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?

April 2012 Returns

Click On The Chart To Enlarge

We are pretty much past the favourable seasonality period for the markets until later, towards the end of the summer.  It seemed interesting to me, the number of talking heads in the media that were saying this year was no time to "sell in May, and go away".  Once again, this spring was going to be different.  It always gives me a pain in the butt when the very people who should represent our interests, put their own ahead of ours, instead.  The truth is, we shouldn't necessarily sell everything going into May, but taking some profits might be what a prudent person would do.

First, we generally had a good long run up in the markets since the beginning of the year.  Second, while people  felt protected by the Federal Reserve Bank's actions in the U.S., the latest effort to stimulate the markets is due to end.  Third, economic data has softened, including in China.  Fourth, Europe is, or soon will be, in a recession.  Still, the experts would have us believe that all is well, and the correction in the markets that normally begins this time of year won't likely happen.

If I sound bearish, it is because I am.  I said at the beginning of the year I would share my trades on this blog.  The reason I haven't done so is because I have hardly made any.  The markets went practically straight up at the beginning of the year, with little opportunity to get in during a pull-back, and the U.S. markets are just now beginning to look like they are breaking the uptrend, and could likely go lower for a while.  More on that during a couple of future blog posts.

16 month return for TSX @ April 30, 2012 = -8.07 percent
Return for Basic Timing Model using XIU = 5.61 percent
Return for Advanced Timing Model (my returns) = -4.36
Money for charity = $0.00

Have you taken any profits, going into the summer season?

The Japanese Experience

Click To See Larger Chart

Automobiles
I don't know if people are aware of the story, but there is a particular reason Japanese auto imports grew to dominate the North American industry.  The single biggest reason, in my opinion, was product.  They made a better car for less, and targeted the entry level buyer.  Their target market was key, since they were limited by North American quotas at the time.  Why target the lower-priced entry level when they could have tried to go after the higher-end, more expensive category?  After all, that is what the North American car makers would do, and they did - SUV, gas guzzlers anyone?

Demographics
No, the Japanese were smarter than that, or were they?  The answer is yes, and no.  The Japanese learned from their own experience that customer loyalty was important.  Satisfied customers tended to buy again from the same company.  Not only did they buy from the same company, they tended to trade up, as well.  After paying off their first car, they tended to buy a more expensive one the next time.  If Japanese customers did so, what made them believe the U.S. customers would do the same?  Demographics, plain and simple.  With an older average Japanese population, it was expected the North American population would follow a pattern similar to that of the Japanese consumer.  And it did.  Brilliant, yes; original, no.

Same Old Same Old
Now, the question is, are we going to learn from the Japanese experience.  I don't mean their auto industry, but their economy.  Sure, there are some fundamental differences in the Japanese and U.S. economies, but let's take a look at Japan over the last two decades.  Their problems really began in the late 1980's.  There were a number of banks misbehaving, and a housing bubble that burst (sound familiar?)  For much of the last two decades, Japan has been trying to stimulate itself out of recession.  The central bank continues to buy government bonds to provide liquidity to the government, and the economy.

So?
Is it working?  By all accounts, Japan's economic course is unsustainable.  While growth has never  recovered, to any great extent, the government debt continues to rise.  The last data point in the chart above was 2008.  Their debt level as a percentage of GDP has only increased since then.

Again?
No, we have tried giving our money to the rich (one percent) with the expectation of jobs, in return.  Clearly that didn't work.  So whose idea do you think it was in the first place?  Now, we are being asked to believe that when it comes to governments, we can borrow our way around the trouble caused by, among other things, too much government debt from bailing out some of the richest corporations on the planet.  And whose idea do you think that was, and is?

Micro Economics
We need to do as they say, and not as they do.  We need to live within our means, and concentrate during these difficult times on reducing debt, and not just maintaining the status quo.  For you and I, reducing expenses is easier than increasing revenues, although we could all use some additional investment income.  The Japanese experience should teach us it is going to take a very long time before things actually begin to start to get a whole lot better!

Do you think we will learn from history?

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?

Peter Hodson and 5I Research

Click Here To Play The Video

Interesting story how a former analyst and fund manager felt enough of a conflict of interest to start his own rating company.  He doesn't give Buy, Sell, Hold ratings since they are used to mislead investors.  Instead 5I Research uses a grade of A, B, C... etc..

In  his company, employees are not allowed to trade the stocks of Canadian companies since that is what they provide ratings for.  He also talks about how management of the companies he would meet with while working as a fund manager would always be giving him a sales pitch instead of being objective.  Compare Hodson's   approach to the major rating agencies that are paid by the firms that they do the ratings of and for.

Clearly, the major rating agencies contributed to the problems leading to the Great Recession.  I have said that I believe the ratings system is broken.  I guess it isn't just me who thinks so.

March 2012 Portfolio Update

Typically, seasonality favours the TSX during March.  Not so this year.  While the TSX was down each week in March, the major U.S. markets were up and down.  Despite the long rally since the third quarter last year, I have been reluctant to chase it.  My own Elliott Wave analysis would suggest a high of 1425.  The S&P 500 Index hit 1419 during the last week of March.


The media talks about the U.S. markets decoupling from the rest of the world markets.  I have my doubts, although the huge government stimulus is having an affect.  Normally the markets should continue higher until the first week of May, but if 1419 is, in fact, the high, then I would not expect any major rally until the last quarter of the year.  According to the Elliott Wave theory, we could see the lows of last fall, again.


My investing horizon remains very short.    


15 month return for TSX @ March 30, 2012 = -7.23
Return for Basic Timing Model using XIU = 5.84
Return for Advanced Timing Model (my returns) = -4.36 percent
Money for charity = $0.00


What are your expectations between now and the end of the year?