Tolerance - A Trader's Mindset

Truth
I am increasingly amazed by the quickness of people to condemn others.  Examples include road rage, comments on the internet, political parties, and yes, even participants in the stock market.  Somebody once said, "Just because we disagree, that does not mean we should be disagreeable".  Disagreeing is normal - attacking the person we disagree with is not.  It is almost as if proving the other point of view as wrong, automatically proves us to be right.  Worse yet, assassinating another's character proves that they deserve no say in the matter, even when the two are not even related. Often the truth lies somewhere in between various points of view.


Once And For All
What works for one, seldom works for all.  I have to laugh at the advertisements which suggest if we are not using their solution, or their product(s), that can only mean we are obviously doing it all wrong.  The fact they try to suggest that they know what is best for me, without even knowing me, is comical, if not misguided. But to attack me because of what I believe, is nothing but intolerance, plain and simple.  When did we become so intolerant of other points of view?  Maybe it just goes hand in hand with our intolerance of other people who don't look like us.

Buy and Hold
Can we really believe there is only one correct approach to the stock market?  Again, I laugh when "experts" look down their noses in disdain at anyone they believe is behaving contrary to their "buy and hold" approach.  It is as if traders are of the lowest class of people while (buy and hold) investors are what everyone should aspire to be.  Clearly, there is no such thing as timing the market, so not only is anyone attempting it, ignorant, they are probably really, really bad at managing their financial affairs, as well!  Not.

Trading Costs
One of the reasons many can't believe timing the market could ever work, despite evidence to the contrary, is the so-called high cost of trading.  Everyone knows, the more we trade, the less we earn.  I have just discovered an interesting concept which would help explain why that is not always the case.  Next time, I will go into more detail.

Mindset Matters
I did not start this blog post with the mindset that all traders are tolerant, and all investors are not.  Believe it or not, markets actually represent people of all viewpoints.  What one person wants to sell, is exactly what another wants to buy.  We don't (and shouldn't) judge the person on the other side of the trade.  The market is able to exploit any weaknesses we might possess, and makes us pay the price, no matter what our strategy.  Still, if there were only two choices, (which I don't believe is true),  I think I would rather be less wealthy and tolerant of others, than rich and falsely believing I was smarter (and hence, better) than everyone else.  Why? Because being able to let go of judgement, I believe, makes me a better person as well as a better trader.

What are your thoughts?

The World Is Not Flat

Jack Be Nimble
Below is an older video from Phil Town's blog http://philtown.typepad.com .  The arrow on the chart beneath it shows us the point in time at which Phil was suggesting people should get out of the market.  When we see the fund managers getting out, we can out-run them because it takes them weeks to adjust their holdings, and us, as little as a day.

"Going Down!"
Being "old school", Manny Schiffres doesn't know how to determine what a bottom looks like, so doesn't want to take the chance of getting back in at the wrong time.  To Manny, quality is "king".  The trouble is, and as the graph shows, everything goes lower in a time of crisis.  Even Maria is convinced taking the long view is the correct approach.  I doubt that today, even after what happened, she will have changed her mind.    The same can be said of most of the people who lost everything in the tech wreck at the beginning of the 2000's.


Phil Town on CNBC's Closing Bell with Maria Bartiromo from Phil Town on Vimeo.

Click To Enlarge

Save Your Money
Yes, the market has come back, but just imagine if you knew how to time the market like Phil, and had practically all of your cash after the market stopped dropping!  Think about how much money got left on the table by riding the market down and not getting out.

Investing and/or Marketing
The surge in world stock markets over the past couple of decades has been caused, primarily, by the spending of the Baby Boomers.  To think that is going to be the case for the next couple of decades is to have your head in the sand.  Demographics are showing us that the Baby Boomer spending peaked (perhaps, not coincidentally) in 2007.  Buy and Hold is, and always has been, a marketing strategy, not an investing strategy.  We need to understand the difference.

"You Trader, You!"
I love how Maria calls Phil a Trader (as opposed to an Investor), as if being a Trader was something bad!  We need to educate people that being a good trader is smart, not bad.  It took a while to get the academics of the day to believe the Earth is not, actually, flat.  There are a few who still believe it, today. I can only hope it doesn't take so long to convince people to learn how to avoid market disasters like the last two we went through because the next one will come soon enough.

If people can learn to be good traders, does that mean they are merely lucky?  How many people do you know who, despite working very hard, others would say they were very lucky in life?  What do you think?

An Update From Harry Dent

Harry Dent's June 2012 Update

Canary in the Coal Mine
The major problem I experienced with the crash that resulted in the last Great Recession was that everybody was afraid to come out and tell the general public just how bad they thought things could get, with one exception.  I watched Mad Money with Jim Cramer on CNBC and one night he told his audience that if they had money invested in the stock market that they might need over the following five years, they should sell that portion immediately.  I did just that, but it was already too late.  While I did not lose as much as most people, it was still a big hit to my portfolio (i.e.: life savings).

The Media?
As it turns out, there were a number of people who came forward, later, to tell us what they knew and how things looked pretty bad to them, well before it actually happened.  The trouble is, what they were trying to tell people was not very popular at the time - certainly not with the broadcasting media.  As for the rest, do you think they would actually say anything to you and me, even if they suspected the worst? (That is where the term "whisper number" comes from - they'll say it to close allies, but not publicly).

Odds Are
Cramer took a lot of heat for telling people to sell.  Many in the industry called him irresponsible.  I appreciated the fact he had the courage of his convictions and was one of the few people I have ever heard actually telling people to sell.  The Buy and Hold types may scoff at the warnings, but as Mr. Dent says in this video, if things don't get as bad as he thinks it might, then worst case is we miss a little to the upside.  If he is correct, we miss a lot to the down side.  Any time I find myself in a situation with little chance of gain, and a huge chance for loss, I will gladly sit it out until the odds are more in my favour.

Technically Speaking
When do I get back in?  When the technical indicators say so.  I'll be one of the first to say when I see the technicals showing me a good re-entry point.  I am no investment professional, and can not advise others what they should do with their money.  Personally, I have been short, or out of this market, since before the year began.  I see no reason to change now.  For other peoples' sake I hope Mr. Dent is wrong, but right now, it just isn't a risk I am willing to take.

How do you see your chances?

Smaller Losses, Bigger Gains

Minimize Losses
I have said it before, and I am going to keep saying it.  I believe the single greatest advantage the personal investor has over fund managers is the ability to avoid taking big losses.  My favourite definition of insanity is when someone keeps doing the same thing over and over again, each time expecting a different result.  If we are losing money from our portfolio, we need to change what we are doing - quickly.  I know enough about human nature to understand the reasons it is difficult for most people to adopt such an approach, but it is not impossible to do, either.  Buy and Hold leaves far too great an amount of potential profits on the table for the personal investor.  At the same time it also exposes them to a vast array of expenses and fees at the hands of the financial institutions relative to what they receive in return.



The Nimble Approach
At the other end of the scale we can day-trade for quick, small profits.  For my money, options would seem better than stocks for such an approach.  Few people, though, have the knowledge and skill regarding options trading to actually do so.  The biggest options markets are also in U.S. dollars, so there are currency and tax implications to consider, as well.  So what is the regular personal investor to do?

Trend Watching
My best results have always come from following market trends.  Of course there are long-term trends, and very short-term trends.  Some are volatile, and others are as clear as a straight line on a chart.  But rather than trying to dictate what a trend should look like, I let the market show me.  Based on past trends in a particular equity and a particular market, I set realistic limits and cash in when the opportunity presents itself.  For instance, with a normal trend and a normal sized position in my own personal portfolio, if I make a profit of $1,000.00 on a single trade, I know to take the money and close out my position.  It isn't automatic, but I tolerate very little risk of giving the money back once I have reached that point.

Small Losses; Big Gains
It isn't like I always get the trend right, either.  In those cases, when a trend reverses, I have had to develop the discipline of exiting a position when it starts to lose money.  It has cost me a few wins, but it has also saved me a ton of losses.  Small losses and big gains are the keys to success.  There isn't a fund manager on the planet who can adopt this strategy simply because the amount of money they throw around is far too large.  That, my friend, is why Buy and Hold is the only thing you will ever hear about from the investment industry, backed up by countless academic studies funded by, guess who?

The Money Trail
On the latter point, I want to share that I just read a book in which the author points out that even many of the scientists believe we are chasing the wind when it comes to our theories on climate change.  It doesn't mean our actions are not having a negative affect on global climate.  What it really means is for a scientist to receive substantial funding in that field, their studies have to resemble the current thinking.  It is hard to find our lost keys in the dark if we only spend our time looking where there is a light shining.  Sadly, it is how the world works.  It is also how the Buy and Hold marketing strategy became the Buy and Hold investing strategy.  More on a profitable investing approach for the personal investor, later.

Do you find it difficult to avoid losses in your portfolio?



    

Trading Stocks

Trader, Not Traitor
I remember one analyst on BNN in particular as he looked down his nose at the commentator and said, "I am not a trader (emphasis on the NOT), I invest for the long term!"  In other words, he was better than any trader.  Trading, to him, was for the amateurs.  At the risk of repeating myself, surely you and I are playing a different game than any fund manager, let alone the talking heads that appear on television.  The major difference being, what they make from their stocks is mostly a side-show for them.  Most of them are compensated six ways to Sunday and get paid regardless of how well their stock picks are performing.  I have also seen analysts on TV who don't even have any of their own money in stocks!   (Conflict of interest LOL!)

Do No Harm
This blog is about my sharing what I have learned over many years of playing the markets.  I decided at the beginning of the year to publish my trades as teaching moments.  I hesitated to do so for a couple of reasons.  One, was because one trading style does not suit all.  Another was because my time horizon has become increasingly shorter.  I trade during the day.  I don't want to put people behind the curve, trying to imitate me while they can't get in and out as easily as I can.  I cut any losses extremely quickly in the current environment.

Bad To Worse
At that rate, I don't see the benefit of me sharing my trades with the average person trying to buy low and sell high as a means of making a reasonable return in these markets.  The regulators forgot the meaning of their role a long time ago.  High frequency traders manipulate prices in the name of so-called market liquidity.  Highly leveraged Exchange Traded Funds (ETF's) change how markets function.  Dark pools exist for the wealthy fund managers to hide transactions from the average investor.  Derivatives cause nuclear level shock-waves in the markets.  The rules put in place after the Great Depression to prevent it from ever happening again have either been revoked, or totally ignored.

Looking Ahead
Does that mean I think the personal investor should just give up, take what's left of their money and go home?  Not at all.  It just means keeping an eye on what's going on.  With the rate of change in technology and in society, obsolescence is guaranteed.  Buy and Hold has as much chance succeeding these days as the horse and buggy did outlasting the automobile at the turn of the last century.  Nortel, and Research In Motion are recent infamous Canadian illustrations of what has become the half-life of modern day success.

The Goldilocks Solution
If Buy and Hold can't work, and day trading is overkill, then what is today's personal investor to do?  In looking for an answer, I thought about the investing club I started.  If anything, it perfectly illustrates the need for a Goldilocks solution - neither too hot, nor too cold.  Investing clubs do not lend themselves to day-trading, and most fail to make money or serve to educate if the time horizon is too long.  My solution there is the same as here - use technical analysis to decipher medium-term trends and trade (yes, trade!) accordingly.  As a result, the trades I share on this blog are the trades we are making in my investing club.

Next Time
I want to remind people that I am not a professional, and as such cannot advise others what to buy or sell.  However, I have no difficulty sharing with others what I am doing, in the hope of serving as an example.  Next time, we will take a closer look at how we trade in my investing club.

What is your strategy in this changing and evolving environment?

The Case For Market Volatility

Click Here To See The Video

Signs of Struggle
With an economy which generates almost 18 trillion (US) dollars of goods and services, the European Union is the largest economy in the world.  In the video, Larry Berman gives the litany of problems facing that economy, and consequently, the world economy, as well.  The level of European debt, demographics, and fiscal austerity all add up to a struggling economy and higher than usual stock market volatility for a very long period of time to come.

Volatility; Not Demand
Sovereign debt levels world wide mean political and economic volatility unlike anything we have seen in generations. All this, just at the time the Baby Boomers are beginning to ease back on their spending as their need for housing, and everything that facilitates going to work every day decreases.

New Paradigm
We have just experienced the peak of a period of economic growth unlike anything the world has ever seen.  The engines are low on fuel.  I hate to be the bearer of bad news, but we are not going to see the markets return to all time highs (at least not new highs after adjusting for inflation).  Still, the financial services industry continues their steadfast and unwavering support for the Buy and Hold approach despite the fact it makes a better marketing strategy than it does an effective portfolio management strategy.  As long as they receive sufficient participation, they aren't going to be the ones to tell us the bad news, let alone admit the hoax they have funded all of these years at their clients' expense.

The alternative to Buy and Hold?  Buy lower, and sell higher.  What a concept!

Have you, or are you making changes to your approach?

February 2012 Portfolio Update

For the iShares TSX60 ETF (XIU), I am showing the gains made by using the 200-day moving average as the buy/sell decision point.  It has been a little over a year, and already the benefits can be seen over a buy and hold approach.  Of course, those gains would be slightly less with commissions factored in.

No new trades in my portfolio (Model in the chart above) since Feb. 08.  I am being too cautious, but want to avoid any sudden drop the European situation might cause.  Also, the qualitative easing by the U.S. Federal Reserve will start to wear off at some point.

Seasonally, we are entering the time of year when the TSX is running on all cylinders as the Material, Financial, and Energy sectors tend to do well.

Two month return for TSX @ February 29, 2012 = 5.76 percent
Two month return for Basic Timing Model using XIU = 5.92 percent
Two month return for Advanced Timing Model (my returns) = -1.13 percent
Money for charity = $0.00


How about you?  Are you cautious in this market, or are you looking forward to good times ahead?

Nature Or Nuture?

More Than Our Genes
Apparently we not only get to blame our poor looks on our parents, a Swedish study, mentioned in this video, says we can also blame our poor investing habits on them, as well - at least in part.  I agree with Mr Zweig, however, when he says we can learn to be more than our genes.  I think it goes back to an older post I did, where I talked about the difference between personality traits, and character traits.  Every personality, I believe, is capable of developing character traits such as patience, kindness, and self control.

A Simple and Reliable Approach
Mr. Zweig also suggests we can learn to manage our emotions over the course of many years.  I would suggest following a reliable, and simple investing strategy that actually works, as a superior approach - it doesn't have to take as long to learn.  A reliable method removes much of the emotion.  It is the emotion that gets most of us into trouble.  Also, the simpler it is, the quicker and easier it is to master.  Of course, there's always the old Buy and Hold approach, where we, basically, do nothing.  I suppose that is the best approach for some people.

Any opinions?  Is nature to blame, or can we outsmart even our genes?

Trading vs. Buy and Hold

Same, But Different
Everyone is entitled to their opinion.  I am posting this because I am of an almost entirely different opinion than a blog I recently read.  I agree with many of the assertions made in that post, yet I came to an entirely opposing conclusion.

Volatility
The first assertion is the discount brokerage business has changed the way the investing game is played.  According to the author, the new lower commissions combined with the excessive amount of opinions on TV, leads people to think they could be the next Goldman Sachs hedge fund manager.  Lower fees and more information,  they say, is bad because it causes people to trade too much.  I have heard a lot of theories, but I have yet to see any research that says the present market volatility is caused by lower brokerage fees!  If anything, I would say the volume of trading, on average, has decreased since the Great Recession.

Competition
Next they imply that trading does not add capital to the best companies in the stock market, and that long term holds are good, therefore all short term trading is bad!?!  Further, they assert we shouldn't even try to beat professional investors with their automated systems and state-of-the-art technology.  This suggests we are in competition with the professional money managers, where nothing could be further from the truth. We do not have millions, or billions of dollars to invest. We do not have to be in the market 24/7. We do not even have to be fully invested. We do not need to meet weekly, quarterly, and annual investing targets. We do not need to appease fund holders and shareholders. We do not need to meet any forced redemptions. However, we do want to know what the big guys are doing. Doing so gives us an edge because we can do what they are doing, only faster.

Sources of Income
Also, according to the author, Buy-and-Hold always beats riding the latest trend.  The implication is hedge fund managers make their "outrageous returns" from the "suckers" dumb enough to make trades in the market.  Personally, I don't know who this person is invested with, but in taking a close look, we can see only a very small handful of professionals manage to outperform the index.  These organizations do not make their outrageous returns from their investing ability, they make it from the fees they charge!  Have you ever noticed they collect their fees even if you and I lose money?  If I say, "Bank", what do you think of?  I think of fees and service charges!

Theory
Next they assert the efficient market theory has been disproved.  I agree.  This theory supports the idea that assets cannot be mispriced since enough people always have enough information to accurately determine the correct price.  Three things - nice theory, but it is not about what people think, but what they actually DO.  Have you ever paid too much for something, knowing that is exactly what you were doing?  (Ever just had to buy that present for your child, no matter what the cost?)  Second, are we to believe that prices are never manipulated?  Third, the "efficiency" of information has never been greater, but that applies to misinformation, as well.  If the market is so efficient, then how did so many professionals get taken by Sino Forest?  Largely because of that theory, one of the main arguments against trading has been that assets cannot be mispriced, so the odds of buying low and selling high would be zero.  The fact the theory has been disproved supports the case for trading, rather than refutes it.

For What It Is Worth
If we want to just Buy-and-Hold this market, then I would purchase a couple of index ETF's.  Not I, since I personally, have zero expectation the stock markets will be any higher a decade from now.  Think deleveraging, and demographics.  If we do want some sort of return, then I believe (based on my years of experience) a good trading strategy - one that uses low commission rates - is the only way to go.

As I said at the beginning, everybody is entitled to their opinion.  What's yours?

Personal Investors As Risk Averse

Investing, Not Gambling
It may seem odd  that I would see the best investors as being risk averse.  After all, no risk, no reward, right?  But this isn't gambling, this is investing.  The odds are stacked against the gambler - eventually the house always wins.  I invest only when I believe the odds are in my favour.  I see people putting their money into penny stocks, or wanting in on the next hot thing, or Initial Public Offering  (IPO).  I ask myself, why? Now, I'm not saying there is no money to be made in these areas, I'm just saying for most Personal Investors the odds are against it.  Very few people have the necessary skills.  These are also areas that manipulators work to their advantage.  People get fooled, believing their loss would be small while their return could be almost infinite.

Loss vs. Gain
Personally, I am less interested in how much I can make as I am in how much I can lose.  The bottom line is, any loss is significant.  I believe the best Personal Investors have a low pain tolerance for loss.  That is one of the reasons I now believe it makes no sense to buy anything with only the hope that, one day, it will be worth more than what I paid for it.  Such is the thinking behind Buy and Hold - buy now, hold until it is worth more than what we paid, even if it means suffering major losses.

Lesson Learned
But, what if the markets go down before going up?  It happened to me - once. Leaving the company I had worked at for many years, I took the proceeds of what was to be my pension and invested that money in the stock market.  In the following six months, or so, the market dropped by more than 25 percent.  I sought advice, which went from, no need to worry, to, too late to sell!  In my case, I was lucky.  It only took a little more than a year for the market to get back to even.  Knowing what I do today, I would have made more than a seven percent rate of return during that same period of time.

Capital Gains or Capital Losses?
When the Tax Free Savings Accounts (TFSA) were first introduced, some advisors were saying not to hold equities in such accounts since we can never claim the losses as a tax deduction.  My reaction to that was, if we are losing money in our TFSA, then we are doing it wrong!  I would rather avoid the taxes on my capital gains than on my losses, as long as I keep my losses small. 

First Rule Of Investing
Warren Buffett has said the first rule of investing is to not lose money.  After the experience of mine with my pension proceeds, I looked for methods of limiting my losses.  I could buy and hold and just wait it out and hope I lived long enough, or I could develop an exit strategy which would leave me with most of my money to buy at a better price.  People will point to the cost of commissions and fees and taxes and say it isn't worth it.  But, why wouldn't I pay a couple of commissions to end up with several percent more in my account?  Seems like a reasonable trade off to me!

Win or Lose?
The successful personal investors, I know, aren't easily fooled by the promise of huge returns.  They know their success lies in the ability to limit their losses by minimizing risks.  Doing so let's even the smaller gains accumulate and compound while others are praying for a chance to get back to even.

How is your risk tolerance? 

Opportunities Created In The Markets

When The Market Gets It Wrong

Let's talk about another common misconception regarding timing the market.  I am referring to the belief  that market timers always have to know what the market is going to do.  In reality, timing the market means taking advantage of the periods of time when the market misprices assets, times when others get it wrong.  I know, in the past, the academics have said this couldn't happen, but I am not alone in saying it happens all of the time.  The price of an ounce of gold dropped around one hundred dollars the other day.  Since gold is, well, gold, are they telling me the value of the U.S. dollar, which gold is priced in, changed so much that the price of gold should correct by that amount?  It doesn't take a rocket scientist to see the price of gold was relatively overbought, meaning, relative to what people have been willing to pay for gold in the past, the price was, temporarily, too high.

Playing The Odds
Note that I said temporarily.  I don't necessarily know what the price of gold should be all of the time, but when it reaches extreme overbought or oversold conditions, the odds are it is going to revert to a point where it is less so.  As it does, it will usually begin a new trend.  If the previous trend was up, then it normally begins a new downward trend.  If it was down, then the opposite is likely.

All In
With a "buy and hold" approach to investing, we have to commit to putting all of our money in the market all of the time.  Since people using such an approach don't believe there is any method for determining the extent to which assets are mispriced, their approach is to average into the market over time.  Consistency and regularity are the key.  Their belief is that there is no pattern to the markets.  So, how is it they perversely expect markets will consistently trend higher over time(?!).  Sorry, I digress. 

Market Extremes
In the so-called timing of the markets method,  I don't necessarily care about the direction of the markets.  If gold is extremely overbought, it can correct lower, no matter what the market is doing.  As far as the price of gold goes, I don't care what it is doing most of the time, I only care when it gets extremely overbought, or oversold.  The same goes for the markets.  I don't have to know what the market is doing every day, until it gets to one extreme, or the other.  Of course, the one exception would be when a reversal is followed shortly thereafter by another reversal.  If a return to the original direction of the trend creates a situation where I start to lose money, I exit the position.  I feel no compulsion to be fully invested all of the time, I simply wait for another opportunity.

Up, Down or Sideways
During long periods of time, the market can trend sideways, rather than making new highs or new lows.  There can be significant periods of time when the market is going nowhere, or going in the opposite direction of the longer trend.  I don't need to be fully invested while this is happening.

On The Lookout
Yes, others would say, but that means you have to be watching the market all of the time.  To, that I ask, your point is what?  Whenever I have money in the markets, I should be watching.  Why would I go away and ignore what is happening to my hard-earned savings?  To those who say they don't have time, I would argue it takes all of 10 minutes to check.  If I use what I call the Basic Timing Model which uses the 200-day moving average as a buy and sell signal, there is little I need to do for most of the year.  The prices of market indexes normally cross their 200-day moving averages only once or twice a year!   

Why Pay More?
To use a shopping metaphor, timing the market is like purchasing items only when they are really, really, on sale, or selling them when they are highly over-priced.  The rest of the time I can prepare my shopping list and check what constitutes a regular price.  The regular prices don't interest me, so until I spot a really great sale, I don't need to feel like I should be spending all of the money I have available.

How often do you check what the markets are doing?

The New Investing Paradigm

Different Process; Different Result

Have you ever stopped to think why home-made bread tastes better than store-bought?  After all, it is the same basic recipe, so why the difference?  We know the ingredients are not exactly the same.  Store bread usually contains cheaper, lesser quality ingredients to save money, as well as preservatives to keep the bread from spoiling, and perhaps other ingredients to speed the bread-making process.  The process, itself, is different.  Most of us at home do not bake hundreds of loaves at a time.  While most kitchens have what is required to bake a loaf of bread, few vendors have the equipment to make all of the bread they sell.  There are good reasons their ingredients, and their processes are different from those we would follow at home.

Viva la Difference
Is institutional investing different from personal investing?  Should it be?  We are subject to so much marketing done by the industry that few people, I have met, see any difference.  The common questions I get are, "Why not give your money to the professionals?  How do you expect to do better when they have so much more in resources at their disposal?"

Ownership
One thing I know for sure, I am going to take a lot better care of my stuff than anybody else will, period.  That is especially true of my money.  We hear so many stories of people who have lost their whole life savings because of this person, or another.  Would it have happened if they could have taken a more active role in the process?  If made aware, most of us are going to put a stop to our losses at a point which is well before everything being gone. 

The Sales Game
Have you ever been to a new car dealership and hung around the smallest car on the showroom floor?  I can tell you there are few sales people who want to spend time with you since most are hoping to land the next big deal on the "super whatever" with all of the toys.  A financial plan tailor-made for us little people is basically the same one made just for everyone else like you and me.  Let's face it, you and I get to speak to the sales people, not the decision-makers.  The sales people are compensated for how much of our money they get us to hand over, not how much they, in turn, make for us.   

Size Matters
Does a multi-million dollar corporation use different financial controls than we would use for our family finances?  I would hope so.  Most of us can see that hiring a corporate accountant to manage our household books is more than just a little over-kill.  Does a whale have different feeding habits than a minnow?  Of course.  The mistake too many people make is in thinking that personal investing should follow the rules of the institutional investors.  Large institutions follow a "buy and hold" approach because they are at the mercy of their own size.  The bottom line is the sales people in the financial services industry promote buy and hold as the only alternative because they want the sale.  I know few sales people who are going to sell one thing, and promote something entirely different.

Setting Expectations
Institutional and personal investors seek a decent return on investment.  Until they lump a whole lot of smaller accounts into larger accounts, the big institutions can't afford us.  It is not cost-effective for them to treat every investment, and every account differently.  They want to make a good return, and earn a revenue stream from charging fees to cover as many of their expenses as they can.  They want us to believe normal returns are in the mid-single digits, that the game is terribly complicated, and also, that a huge investment of time and resources is necessary (to justify their fees).

A New Paradigm
I believe the investing paradigm is changing.  In the beginning, the game was entirely broker-centric.  The broker controlled the flow of information and money.  Everything was done through them.  Then, when the internet provided unprecedented access to information, the process became somewhat automated by the application of computer and networking technology.  The problem with today's model is bigger is less effective than smaller.  Too big to fail is an invention of the owners of the means of finance, meant to serve themselves and their wealthy clients.  Large industrial companies, and technology companies that grow too large in physical size can't withstand the pressure brought about by the application of technology to global markets.  You may be reading it here first, but I am saying a new future of personal investing is beginning with you and I, today.  We can outperform the large institutions if we don't try to beat them at their own game, and if we don't continue to blindly follow the rules they create for us.  We have the technology, we have control of our own money, we have access to all the tools, and we can learn to use and improve our own ability.  The last thing we should do is to want to be just like them.

"Buy and Hold" hasn't worked in the last decade.  I can't predict if market conditions are going to favour a buy and hold approach over the next couple of decades.  Are you willing to risk your future and take that chance?

A New Risk Paradigm

Risk-free?

Click Here To Play The Video

In this interview with Ann Rutledge, she states that the financial concepts she studied at the University of Chicago were predicated on the notion of a risk-free rate.  With the Standard and Poors downgrade of U.S. debt, that notion becomes, in her words, a myth.

Same Asset; Different Risk
She thinks that if the U.S. debt is not risk-free, as was previously assumed, then it would be possible to use more than one model to determine asset risk.  If different people use different models with different assumptions, then that means there is no longer only one answer (as assumed for efficient markets theory because the efficient market theory assumes the market is aware of the information used to price an asset, so the price has to be correct since that information is known).

How Real Markets Work
I have always found that logic to be what is called "circular logic" in computer programming, but has been highly followed for many years.  If what Ann is saying is correct, then I take it to mean that different people, using different assumption would be willing to pay different prices for the same asset.  This sounds more like a real market to me.

This means the market does not always get the price correct, that the market is capable of mispricing assets.  This would also mean we can take advantage of situations where the market has mispriced an asset by buying low and selling higher.

Which Leads To...
To me, this is a perfect example of how the academic models, touted and flouted by the financial services industry as proof that "buy and hold" is the only approach that might possibly work, will continue to be disputed by actual experience.  It would prove that timing the market is more than merely being lucky, as they have tried to lead us to believe.

What do you think?  Might the financial services industry use out-dated academic models to support their "buy and hold" position?

Position Size

80/20 Rule

Decisions, Decisions.
Size matters, or so I am told.  From "too big to fail", to sports like boxing, size is a factor.  The question is, how does size affect one's investment portfolio decisions?   For those who don't have a sell strategy (i.e.: Buy and Hold) diversification is the only hope, and what follows will be of little use.  Having a sell strategy provides me with a few more options.

Call Me Arrogant
First, I have heard it said that buying a whole position all at once is the dominion of the arrogant.  That may be true if we are not using technical analysis to time our entry points.  My method of determining when to buy has proven to me that what I call a buy signal is just that - the point in time when the odds are most in my favour.  Averaging into the market almost always reduces my returns, it does not improve them.  If I buy all at once, and I am only partially right, then I can begin to reduce the size of my position.  If I am completely wrong (read: losing money) then I sell everything I just bought.  I would rather be out the commission than lose capital.

Diversification
Next, we should talk about the size of a position.   I have seen academic studies that demonstrate even twenty stocks is not enough for any one portfolio.  (That study was probably commissioned, pardon the pun, by the financial services industry - cha ching!)  Note that a single broadly based Exchange Traded Fund (ETF) can contain well over the twenty stocks required to provide me with enough diversification.

Market Correlation
What I am saying is holding broadly based ETF's provides me with all of the diversification I need, thank you, even if I put my whole portfolio into one ETF!  "Wait!" the experts will say, "You need diversification between various regions of the world!"  Do you hear the cha ching in the background, again?  Since I have a sell strategy, if my investments in the TSX are under performing, when I do sell, nothing says I have to buy the TSX, next time around.  Understand that markets around the world are highly correlated, these days.  By that I mean when one market tanks, the others are likely to do so, also.  Maybe not at exactly the same time, but close enough.  

80/20 Rule
Having said all that, I believe in the 80/20 Rule.  Applied to investing, the rule tells us that 80 percent of our returns will come from 20 percent of our holdings.  Rather than watering down my returns by casting my money into everything in every market, I use seasonality, technical analysis, and fundamental analysis, to focus on the areas of the market that are working, and simply forget about everything else until the conditions change, again.

Returns
The major lesson the market has taught me is I don't have to have all of my money in the market all of the time.  I used to think I was wasting opportunities by not being all in!  Nothing could be further from the truth.  If I divide my portfolio into five, how much of a return do I need to make 20 percent, over all?  You get it, I still have to make 20 percent each time.  Each fifth of my portfolio that makes 20 percent contributes 4 percent to my overall results.  Do that five times, and at the end of the year I end up with 20 percent.  Or, I can make 10 percent on any one position (each time contributes 2 percent), and do that 10 times, and still end up with 20 percent per year.

Better Than Average
Do you get what I am saying?  I only need to have 20 or 40 percent of my portfolio in the market at any one time, and as long as it returns 10 percent in a month, or two, I can take two months of the year off, and still make a twenty percent return.  Not bad, when the average annual rate of return for the markets is around 8 or 9 percent! (Which, by the way, most active fund managers fail to do over the longer term, after expenses). 

Sleep Tight
I am not saying this is what you should do with your own portfolio.  I am not qualified to give that kind of advice.  I am saying, with practice, and experience, it is possible.  Consider the possibilities that not having everything in the stock market all of the time creates.  If nothing else, it helps me sleep better, especially in these crazy markets!

How do you decide how much to put into any one investment?

Is It Time To Sell?



Click To Enlarge


Dollar Cost Averaging
Rather than Buy and Hope, I mean Hold, I use the 200-day moving average to guide me in my investing decisions.  This has not always been the case.  There have been too many times in my past where I didn't know about things like moving averages.  Having money to invest meant dollar cost averaging into the market by tossing in set amounts of money at set intervals.  While this tends to average out over longer periods of time, I began to learn about a better approach.

First, why hope for average returns, when you can do much better?  Second, nowhere is it written that we must be fully invested all of the time!  Of course, this is total heresy in the eyes of the financial "experts".   Still, repeat after me, "Buy and Hold is, first, a marketing strategy, rather than an investment strategy".  Sorry, I digress.

200-Day Moving Average
My own research and my own experience going back decades, suggests that bad things happen in the markets after prices fall below the 200-day moving average.  Sure, things can go wrong when prices are above the 200-day moving average, but catastrophes can be avoided by stepping aside when below that level.  Did you know the largest single day price drops in the stock markets came after prices had declined below the 200-day moving average? 

Program Trading
If it was true in the past, it is likely even more so, today.  Large fund managers employ something called program trading where large numbers of transactions are executed by computer according to predetermined conditions.  I'm guessing, but I would bet dropping below a 200-day moving average is one of them.  Wikipedia suggests that in 2006, program trading accounted for between one third and one half of all trading on the New York Stock Exchange every single day!

Good News; Bad News
So, am I suggesting we should sell everything and wait for a better day?  First, I will remind people that I am not qualified to make such recommendations, but I will tell you I have taken my profits long ago.  For people still in the market, however, there are some encouraging signs.  Daily charts are in oversold territory which means we should see a bounce higher, and the S&P500 Index and the Dow Jones Industrial Index have not crossed their 200-day moving averages.  Neither has the commodity index.  However, there are no guarantees.  As long as a stock we own, or the TSX, in general, is below the 200-day moving average, there is a greater chance of negative surprises. 

I know there are just as many people out there who believe these conditions make great buying opportunities.  That is what makes a market.  Buying on the way down is great when it works; not so much when it doesn't.  Me, I am into capital preservation.  I'll hold onto my cash for other future opportunities, thank you.

As always, I welcome others' thoughts on this, and other topics, even if they are different from my own views.  What do you think?

Dividends

A Non-Traditional View
My viewpoint on dividends is not the traditional one.  While there are many reasons given for buying dividend paying stocks, few look at the opposing point of view.  Mine is not the popular viewpoint, so at the risk of sounding like I don't know what I am talking about, I ask you to consider what I am about to say.

Getting Paid To Wait
The classic reason for buying dividend paying stocks is because you get paid to wait.  For a less than apples to apples comparison, I suggest we look to the rental income market.  Should we insist on keeping renters who are paying the rent, but who destroy the premises in the mean time?  I think most landlords would not want to continue their relationship with renters who are costing them money.  Yet,  when it comes to investing, we are expected to waste capital in the event the stock price goes lower in order to gain income.

Dividend Support
No worries, they say, "Dividend paying stocks lose less than other types of stocks in a downturn!"  Our single largest advantage over the pro's is our ability to move quickly.  Why would I want to hold any stock that is losing money?  In selling, the worst case is we buy it back later at the price we sold it, but normally we can buy it again at a lower price which would more than make up for any dividend.  As for losing less, dividend paying stocks also make us less, because they have to pay the dividend.  It is like a tax on our profits.

Return of Capital
Speaking of tax, I know there are many, many people who delight in receiving a tax refund.  While it feels good, all it really means is we paid too much in the first place!  Meanwhile, the government has been using our money until we later prove to them it actually belongs to us.  I look at dividends as a return of capital - money we paid to get the stock in the first place.  Why is it we are happy to get our own money back?  If
we hadn't "overpaid" for the stock to get the dividend in the first place, we could have purchased more stock!

Outperformance
Of course, dividend paying stocks outperform in the long run, but only in a buy and hold portfolio!  As I have said before, nothing says we need to hold stocks that cost us money, or under perform other stocks.  My preference is to buy stocks at a low price and sell them at a higher price.  The fact that dividend paying stocks don`t drop as much as others means it is more difficult to buy them at a low price relative to other stocks.  When the market corrects, I want stocks to drop as low as they will go, so I can buy them at a real discount!

Over-hyped?
I`m not just poking fun, here, either.  I no more consider the dividend yield of a stock I am buying than I count the number of members on the board of directors.  I neither buy a stock because it pays a dividend, nor discount the ones that don`t.  That doesn`t mean that others shouldn`t consider dividend yields, but I am not in favour of the buy and hold approach. 

I`m curious about other people`s approach regarding dividend paying stocks.  What do you do?