Investing, Trading and Profits

Is there something in trade that desiccates and flattens out, that turns men into dried leaves at the age of forty? Certainly there is. It is not due to trade but to intensity of self-seeking, combined with narrowness of occupation. Business has destroyed the very knowledge in us of all other natural forces except business.
John Jay Chapman1862-1933, American

Lately profits have not been easy to come by, as the volatility levels in the markets have risen significantly. The problem with most individuals is that they are always looking for more and more profits. Most of us do not take the time to sit down and do some simple math. One cannot win every month that is practically an impossible goal. What you can do is win on a yearly basis. It is said that 60-70% of the time the markets are doing absolutely nothing. This is probably what drives most investors insane. They forget to look at the big picture. As long as you make some profits, does it really matter when they come in during the span of a year? Most of us have no patience we just want to make money all the time. Ironically we end up doing just the opposite. It is one of the paradoxes of life. When you chase something with all your might, you never ever catch it.

You should set fixed profits targets; 20,30, 40% etc and not worry about whether you hit those targets in the first two months or the last two months of the year. The main thing is that you meet your objective. Sadly most of us seem to focus on the short-term trends and want to attempt to extract gains from the market every month. The only thing that ends up getting extracted is large sums of money from our trading account into the accounts of the disciplined investors. If the stock we are holding does not perform to our expectations, we dump it. A few months later we burst into tears as we watch all our potential profits evaporate right in front of our eyes as the stock takes of. This is one of the reasons why 90% of investors lose money, lack of discipline and inability to stick with a plan. By the way this is precisely what happened with Gold shares. The time to buy these shares was towards the end of 2002 to about April 2003. however most investors were dumping the positions they had taken earlier and the level of dislike was high. But the masses started buying towards the end of 2003 and early 2004, just when they should have been taking some profits of the table. As usual with the precision of a Swiss watch and the stupidity of a mule they bought at the wrong time and will end up selling at the wrong time. Now that the sector is correcting, they are dumping their shares at levels that 50% of their highs.

What is the common theme here, frustration, pain, aggravation, these factors break the backs of most traders. So what do they do, they throw the bucket in and call it quits. Just when the majority of them do so the stock takes off and like idiots most them try to jump on board when it's flying up rather then when it was standing still. Is it not ironic we are so eager to chase a moving train, that can crush us to pieces instead of just waltzing in slowly and finding a comfortable seat, when it is stationary.

It is this constant need to see gains every month or every week, that de rails most investors. They lose sight of the big picture and focus on small nonsensical events. The more you pay attention to daily swings the more you train your mind to lose. The more often you look at real time quotes the more often you will see real time loses. The art of wining is simple; take time to do the opposite of what you feel compelled to do. That means not wasting your time looking at real time quotes or driving yourself insane by trying to see if you portfolio is up or down on a daily basis. Stop trying to find reasons to dump a stock if it looks good, simply because it is not moving according to your insane schedule. Do not sit and fret about how much potential profits you are losing because you could have or should bought another stock that is doing well. The more time you spend on these stupid subjects the more likely you are to end up doing something stupid. And when your mind tells you that you cannot relax and that you cannot take it easy, this is the time you need to get the hell away from your computer.

Find a nice quiet, serene place, where you can hear the bird's sing and feel the gentle breeze on your face. Then crack open a book and force yourself to read, it might be difficult at first, but slowly and surely you will feel yourself relax and drift away. Off course the book must be interesting, if not you will end up tearing out your hair. If you are fully at ease with yourself you could sit down in silence and talk to yourself, ponder on your mistakes. Ask yourself questions as to why am I in such a hurry for all these gains? Why do I sit glued to the screen trying to squeeze profits out of thin air? Why do I obsess about things that in all reality are beyond my control? And why don't I take a few hours or days to do something I truly like? Time out is the best thing you can do for your body and mind when it comes to trading and investing. The best investors tend to be nonchalant and easygoing. They do not look to squeeze profits out of anything, but instead look to go with the flow, the flow in this case is the trend.

In the end peace of mind is priceless. There is a saying been there done that, well I have come up with one that is little different and it seems to reflect the state of most investors.

The reason I am doing this is to show you that in almost all those trades, we have transition phase. A time when nothing happened, a time when the stock actually dipped below our entry prices, a time when we felt like getting rid of the stock and then a time of jubilation as we collected our rewards. The point here is that nothing good comes easily. As I have stated repeatedly if it does come easy it was not worth it in the first place and it usually ends up going twice as fast.

We have been warning for awhile now that we would have increased bouts of volatility and that profits would not come by as easily as they did all of last year. The reasons are simple the markets have phases and when they enter a difficult phase you have to bear with it. If you bail out you will miss the next upward phase. Most people always bail out at the bottom and buy at the top. They just don't have the patience to take a position, stick with it and take a little pain.

We are not trying to state that we have found the Holy Grail and that we will never ever make a mistake. That is absurd and stupid, we will make mistakes, we will have loses. Nobody can play in the market and win forever it is statistically impossible. We do not look to try to do the impossible; we only for ways to do the possible that most individuals think are impossible.

The two areas most responsible for failures are lack of portfolio management and discipline. Actually one could call lack of portfolio management a form of having no discipline.

Take every gain without showing remorse about missed profits,
because an eel may escape sooner than you think.
Lope de Vega 1562-1635, Spanish

Investing is the only means there is to riches. It involves hard work, be it research, a hit tip, a recommendation from our adviser, indeed even finding an adviser that fits our individual profile can be awfully time consuming... what a pain.. . All those records and history to check out.

Sometimes we invest in ourselves, we start business's, embark on projects, we take calculated risks and most of the time it is historic facts that lead us to the ultimate decision about how to employ our finances. If we have borrowed money for our businesses we have had to prove our case to the financier. Not one stone is left unturned. Yet, once we enter the market all our discipline seems to evaporate, the due diligence seems to be unavailable. Leverage is used based on equity not planning. We get scales on our eyes in the shape of $$$$ signs. We think we are being cautious when we place our stops, we think we have protected our capital, when in reality all we have done is show the world our sell points, the stops will get run in time.

If you are like me you will have tried to teach yourself some technical analysis, only to find that the analysis was late or flawed. Remember the times you were thinking of selling only to find the market beat you to the draw, and all those profits evaporated. I can nearly guarantee that when the macds crossed there was a gap up or a gap down. The smart money had already moved. The result is you get disillusioned with TA. Technical analysis should be tweaked to tell the truth, if it does not do so then dump it and find something that does. I have my favourite settings that seem to work in all timeframes from one minute to weekly. I always look at the settings of charts that are posted on the internet, there are clues posted everywhere.

There is a distinction between investing and gambling, the trick is to find it. Each person has their own definition, for Warren Buffet it is "value", what is yours? If you think that "momentum" is for you make very sure that you know some TA, have a large cheque book, and are fearless. And as for the talking heads, are they making any money from stocks or are they making money from appearance fees. I'm a cynic, all that anyone is interested in is making money and the thing I try to make sure of is that it's not mine they walk away with, so if it's not mine then who's is it... ?

I have not done the sums completely, but if the market does nothing for 70% of the time, then it is logical to assume that it goes up 15% of the time and down the other 15% give or take a few thousandths of a point. Here we are, mere mortals, chasing thousandths either long or short. The odds are not good when you view it in that light. And to compound the problem are we bulls or bears? So we halve our options in the beginning. This is why its hard to find fund managers who are consistent in all markets, and invariably we choose someone who is of the same bias as us. Boy!! do we stack the deck of cards in someone else's favour.

It is the compounding of net savings that grows an economy, so it is when everyone is investing surplus capital that the tendency is for the markets to rise. The problem arises when leverage gets too an extreme, and that is the point we are at now, where returns are not covering leverage costs. It is a house of cards, all stacked by Alan Greenspan. When the stops start getting hit it will compound into a race to exit. It will be net savings that will be destroyed, the leveraged component will be returned to the lender. Without savings the economy will stall again. I am more bearish now than I was two years ago as leverage alone is not enough to hold an economy together and return profits to the investor. It take sound unencumbered capital.

In looking for a sound investment we must take into account so many factors; where we are in the K cycle, what sectors perform, are there new trends emerging, how is technology progressing and in what direction, are the products "needed" as opposed to "wanted", is there competition from lower cost countries, what price are people putting on vanity, can people financially afford the products and then top that off with the games that the Fed play. Couple all that with where the smart money and the lads are investing and you have a good chance of being in the 10% of winners.

Where do I see the markets heading? Well we are in the winter of the K cycle, that historically meant that the metals and commodities have done well, bonds have also been good but only after interest rates have risen and stabilized. There is a new paradigm also that has not been here before in a K cycle and that is biotech and information. I also list water as a sound play. Never the less in a market retreat all asset classes will get hit, it's just that some will recover faster.

For an economy to function it takes investment and research, whether it is our money or someone else's does not matter as long as there is a return commensurate to the risk. It is when the return fails to emerge that problems arise. In the case of a country the tipping point is 5% of GDP. The progression of the business cycle is like the tide, up and down, in and out. So ultimately we need to be aware of more than just stocks as all asset classes need all the other asset classes to be functioning, and smoothly. If not we have a shock and a recession. In a previous essay posted on the Tactical Investor web site entitled "I played Chess with Greenspan" I ended by defining a depression as "A period where there is a recession on a global scale", "It is a period where inventory creation is an adjustment across boarders". So if we are to profit in the short term it will be from research into the asset classes and seeking the best performing companies or products in those favoured sectors that are in the oversold area. Sol and his team at Tactical Investor are always seeking top investment opportunities to pass on to his subscribers, to date he has never had a loosing year, that is a record to be proud of. I wish you all a similar result in the years ahead.