A10, Stock Trader Dude

T. Boone Pickens and his reflections of a life of comebacks is interesting in the sense that outsiders to the game of trading may be able to grasp one thing: you only need one or two big trades to change your life. Trading everyday may not produce anything other than trades, while when luck is with you and you press, fortunes can be made. Without big trades, there is no life changing stimulation… although there are other interesting business and personal concerns discussed in the book, a few very large trades going your way makes all the difference. Of course, the aspect of generating huge profits is based on turning over your inflated holdings while they are still inflated, whatever they may be. When you’ve accumulated a fortune from a few large trades the difference is you don’t need to trade or risk again in that same way because you no longer have to risk everything, and when you lose, what does it matter when you have an abundance of resources.

The market will go down again… there’s a reason for it too: there’s no compelling reason for stock prices to rise because there’s no reason to believe earnings will rise. We can only take what the market gives us, and the signal is clear that values are perceived to be lower, and nobody knows for how long. Cheap stocks don’t necessarily mean a bargain, but it’s all about the guys with cash left to invest, if they interpret average stock values as cheap and sustained buying occurs to lift the stock market much closer to the peak the investors that have been scared of losing their money will sell their stock holdings and lock in a smaller loss. And if there is no new buying the market begins to drop again, but this time, the people that get out with most of their capital are not coming back.

Wishing that your investments went up in value is not a strategy; it’s an aversion to loss. There’s a reason stock prices are down, and there’s a reason that people lose significant amounts of money; people are irrational. Stock prices were inflated, not rational, and people lose money on investments because they refuse to take a small loss and sell, which turns into a larger loss. Selling too early only costs you a potential profit, but it never costs a total loss.

Large drops and rises in the stock market are fine. Whenever there is significant movement there is a chance for outstanding reward. If hedge funds and mutual funds go out of business there is less competition for the independent investor and trader. Fortune favors the bold, nothing can change that, of course that doesn’t mean the bold don’t lose.

Your investments don’t matter; it’s the decision you make about them that does. The only thing that matters is when you sell. Everything else will act as a distraction. If your stock holdings are down and you are concerned, your real concern is with yourself, because you didn’t act to sell or protect your holdings with puts.

While books that promote the concept of the mind of the strategist are nearly useless I’m going to review anything that may relate to engaging productively in the investment markets: Avoid perfectionism: mistakes are a necessary part of the game, winning and losing cannot be separated, the most you can do is plan for loss and takes steps to limit it. 

Challenge constraints: make the problem less formidable. How would you solve the problem if you had the freedom to do anything you wanted? Avoid timidity: details have a shelf life; clear solutions are not always available. After analysis and creative thinking, choose a basic course of action and forge ahead. 

Focus on the one thing that means something: even if banking matters can be complicated, the direct factor on success is simple: amass money cheaply and lend it out at a rate as high as possible. If you separate winners from losers you can distinguish the elements of each product in the marketplace or an investment and determine why one group or method has emerged as winners. Whether the key difference is in distribution, design, technology, sales, product variety, servicing, raw-materials acquisition, or something else, it is important to know which makes a meaningful difference and to pick the one or two that can use additional resources to establish a winning platform.

Over the past ten years the DJIA has rarely been under 8000, but wishing the market up from here, as if 8000 is the established low seems foolish. Money magazine, Fortune magazine and news programs like the CBS evening news have financial industry people and journalists claiming that now is a good time to invest because the stock market is down substantially. That is not a reason. What about the fundamentals? If economic conditions are poor, and earnings will not improve for the foreseeable future, what’s the rush to invest? The media seems to think that because stock prices are on sale that is a reason to buy. It is not. There must be some quality filter. It reminds me of all the Phantom Menace toys that were marked down fifty percent. Maybe that seemed like a good deal to some but it wasn’t, those toys eventually wound up in the bargain bin in Toys “R” Us for 99 cents. That hurt the company’s earnings, even supposedly “sure-things” like Star Wars turned out to be crummy. DJIA 8000 may be the new ceiling, perhaps not right away, but how can all the excess be out of the market when financial journalists and the media are still saying this is a buying opportunity? I’m fine wherever the bottom will be, be it 4000 (@1994), 3000 (@1993), 2000 (@1987), 1000 (@1980), it doesn’t matter. The thing about a bear market is, it keeps finding ways to go lower, these “sale” prices continue to get reduced, in 1973 mutual funds lost thirty to forty percent, and then lost another twenty five percent or more the following year. If the media, financial journalists, and financial industry people had a keen insight they would have sold off their investments when those investments were inflated, and if they couldn’t determine that, what makes them think they have a special insight into when prices are at favorable buy levels? The most important part of the game is knowing when to sell – it avoids all the unpleasantness of buying and holding when stock prices remain depressed for long periods of time, and only those investors with significant cash reserves can effectively act when there is a viable catalyst for earnings growth and take chances when prices are at extremely low levels and due for a boost.

What can you do? For millions of Americans, a 401(k) account is the key to retirement security, even riches. Here’s how to make yours flourish. These statements were made in USA Weekend when the paper presented a retirement planning guide written by the editors of Kiplinger’s Personal Finance on September 19, 1999. The article stated that ultra-conservative guaranteed investment contracts (GICs), which offer a set return represented just fifteen percent of 401(k) assets. The article contended that stocks over the long haul were a good choice because they offered almost an eleven percent return over the past seventy-five years. What they failed to mention is that you lose much of the positive compounding effect when you have losing years. And what they didn’t consider was long periods of time, for example, sixteen years of low stock prices. If that happens, US stocks as an asset class won’t make you wealthy as the article proposed, or do much to provide for your retirement. The best part of a 401(k) is the ability to buy and sell investments without regard for tax consequences. So, if your stock holdings are above what you paid for them, and retirement is a concern, perhaps now is the time to sell your holdings and channel your funds into investments that have a guaranteed return. If you still want exposure to stocks, depending on your plan, you may have international stock investment offerings, or even the chance to load up on solid US companies with a favorable outlook that pay dividends. This way, at least you are getting paid to wait around in a stock that may take a long time to increase in value. The best part of the article is this quote, “The long-term consequences of requiring an unqualified person to act as his own chief investment officer should be obvious.” Investor education and experience are easily outmatched by proper planning to limit losses and luck.

After a large drop in the Dow and S&P 500 index the pattern has been a partial rebound the following day or soon after… once that ends the market may have asserted long-term values will remain at a lower level – and for good reason – perceptions were inflated for many years and the long-term outlook going forward is not promising. So, the players that can still play the game will be defensive, that means catching stocks on the way up and selling inventory at a slightly higher price to the next batch of buyers hoping to do the same. But in that case, the investment community, including the public, isn’t there to propel those stocks much further and those stocks naturally sell off. The only thing that will matter – for those that want meaningful returns is to have a keen sense of awareness of the companies that will rise to the top or continue to do well. And if you can’t compete in that way, you’re wishing that your shares rise in value for some reason, but that’s not investing.

Don’t let them fool you. The media and financial pundits aren’t going to pay your bills, now or in retirement and they aren’t going to reimburse you for losing any money in your investments. The media has put financial people forward for years when the stock market dips and their motto is always, “Don’t panic/Don’t sell.” We’ve heard this talk before, and it hasn’t made you rich. Don’t panic isn’t advice… it’s telling you to disregard the most obvious facts of the situation: Rescuing stocks, PAWS & effectSell, sell now, you fool 

The only way to lose is to hang on to investments that nobody else wants. You lose your margin of safety if your stocks decline past the price you paid for them. That is the time to sell, as your margin of safety is reduced – it’s defensive. The only way the game works to make you money is when people are willing to pay more. Most folks do not hedge their exposure, and so they are left vulnerable in the event of a severe decline. When you have properly protected your position – you’ve limited your loss in advance to an acceptable amount, and if the stock price gets crushed you’ll get back most of your capital.  PAWS (plenty of almost worthless stock) and effect, if your stock holdings stay down for the long-term you do not benefit – it causes more frustration to hold investments all the way down than to sell and at least have the chance to buy greater amounts of stock when the price is extremely low and due for a rebound. What is the path of least resistance? There is a valid reason for stocks to sell off – the glory days have passed long ago (since early 2000) and the perception is that boom times are far off. Use logic, the only people that get hurt financially when stock prices decline significantly and stay down for years are the people that held on!