Category: Uncategorized

You Don’t Need To Know The Future

I am being asked all the time, what do I think about this and that stock. I don’t have an opinion about every stock. I might have the occasional insight into the merits of one business or another, but I never let my subjective perspective dictate my buy and sell decisions. Not in public markets, where liquidity and momentum have created their own world; where perception is the reality.

When conviction and biases trump discipline, nothing good happens in the financial world and if does, it is due to non-repeatable luck and not a skill. (apparently if you are a value investor, this doesn’t apply to you – you have a different market philosophy and that is ok; there is room for everyone)

If you honestly believe that you don’t know what will happen next when you open a new position, then:

1. You will find a method that has positive expectancy in the current market environment. After years of adding and cutting, complicating and refining, the basics of my approach could be summed up to: buying breakouts near 52-week highs from proper technical bases in healthy markets. It is not the perfect approach for every market environment, but it is consistently profitable.

2. You would never venture to use a method you don’t understand and just buy random stocks based on tips or rumors. There will be no fear of missing out, because you realize that you don’t have an edge outside of your market approach.

3. You will not hesitate to take your signals – because you don’t know which ones will be successful

4. You will always have a predefined stop – because you could be and occasionally, you will be wrong. It is Ok to be wrong. It is not Ok to stay wrong.

5. You will risk equal percentage of your capital on each signal (idea), because there is no way to know in advance which ones will be the big winners. They are obvious only in hindsight.

6. You will have an exit plan – rules to protect profits and keep you in a position until a trend persists

Everything you need to know about successful trading and investing is on the web, gratis. There are no secrets. The rules of the game are known for each of the major market approaches – momentum, value and statistical arbitrage. Most people simply lack the discipline to follow the rules. There is a huge empathy gap between knowing something and actually applying it. It is just like the difference between knowing how to get in shape and doing it. It takes strong will and a desire to make it; it takes discipline.

Other than using a market method with proven positive expectancy, the only edge I have is discipline and it is more than enough. Diligently doing my homework and following my rules.

The Consumer Is Far from Dead

We just had the most successful Cyber Monday in history with sales up 30%. Mobile sales were up the astonishing 70%. And all of this, on top of very strong Black Friday. What does it mean:

1) Online shopping – the future is here. People feel more comfortable doing it and this trend will only accelerate across the world. 5 years ago, people used to say that if you have online presence, the whole world is your potential customer. Today, if you don’t have an online presence, you basically don’t exist. $AMZN and $EBAY have been the biggest beneficiaries of this trend as they simply are mind share leaders in this category. It is their battle to lose. Brick and mortar shops are so far behind.

2) The U.S. consumer is alive and well and as we all know, its spending drives not only the U.S., but also the world economy. Some might opine that more people taking advantage of one-time deals means that the consumer is trapped and desperately looking for savings. At the end of the day, the mere fact that more people are spending more is indicative of improving consumer confidence. Maybe all that news about housing recovery is actually creating the so called “wealth effect” – when people feel good about their future, they tend to spend more.

Why Stock Picking Still Matters

You have probably heard it from thousand different sources – one of the reasons why hedge and mutual funds have trouble outperforming the S & P 500 is the increased correlation in the market. There are binders of research done on the subject, but what most have missed is the time-frame. Yes, in short-term perspective, correlation has risen to levels never seen before. During steep market corrections and the initial stages of a recovery, correlation often comes extremely close to 1.00, meaning that everything moves in one direction disregarding of underlying fundamentals and growth prospects. But if you take a step back and look at stocks from a longer-term perspective, you will realize that stock picking today matters as much as ever.

I am not a big shopper, but in terms of user experience I hardly find a big divergence between Dillard’s and J.C. Penny. Maybe the biggest difference is that the former offers brands that people care about. Maybe this is all the difference that actually matters – selling people what they want, but I’m not a retail expert and I have no intentions of analyzing the merits of their product portfolios.

From a 10,000 foot view, Dillard’s and J.C. Penney are both simple department stores, which well being is highly influenced by the economic cycle. They both suffered 90% cut in market cap during the 2008/2009 financial fiasco, but as you can see from the chart above, their recovery stories are very different.

While $JCP is still struggling to hold above its levels from the fall of 2008, $DDS just hit another all-time high and it has come a long way over the past 4 years. You didn’t have to be a retail expert and addicted shopper to figure out which one would perform better. All you had to do is watch the 52-week highs list and shop your stocks from there.