The Deipnosophist

Where the science of investing becomes an art of living

My Photo
Location: Summerlin, Nevada, United States

A private investor for 20+ years, I manage private portfolios and write about investing. You can read my market musings on three different sites: 1) The Deipnosophist, dedicated to teaching the market's processes and mechanics; 2) Investment Poetry, a subscription site dedicated to real time investment recommendations; and 3) Seeking Alpha, a combination of the other two sites with a mix of reprints from this site and all-original content. See you here, there, or the other site!

09 July 2008

Black Fridays, black Wednesdays, black everyday... black markets! Part 2

"The difference between school and life? In school, you're taught a lesson and then given a test. In life, you're given a test that teaches you a lesson."
-- Tom Bodett

Okay, first things first. Does Allan (AllAllan) trade willy-nilly?

"Willy-nilly trading," at least as I define the term, is not a function of the total number of trades in a compressed time frame, but trading (buys and sales) that has no methodology, no plan, no roadmap of how to arrive there from here. Allan has a methodology, and a plan, which he shares with his blog's readers. Allan also enjoys investment success.

The sole 'right' way is what works for you -- where you equals your temperment as investor, your tolerance for risk, your objective ("To make money!" lacks meaning), your time frame. Pair the (read: your) time frame with the appropriate periodicity within the market, and you have the initial rung on the ladder of investment success.

Allan's and my approach to investing success are not as dissimilar as appearances lead the casual observer to believe. The largest difference between our methdologies is time frame; Allan's time frame is briefer than mine. This is due largely to my desire to accomplish, if not achieve, other things with my life other than sit chained to a computer watching Mexican jumping beans, er, stocks, gyrate. (Which does not translate as Allan's raison d'être; far from that.) Paradoxically, Allan's less lengthy time frame will generate more signals with fewer bars on the charts, whereas my time frame will require more bars to generate fewer signals. But we each find consistent success thanks largely to the lessons we each endured at Wall Street University. (See again the quote that begins this post.)

Please do not interpret my comment above that I am somehow right, and Allan somehow wrong. Consider the third investor whose time frame is years, even decades; over the course of one decade, he or she will have a mere 120 monthly bars that could generate a signal. I receive that number of bars within weeks or even days, Allan within days or even hours. The core truth? To each his own, but to thine own self, remain true.

Thanks to several private email messages, I realize, albeit belatedly, that I was insufficiently clear (in part 1) about one crucial item, so I will spell out the lesson.

Chart action betrays whether investors should pay heed to the concerns du jour; if patterns and trends merely reflect a trending market (for example, the decline of the past ~8 months) but do not highlight something more dire, then treat the decline as a garden variety correction or bear market, and not the End of Days. This concept of investing derives from the Cuban Missle Crisis (yes, 46 years ago) when investors sold everything amid prevalent fears the end of the world was nigh... Until someone, who proved more wise than wiseass, suggested,

"Why not invest? If the world ends, then we all are dead anyway, so it matters not at all if you are wiped out financially. And if things work out (as they did), stocks could rally." (As they did, big time.)
Despite my inclination to the dark side, chart patterns today fail to betray the End of Days to be upon us (again), just as was the situation 46 years ago. And many, many other times when fears rooted deeply in investors' psyches. I suspect that the markets, and we all, will muddle through as we always have. Consider that the markets made new reaction (bear market lows) on Monday of this week, while Apple/AAPL, suggested in part 1, is nowhere near its low, but instead lurks ~10% beneath its all time high. (Set ~8 months ago when this bout of general market weakness began.)

I heed my Investment Rules; many of my creation, others culled from various resources over the years and decades. I include them in no particular order, which is in keeping with the reality of the markets themselves.

dmg's Investment Rules

1) Capital preservation should precede capital appreciation
2) Markets discount the future
3) Embrace uncertainty
4) Allow yourself to be wrong
5) Exercise patience
6) Remain flexible, yet disciplined, at all times
7) Always expect the market to do the unexpected
8) Attempt to trade (invest) with the periodicity’s trend, not against it
9) Never place a lid on how much money you can make, but always have a floor on how much you can lose
10) Let profits run; limit losses to a pre-determined price and/or percentage decline
11) Never become overly-enthusiastic despite current trends (lose objectivity)
12) Never become overly-pessimistic despite current trends (lose objectivity)
13) Consider the use of a risk-management discipline to address systemic risk
14) Do not over-trade
15) Do not take extreme positions
16) Trade evenly – do not "double-up to catch-up"
17) Seek strong stocks to purchase during periods of weakness
18) Seek extraordinarily strong stocks to sell during periods of strength
19) Lighten your commitments in a down-trending market, or in a market that appears “toppy” after an extended advance or rapid advance. It is always important to preserve your capital
20) Never own stocks in a down market on margin
21) For the minority to make money in the short-term, the majority must be wrong
22) Study your weaknesses
23) Learn from your mistakes
24) Act according to your convictions; learn to trust your doubts, as well as your expectations
25) In a primary uptrend, numerous resistance-levels are often overcome; resistance is just a temporary hurdle en route to higher prices
26) In a primary downtrend, many support levels are usually broken, and support proves to be a mere way station prior to lower prices
27) Never look back (in a wishful manner);
it can easily distort one's current, and future, judgements
28) Strong stocks and strong markets open down, and close up
29) Weak stocks and weak markets open up, and close down
30) Never confuse a stock's momentum with its earnings momentum
31) Growth investors buy up vs value investors who buy down. Know which category fits your temperment.

Yes, there are more Rules than the 31 above, but this list is a good beginning. Too, I considered putting flesh on the bones of each Rule; that thought proved ephemeral, though, as I decided in favor of your questions, comments, and shared insights. (Which qualifies as a good method to guage your interest to learn, and to improve your investment results.) Nonetheless, please print my Investment Rules, and keep them close at hand.

This post will continue with Part 3, which will include (possibly annotated) charts of Apple/AAPL, and other investment opportunities.

Full Disclosure: Long Apple/AAPL.
-- David M Gordon / The Deipnosophist

Labels: , ,

who's online