Tag Archives: personality

Don’t Be This Guy

Take a look at this picture, which I took a few years ago, on a Friday afternoon, on a New York/New Jersey ferry. After a long and stressful work week (it was 2008), the gentleman in the photo was more than a little inebriated (i.e., could barely stand up), probably the victim of an early happy hour. Now, you should also know that these ferries are fast, and the winds on the river are strong – the wind is often strong enough to blow glasses off your face. This poor soul had urgent business that was unable to wait for the trip across the river, so he walked to the front of the ferry, unzipped, and relieved himself over the bow-directly into what was probably a 35-knot headwind. Though this happened a while ago, the lesson and the aftermath made a lasting impression (probably more so on the people who did not see it coming and did not step out of the spray). Though few of us might commit the Technicolor version of this error, financial commentators do it all the time, in other ways. I spent some time this weekend doing a lot of reading – everything from social media, “big” media, gurus and pundits, and paid research. It was interesting to see the commonalities across the group (a less kind assessment might be “groupthink”), but I saw one error repeatedly: Attempts to catch or call a trend turn with no justification. This error can be hazardous to your financial health, so let me share a few thoughts. Why we are always looking for the turn I think there are good reasons why traders are always looking for the end of the trend. Many of us who do this are competitive and contrary in the extreme. I joke with people that I could have a conversation like this: Me: “Look at the pretty blue sky.” You: “Yes, that really is a pretty color of blue.” Me (now concerned because I agree with someone else): “Well… is it really blue? Isn’t it more blue green? And we know it’s essentially an optical illusion anyway…” This tendency is natural and pretty common among traders. On one hand, it’s a very good thing – you will do your own work, be naturally distrustful of outside opinions and cynical about information, and will work to think critically about everything. But it’s also a weakness because it makes us naturally inclined to see any market movement and think that the crowd is wrong. The crowd is not always wrong; often, they are right and they are right for a very long time. I think this is a simple reason why so many of us are always looking for the turn – many traders (not all) are simply wired to be contrary and to think in a contrary way. We are different, and we want to stand apart from the crowd. For many of us, this is a part of our personality and we must learn to manage it, and to understand that it is the lens that can distort everything we see. Trading lessons and psychology Beyond this element of personality, there are also some trading and market related reasons why we are always looking for a turn. There’s a misguided idea that we have to catch the turn to make money. Decades of trend following returns (for example, the Turtles) have proven that you don’t have to catch the turn; it’s enough to take a chunk out of the middle. There’s also a natural inclination to be angry and distrustful of a move we missed – if we see a long, extended, multi-month trend in which we are not participating, it’s natural to be scornful of those who did participate and to look for reasons the trend might be ending. Many classical chart patterns are taught and used out of context. Any trend will always show multiple “head and shoulders” patterns, and inexperienced chartists will not hesitate to point these out. The problem with poorly defined chart patterns (out of context) is that you can see anything you wish to see in a chart – it’s always possible to justify being long, short, or flat a market, so it’s always possible to find evidence to support whatever you want to do, at least in the absence of clearly defined trading rules and objectives. Another problem is that many traders use tools that are supposed to somehow measure extremes. Overbought/oversold indicators, sentiment indicators, ratios, bands – the problem is that these all measure the same thing, in a different way. If I get an oversold signal from sentiment, RSI, and some Fibonacci extension, I do not have three signals – I only have one because the tools are so tightly correlated. This is important to understand – if we don’t understand this (the correlation of inputs into a trading decision), then we will have false confidence in our calls, and performance will suffer. Better to know you don’t know than to think you know more than you do. Commentators and asymmetrical payoffs If a trader places a trade, she makes money if the trade is profitable and loses money if it is not. This is simple, logical, and just. However, for a commentator (blog writer, research provider, TV personality, guru, etc.), the payoffs are very different – the public remembers the times we are right, and very quickly forgets the times we are wrong. The fact there even are permabears (people who have been bearish stocks for decades) who are called to be on TV and in the paper when the market goes down is proof of this fact. It’s possible to run a newsletter or blog business for years making outrageous claims that never come true such as “end of the financial world,” “the coming crash,” “how to protect your assets from the coming seizures,” etc. The crazier and more outlandish the forecast, the better: If someone says the S&P is going down 500 points tomorrow and he’s wrong, no one will long remember because it was a dumb call. If, however the S&P should, for some reason, go down 500 points, that person is, instantly and forever, the expert who “called the crash.” In fact, if that forecast doesn’t come true but there’s some mild decline in the next few months, creative PR can still tie the forecast in. Why does this matter? You can read blogs and listen to commentators, but read with skepticism. Realize that the person writing has a reason for calling ends of trends and turns. Your trading account, however, has a different standard: If you lose more on your losing trades than you make on the sum of your winners, that’s going to be a problem, in the long run. Finding ends of trends I’ve written about this before, so I will just point you to the relevant posts. One way I have found to avoid the situation where I’m going against the trend is to require some clear signal from the market that the trend might have ended. There are specific patterns that can help: (exhaustion, climax, three pushes, failure tests, price rejection), and then seeing the change of character (new momentum in the other direction) to set up a pullback in the possibly new trend is key. (Start reading here for ideas on evaluating and catching a possible turn.) In the absence of that sequence: 1) something to break the trend and 2) new counter-trend momentum and change of character, the best bet is to not try to fade the trend and to wait for clear signals. Let me leave you with a few charts of current markets, with only one question: What direction is the trend in each of these markets? Most of the time, that’s all the commentary we need. And that guy back at the top of this post? Yeah, don’t be that guy.

Larry Williams’ Principals And Insight Into Becoming A Better Trader

Larry Williams is a well-known trader and newsletter writer in the stock trading space. He has over 40 years of experience in the market and has written numerous books including Trade Stocks and Commodities with the Insiders: Secrets of the COT Report and How I Made One Million Dollars … Last Year … Trading Commodities . There is something to be learned from someone who has been in the markets for 40 years and been extremely successful. We were extremely lucky to be privy to a recent interview Larry Williams was a part of. Below are some notes we’ve gathered from the conversation: 1) Fundamental and technical analysis both work, however they will only work under the right market conditions whether it be a bull or bear market. For example, in the latter stages of a bullish market, as a buyer, you might find companies with low P/E ratio to be few and far between. Therefore, if you stick with fundamental analysis, you will most probably miss out on buying opportunities you’d otherwise find through technical analysis. In technical analysis, your focus is more on supply and demand in what is most likely a shorter time frame versus how well a company is fundamentally performing over the long haul. 2) For commodities, retail traders like to buy strength, but commercials like to buy weakness because the cost is less. Our interpretation of this is that most successful traders buy strength because of human behavior. People see an underlying asset like a derivative of oil go up, they jump on it for fear of missing out even if the prices jump and then more people jump on it. Until of course the prices become too ridiculously high and then people try and sell to lock in their profits. Commercial companies that use commodities like to buy at low prices because it keep their cost of goods sold lower. If revenues are constant and you reduce costs then you’d have better margins. 3) Most indicators are redundant, RSI (Relative Strength Index) and STO (Stochastic Oscillator) are essentially the same. There are a lot of things to look at, but when using an indicator understand the purpose of the indicator you are using. There are a lot indicators out there that essentially do the same thing. Both the RSI and STO both help to determine overbought and oversold conditions. While there are evidently cases when regardless of whether or not a stock or index is overbought, prices continue to print higher. The key is not to have too many, keep it simple, and don’t use the same overlapping indicators. 4) Trade your personality, find the system that fits you and lifestyle. Can you trade during work or at home? Do a personality check. One thing I’ve learned through trading in the stock markets for about 10 years now is that you have to trade your personality. Take someone else’s trading plan and trying to trade against that typically doesn’t work out unless the both of you have the same personality. Each of us have different risk tolerance and financial needs. You should only trade with what you are willing to lose and not only that but you have to be comfortable with actually losing that amount. Market Related Information When interest rates go up, stocks have historically been hit hard in the short term, but you’ll want to buy that weakness. The logic behind this is that when rates begin to go up, more people will feel goosed into borrowing and that leveraged money will go into consumption and production. Market tops are typically well formed and structured thereby also taking a long time to develop. On the other hand, market bottoms are based on crashes and plummet on panic. How many positions should you hold? Any more than 4 positions is a lot of multi-tasking. For Larry Williams, 3-4 positions is plenty. Any more than that require too much multi-tasking. In addition, he typically puts on a 2%-4% risk of total trading capital on each trade . Losing four consecutive trades at 4% risk would be a 16% drawdown. What is the biggest lesson Larry has learned from trading? He learned to be humble when you are winning and learning from other people. All highly successful traders are a little unsure of themselves, so they never bet big. None of these successful individuals have had high levels of emotional response to things and therefore don’t get emotionally rattled. What are the four steps to making a trade? Find condition, find the entry, set your target, create trailing stops. What are some other interesting tips and tidbits? 1) Conditional traders look at conditions, seasonality and overlay technicals. 2) Trading should be like combo lock where you need to get a number of factors going your way.

For The Love Of The Game: How To Keep Learning In The Market

Summary This is a philosophical piece intended to help young aspiring analysts. I will share my mistakes and lessons learned on the buy side. I will briefly discuss Cheniere Energy. This is a philosophical piece with two goals in mind: To inspire young aspiring analysts, and to share the multitude of career mistakes that I made. With the benefit of hindsight and reflection, I know others can benefit from my self-inflicted missteps. Given the significant amount of time I spend engaged on the Seeking Alpha website, I am noticing more and more talented authors. For some of the folks more junior in their careers ascents or for aspiring analysts trying to make it into the research arena, I think my experience and unique observations may benefit them. So, in the spirit of trying to help others, I sincerely hope to pass the baton and impart some insights that may benefit them as they progress in their careers. The Power of Mentors For context, I will provide my brief background and relevant professional investment research experience. During my undergraduate days, I attended the Isenberg School of Management at the University of Massachusetts at Amherst. I was passionate about investing since middle school, as my dad sparked my intellectual curiosity. While at UMass, I gained access to an alumni list and then emailed as many people in the industry as possible. After getting a response, I would then call them, usually early in the morning, before their hectic day’s beginning. So here I was talking quietly in the dorm room hallways (trying not to wake up my floor at 7 am). As I had virtual no industry contacts, this was the best strategy. However, long on confidence, I was convinced that I was the next up-and-coming star analyst and I only needed to be discovered. From that point, I would land a junior analyst role. Not only I was incredibly naïve, but I had an exalted sense of self, which was unwarranted and unhelpful. However, nice alumni looked past this misplaced arrogance and focused on my passion. Through these calls, I was able to connect with many smart and talented UMass alumni who were actual market participants on the buy side. One individual was, and still is, a portfolio manager at prestigious Wellington Management. He is piercingly bright, very generous with his time, and passionate about helping UMass alumni learn about investing. Although I haven’t been in as close contact with him lately, he was extremely influential in my progress and evolution as an investor. I have one other mentor, whom I originally connected with on LinkedIn in 2004. This was a period between jobs, and I was still questing for that elusive foothold on the buy side. This individual is currently an equity portfolio manager at Alpine Funds. Yes, he has the shiny credentials of a top MBA and CFA, but more importantly, he is a great investor and extremely hardworking. He and I have been friends through email since 2004, and we constantly trade investment ideas via email. Over the course of thousands of email exchanges, my writing and thought process continued to improve. Specific investment lessons from these two mentors For context, my mentor at Wellington is a portfolio manager at Wellington, and manages international equity growth funds with approximately $4 billion in assets under management (AUM). Over the course of our friendship and multiple email exchanges, he explained (using the Socratic method) how growth stocks work. He said that the only thing that matters is consensus earnings estimates. In order to take a position in any equity, you need to qualitatively and quantitatively understand how the market arrived at current consensus estimates. If, and only if, you deeply study the company and build your high-level models that capture the major drivers of revenue and earnings can you have an opinion. Never, never, never have a strong opinion on a stock unless you have really done the work. The fastest way to get dinged during an interview on the buy side is to come across long on opinion and short on analysis. It is always better to say “Here is what I have read, and here is how I think about it, but perhaps I am missing certain angles.” It is much better to informed and humble than arrogant and overly confident, especially when speaking with actual market participants. He then taught me that many people fall into the trap that a stock is overvalued because it has a high P/E ratio compared to the market or its sector. With the supercomputers of today, crunching ratios is a waste of time, as it is fully reflected in the stock price, given that the market is very efficient at incorporating actual events. Again, you have to understand consensus estimates better than the Street. If your model and work are materially different from the consensus, only then should you make a bet. For a concrete example, over the course of a few emails, he walked me first-hand through why in mid-2003 Research in Motion, now BlackBerry (NASDAQ: BBRY ), was his largest holding. I think BBRY’s stock ultimately ended up increasing by 5,000% from 2003 to 2007. If any reader cares to do some searching on Google, they will find that the vast majority of then-leading experts thought BBRY was going to zero. They saw that they were losing money and also saw the company’s cash burn, and erroneously assumed that BlackBerry had nothing noteworthy in its pipeline. Now, my mentor will freely admit that he happened to have met with management (that is a major advantage of being a professional money manger – access to management teams to kick tires). During his visit to BBRY’s corporate HQ, he was able to work out first-hand how technologically advanced the company’s products were, and envisioned their appeal to chief technology officers in the Fortune 500. He also understood the huge addressable market, the potential margins on the handsets, the security features of its product, and that BBRY was really a great software company. Had I known then what I know now, I would be retired at age 35 if I had put on a concentrated long bet on BBRY and simply held it for four years. Clearly, I wasn’t wise enough to understand that I was handed a lottery ticket with winning numbers on it. (click to enlarge) My mentor from Alpine Funds has also taught me a great deal. Once a new investor gets up to speed on the core blocking and tackling, like being able to read financial statements and the basics of accounting, the best way to make money is to develop a great imagination. Stock prices will rise or fall past on their future cash flow and revenue growth relative to consensus estimates. For another vivid example, in 2004, this mentor of mine walked me through his largest holding in his personal account, Silver Wheaton (NYSE: SLW ). If I recall, SLW was then a $4 stock. He explain to me that he was very bullish on silver, and that this was the best vehicle to participate in silver’s ascent. He explained how silver was a by-product, and mining is extremely CAPEX-intensive, so producers who are targeting gold or copper are willing to sell their silver by-product production (or silver streams) for an upfront payment and then for a low price of $4 per ounce. The producers would then use the upfront payment to fund their CAPEX. Silver Wheaton eventually traded as high as $50 in May 2011, though it was a bumpy ride, with the stock dropping down to $2.50 during the 2009 equity crash. My mentor also emphasized the importance of being willing to take a contrarian stance if you have enough conviction in your idea. When he was traveling the hedge fund circuit, as he had two stints as a hedge fund analyst, he learned the importance of managing your downside risk, but also that betting big when the risk/reward was greatly in your favor. Although he was capable enough, he determined that the hedge fund world didn’t suit his personality and investment process. This is my long-winded way of stating that mentors are invaluable. They will encourage you, push you, and if you put in the effort, they will help you become a better investor. I am still in constant contact with my friend at Alpine Funds. I distinctly remember when he once told me, “My wish for you is that you greatly surpass my as an analyst.” That illustrated to me that he was invested in my success, and he was humble enough and had had the benefit of mentors while he was in his formative stages. Don’t get into fights with your boss My next piece of advice is that if you do make it to the buy side, know your role and keep your ego in check. Although the barriers to entry are very steep, just because you made the team doesn’t mean you can’t get cut. Despite an insatiable curiosity and undeniable passion for investing, my ego and poor semantics while expressing my investment ideas wrote proverbial checks that I couldn’t cash. The collective bill came due when I couldn’t meet the proverbial margin call. My five years of solid performance and exemplary annual reviews were marred by aggressive and arrogant interactions with senior analysts. No one want to be told they are wrong and that their thesis is wrong, especially from a 29-year old. You can’t tell your boss that you think you are a better investor than him. This is a career-limiting move, trust me. So the takeaway is that if you can surmount the incredibly high barriers to entry, take it slow, listen, observe and ask questions. Investing isn’t like the NFL, it isn’t a pure meritocracy. You have to work hard, learn, be likeable and keep your head down. If folks sense that you are not a team player (however misplaced this label may be), your career at that shop is effectively over. Know yourself Beside the fact that I didn’t have the right temperament for Liberty Mutual, you have to know yourself. Reflecting upon my five years at Liberty, I probably knew it wasn’t the right cultural fit in year three. However, don’t do the impulsive Jerry Maguire letter and then quit, as this is terrible career mistake that has to be explained away in future interviews. There are exceptions, but the buy side generally requires a CFA, Ivy League education (at least on the equity side), lots of networking, and even more luck to find your foothold. Although I made it into the industry, I only advanced to the bottom rungs of the ladder. There is an alternative pathway. There are excellent open source sites like Seeking Alpha, and different ways to make a living. However, this is the path less traveled, and it will invariably take years of building your brand, developing a portfolio of great research as evidence, and getting the marketing aspect right. There are members of the Seeking Alpha community who have successfully done this, so they would be a much better resources. I only write articles in my free time as a hobby. The Power of Redemption Moving along, let me power down my philosophical side of my brain, and let’s talk about one of my recent investment ideas written here on Seeking Alpha that seems to be playing out. I want to specifically highlight two investment pieces that I wrote recently on Cheniere Energy (NYSEMKT: LNG ). The point of bringing this up is that through the comments section of my first article, the Seeking Alpha community inspired me to improve upon my first article that some labeled incomplete. I viewed this as constructive criticism and an opportunity to dig deeper and write a follow-up article. Incidentally, my original thesis seems to be playing out, as Mr. Chanos disclosed a new short position in shares of Cheniere. However, I am not spiking the football on the one-yard line, as the stock has now become a battleground stock between the bulls, including investing greats like Seth Klarman and Carl Icahn, and the bears, like Jim Chanos. I have done a lot of research on the company and have shared my bearish view on the site. Again, I’m not writing to gloat, but simply suggesting that if we are passionate about our craft, we can make good investment calls. Of course, the buy side has its advantages of access to management team and access to many research publications. However, with the power of Google and some intellectual curiosity, you want produce compelling work. I can’t tell you the last time I read a sell side report. As a general rule, I completely ignore sell side research, as I like to do my own research. Moreover, when an idea finally works and it gets recognized by the market, it brings a great feeling of satisfaction and even redemption for hobbyists like me. To sum up Mr. Chanos’s bearish arguments: There will be massive global overcapacity in the LNG space. LNG is priced based on Brent prices, and Brent has collapsed from $110 to $50, so incremental new long-term supply agreements will be less lucrative. The industry is plagued by massive cost overruns (look at Chevron’s greenfield projects). Cheniere’s contracts aren’t sacrosanct. The company is way too promotional and has yet to sell any LNG. Its capital structure and executive compensation polices leave much to be desired. Concluding Thoughts Investing is more of an art than a science once you understand the fundamentals. For aspiring analysts: Find great mentors, don’t get in fights with your boss and know yourself. Investing is an extremely humbling pursuit; therefore, savor your victories, because they can be fleeting. Good luck, and thanks for reading. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.