more interesting insights I found:

1. Leverage made Livermore his fortune, leverage destroyed him. He knew everything one can possibly know about market psychology and price action but it seems he never learned how to control risk – it was a constant all or nothing betting for him. No wonder he went broke 4 times.

2. Ben Graham understood that no approach works all the time. There are time and place for everything. Markets evolve and some concepts stop working. A margin of safety doesn’t matter during periods of forced liquidation, especially when you are leveraged to the hill.

3. “A high IQ guarantees you nothing! This is one of the hardest things for newer investors to come to grips with, that markets don’t compensate you just for being smart.” and “Intelligence in investing is not absolute; it’s relative. In other words, it doesn’t just matter how smart you are, it matters how smart your competition is.”

4. “Putting too much money into something you don’t fully understand is a good way to lose a lot of money. But what’s more damaging than losing money is the psychological scar tissue that remains after the money vanishes.”

5. “Once something belongs to us, objective thinking flies out the window.”

6. “Professional win points. Amateurs lose points”, therefore professionals should play to win and amateurs should play not to lose (try to make fewer mistakes).

7. “Bad things tend to happen when we compare our portfolios with others, especially if they possess a lesser IQ and extracted a higher return.”

8. On the dangers on concentrated bets: “A single stock leveled one of the most successful funds of all time, you should think twice before putting yourself in the same type of situation.”

9. “The most disciplined investors are intimately aware of how they’ll behave in different market environments, so they hold a portfolio that is suited to their personality. They don’t kill themselves trying to build a perfect portfolio because they know that it doesn’t exist.”

10. “The average intra‐year decline for US stocks is 14%, so a little wind in the bushes is to be expected.2 But saber‐toothed tigers, or backbreaking bear markets, are few and far between. Corrections occur all the time, but rarely do they turn into something worse, so selling every time stocks fall a little and waiting for the dust to settle is a great way to buy high and sell low.”

Source: Batnick, Michael. Big Mistakes: The Best Investors and Their Worst Investments (Bloomberg). Wiley. Kindle Edition.

The Biotech Sector Is Setting Up For A Breakout

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Bull markets often correct through sector rotation. When leading sectors take a breather and consolidate, others step up to the plate and break out. While tech and retail shined in the past few weeks, their momentum is starting to show signs of exhaustion. I would not be surprised if we see a short-term rotation as the hot money in the market chases after other sectors. Biotech and financials are prime candidates.

The small-cap biotech ETF, XBI is setting up near its all-time highs.

The large-cap biotech ETF, IBB is building a beautiful base above its 200 and 50-day moving average. Look at this tight range contraction in the past few days. A breakout and a confident close above 110 might spur further momentum. A 4-5% move in IBB usually means 20-30% moves in some individual biotech names.

In the meantime, interest rates are perking up again, which is usually good news for financials. Here’s the regional banks ETF KRE approaching new 52-week highs.

Disclaimer: everything on this website is for informational and educational purposes only. The ideas presented are not recommendations to buy or sell stocks. The material presented here might not take into account your specific investment objectives. I may or I may not own some of the securities mentioned. Consult your investment advisor before acting on any of the information provided here.

Momentum Monday – Taking Profits On Strength

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Does taking profits on strength makes sense in a strong market? Or trying to capture potentially bigger moves by selling on weakness is the right approach? Both exit strategies make sense. We take a look at the major stock indexes and share some ideas.

Some tickers covered: QQQ, NFLX, NVDA, BABA, MSFT, TWTR, AAPL, FSLR, and many more.

Disclaimer: everything on this website is for informational and educational purposes only. The ideas presented are not recommendations to buy or sell stocks. The material presented here might not take into account your specific investment objectives. I may or I may not own some of the securities mentioned. Consult your investment advisor before acting on any of the information provided here.

Two Stocks That Surprised Everyone This Year

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FOSL which is up 170% year-to-date which makes it the best-performing S&P 500 stock so far. Who would’ve thought that a watch-maker would be one of the price leaders in 2018? Probably, no one. This is one of the reasons why it is happening.

The best-performing stocks in any given year are usually the ones that surprise the most which mean that they are either:

A) High-growth stocks that keep growing much faster than most analysts expect. They have established a powerful price momentum and no one believes they can possibly go any higher. NFLX is a good recent example.

Or

B) They come from an industry with extremely low expectations and high short interest. Extremely low expectations are easier to beat by a wide margin and high short interest is a potential fuel for higher prices because short sellers eventually will cover their bets (the question is if they will do it voluntarily when a stock sells off or involuntarily when a stock rallies and their bets are squeezed higher). FOSL and MOV are good recent examples.

Low expectations + New 52-week High can be a powerful combination.

Think about it. What’s your most likely reaction when you see a stock from low-expectations industry make new 52-week highs? You are very likely to dismiss the price action and think that the market must have gone crazy.

All trends need skeptics and doubters otherwise there would not be anyone left to buy.

When I highlighted MOV on Momentum Monday ten days ago, Howard’s reaction was: “Don’t they make watches? I am not interested in that stock”. His reaction made me smile. Almost every time when I highlight a great technical setup that Howard doesn’t like for fundamental reasons, the stock in question ends up making a significant move higher.

Today, MOV broke out to new 52-week highs after beating earnings estimates by 240%!

I don’t know what the future of FOSL and MOV is. I don’t use their products. Maybe, this year’s rally is just a temporary blip and the gradual adoption of smartwatches like Apple will end up being an extinction process for Fossil and Movado. What I know is that we should be paying attention to stocks from unpopular industries making new 52-week highs. Sometimes the market as a whole is smarter than its individual parts.

Momentum Monday – Big Tech Stocks Are Setting Up For A Breakout

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While crude oil is pulling back, interest rates in Italy are spiking and emerging markets are struggling, large-cap tech stocks are setting up for potential breakouts.

Some ticker symbols that we cover: EWI, USO, QQQ, GOOGL, SIVB, BKNG, BABA, SQ, TWTR, etc.

Disclaimer: everything on this website is for informational and educational purposes only. The ideas presented are not recommendations to buy or sell stocks. The material presented here might not take into account your specific investment objectives. I may or I may not own some of the securities mentioned. Consult your investment advisor before acting on any of the information provided here.