You know, I trade/invest for a living. I manage money for a living...and I haven't lost a dime during this whole -55% or so market plunge.
However, if I hadn't come upon Investors Business Daily back in 2000, and if I hadn't pored over O'Neil's books, and if I hadn't subscribed to Daily Graphs, I would be in a world of hurt right now.
The fact is, I'm not...and if I look for a reason it always comes back to O'Neil....and, of course, Darvas. But if it weren't for O'Neil I would have never known about Darvas. So...
Take it to heart...when the market starts correcting, and when you see four or five distribution days in a two to three week period, sell some stock and raise some cash. If the correction continues, sell it all and stand aside because, as this historic decline demonstrates, you never know just how far the market will fall.
The two secrets to long term success in the market:
1) Cut every stock loss quickly (never allow a stock to fall more than 8% from your buy point)
2) Stay out of bear markets and corrections.
Those two "insurance policies" would have saved hundreds of thousands of investors billions and billions of dollars.
The "buy and hold" crowd won't teach you that...they don't want to teach you that...so much the worse for them.
If you haven't done so, you may want to read "How to Make Money in Stocks"...the latest edition.
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9 comments:
ST,why can't mutual funds adhere to these basic rules?
Ron
1) They're too big. It takes too long for them to get out and it takes too long for them to get back in. They are hampered by their size.
2) They have charters that force them to remain 100%, 90%, 80%,... invested in stocks.
3) Their stock selection process can be very cumbersome. They often need to present stocks before committees before building positions. This takes time.
Most simply aren't geared to move quickly and decisively.
So, what they do nowadays is define themselves (i.e. "large cap growth", "small cap value",...) and place the onus to diversify on the investing public.
This, in turn, gives employment to financial advisers, 20% of whom have skills with a "value add" and 80% of whom survive by siphoning fees from the system without adding hardly any value.
Investment Advisers, Financial Planners and Mutual Funds increase revenue by getting money under management. They are purely fee based. They can't charge a performance fee. Thus, they are geared not to performance, but to sales.
It's a structural problem in the business model if you ask me. Millions of Americans are paying a lot of money in fees for very little "value add".
The problem with "buy and hold" advocates is that they take the model of Mutual funds and asks individual investors to apply the same logic. They quote Warren Buffet and print historical charts of Dow jones to emphasize their point.
Its so ridiculous that Motley fool was asking people to sit tight in a bear market quoting it as a key to Jesse Livermore's success (i.e. his sitting tight).
In short lot of misinformation about stock market.
Hello SS,
One of the most misinterpreted things I see out there among traders is the Livermore "sitting & waiting" strategy. His sitting tight strategy was BEFORE the trade, waiting for things to set up. It was not some mindless "buy and wait" as is so often misquoted.
Strictly speaking, "buy and hold" is what we all do, it's just that the smart ones adjust that "hold" period to the trending timeframe of the market. Hence, that's why Livermore's most important dimension in trading was the time domain, not the price domain.
But of course, "buy & hold" is always interpreted by default as meaning "long term", whatever that is.
"Time" is one of the most important dimensions in trading. You're right. If you consider the difference between a day trader, a swing trader, an imtermediate term trader, a long term trader and a buy and hold investor - the most substantive difference is "time"; sure style plays a role (value, large cap, etc.), but it's not as important.
We all have to define ourselves somehow. If we enter a trade not knowing our general timeframe, then we don't know what we're doing.
As an intermediate term trader (2 weeks to 3 months or so) I sit through smallish corrections that would make a daytrader/swing trader cringe with horror. I'm ok with it - it's where I excel. But some people excel in shorter time frames.
During a good market (been a while) a holding period can increase and during choppy markets it can decrease. It all depends on the market.
The problem with a great many "buy and hold" investors is that after they make their one decision they then abdicate all responsibility and leave their stock to the vagaries of the market. It's not unlike plugging up a bottle and throwing it out to sea...directionless.
Making decisions can cause people a lot of discomfort; especially when it's in an area as difficult to figure out as the stock market...so buying and holding is easier to do. It demands less time, less knowledge...thus it's a default methodology for beginners.
The amount of money one has under management also determines one's time frame. Livermore successfully used daytrading to build a stake. Once he had his stake his time horizon increased. Making the 'big money' demanded a longer holding period. He learned that from suffering through subpar returns during a bull market. He was taking $2 gains when the market was offering $30 gains.
Many people do misinterpret Livermore. I've read his books countless times. When he talks about sitting and waiting - he means both waiting out the poor markets by doing nothing (fishing) and he also means holding onto his position(s) as long as the trend and over all market conditions remained in his favor. He was able to sit with a winner through many an intermediate correction...and he was able to go to France on an extended vacation while the market flatlined.
One thing is for sure though. He would not have been holding anything "long" over the past year. He'd have probably been fully leveraged on the short side and making a killing.
In the book "Reminiscences.." you can read about the way he played Tropicana on the short side. He let it come in quite a bit and never covered. He held tight. But the overall trend never changed or he would have certainly covered.
In this current market I often find myself wondering: "At what point would Livermore have covered?"
I don't think that point has arrived yet.
People fail to understand how Livermore backed out of his decision when he felt he was wrong. "Reminiscences of stock operator" describes an incident where he bought Anaconda at $300 thinking it will run 20-30 points. Instead it stalled at $300 and Livermore backed off from his trade. I agree ST, any covering has to happen on capitulation which has not happened yet. Do you short sell stocks too? or are you like Darvas/Loeb who held back from doing anything in bear market. If you don't know yet, Gil Morales (a star CANSLIM performer) has his own report (with a subscription fee of $50/month). His recommendations have consistently worked out well in buying/short selling since last year.
You can find it on http://gilmoreport.com
Salman,
Good plug for the Gilmo Report. I have been a subscriber since it began early last year, and yes it is excellent. It's a teaching newsletter, and is not just handing out fish.
I agree with ST that when you're confronted with decision time it's helpful to ask "what would so and so do?". I think that is very constructive. Trading really is just the business of "decision making". People who have a hard time with that are going to have a rough go of it.
Good conversation.
You know, I run a fund. With a fund comes a Private Placement Memorandum (PPM). It's a prospectus detailing your investment methodology. My methodology is CAN SLIM. I can short. However, I have a feeling that most of my investors understand that the primary modus operandi of the fund is to stay out of corrections and bear markets. It is comforting for them to know that.
For me, at least, shorting is difficult. It is a little counterintuitive and in the past I haven't had the same success as I do on the long side. So, the reward doesn't justify the risk.
When you manage money for other people your priorities change. Rule #1 is don't lose their money. Rule # 2 is, when you have a chance to make money, make sure that you do so with as little risk as possible. I need to make sure that all the odds are on my side at all times and I rarely feel that way on the short side.
From what I understand, Gil had a rough go of it trying to short last year. I could be wrong. Someone familiar with the situation mentioned it to me. He wrote the book (literally). So, if he is/was having a hard go of it, well...
I have nothing against newsletters. However, I don't really subscribe to any. The only newsletter I ever subscribed to was Dan Zanger's. I learned a lot from him by reading his past newsletters (they're archived back to 1997 or so). However, I learned after a while that the effect of receiving his nightly newsletters did me more harm than good. My decisions have to be 100% mine...no one else's. If I'm long a stock and Zanger says that the market is due for a correction, it affects my subconscious - because I respect him so much. It can cause me to waffle a little bit - and that is very bad for a trader. So, for me, I just look at the charts and try to ignore everything else. I peruse the Monday edition of IBD - but other than that I'm very wary of any kind of "tips". They can come from many places and the people they come from might have great intentions. But their holding time might be different. Their style might be different. Their goals might be different. Dennis Gartman was plugging stocks last night. But his holding time is five years.
One time, years ago I turned on CNBC in my hotel room and I saw Cramer yelling "Sell, Sell, Sell" to BOOM. I had a position in the stock. After hearing that I got a little nervous. What does Cramer know about BOOM that I don't know. It caused me some discomfort even though I don't really respect Cramer too much. Nevertheless, I nver felt comfortable holding it again. I sold a short while later and the stock rose 300%.
So, I have to be very careful...it's a weakness I have to watch out for.
Great Post ST. Excellent points for the newbees. Hey, when did you start a fund? Not so long ago you you were studying for your licences. Congrats.
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