The best that can be said for 2009 is that it could have been worse, that we pulled back from the precipice on which we seemed to be perched in late 2008, and that 2010 will almost surely be better for most countries around the world. The world has also learned some valuable lessons, though at great cost both to current and future prosperity – costs that were unnecessarily high given that we should already have learned them.
The first lesson is that markets are not self-correcting. Indeed, without adequate regulation, they are prone to excess. In 2009, we again saw why Adam Smith’s invisible hand often appeared invisible: it is not there. The bankers’ pursuit of self-interest (greed) did not lead to the well-being of society; it did not even serve their shareholders and bondholders well. It certainly did not serve homeowners who are losing their homes, workers who have lost their jobs, retirees who have seen their retirement funds vanish, or taxpayers who paid hundreds of billions of dollars to bail out the banks.
Livermore was wealthy and broke several times over during his tumultuous life, which ended in his suicide. His ability to make and lose millions garnered him many lessons which the trading community have enshrined over the decades since his death. Yet these lessons and rules remain as pertinent today as they were in the early twentieth century.
We’ll take a look at several of his trading rules to remind us why we must have a plan in place before trading a dollar of our hard-earned money.
(I must give credit to the Lefevre book mentioned above, as well as Jesse Livermore: World’s Greatest Stock Trader by Richard Smitten, for the following ideas.)
Lesson Number One: Cut your losses quickly.
Nowhere is this rule more apparent than in the modern-day crash our markets experienced in the fall of 2008. For those market participants who “bought, held, and hoped,” the gut-wrenching drop left them paralyzed, disillusioned, and angry at the market. They felt like they had no control and no choice as the losses spiraled down the rabbit hole. The primary culprits of this death trap are hopeful thinking and fearful paranoia.
As a market slides lower, a trader will rationalize his losing position by either doubling down (buying more at these now-cheaper prices) or at the very least, holding on because “there’s just no way this market can go lower.” If merely this one simple rule was implemented to “cut your losses,” the vast majority of traders would be light years ahead of the crowd.
As soon as a trade is contemplated, a trader must know at what point in time he’ll be proven wrong and exit a position. If a trader doesn’t know his exit before he takes the entry, he might as well go to the racetrack or casino where at least the odds can be quantified. Trading without an exit plan is like driving a car without insurance. You might go years without a major crash, but when the crash occurs (and…
Vitaliy: "This article I’ve shared before and will share it again; it is by far my favorite article I’ve ever written as it really highlights what investing is about – the investment process. It is a true story, with very few magnifications on my part. I hope you enjoy it."
“Any time you make a bet with the best of it, where the odds are in your favor, you have earned something on that bet, whether you actually win or lose the bet. By the same token, when you make a bet with the worst of it, where the odds are not in your favor, you have lost something, whether you actually win or lose the bet.” – David Sklansky, ‘The Theory of Poker’
Over a lifetime, active investors will make hundreds, often thousands of investment decisions. Not all of those decisions will work out for the better. Some will lose and some will make us money. As humans we tend to focus on the outcome of the decision rather than on the process.
On a behavioral level, this makes sense. The outcome is binary to us – good or bad, we can observe with ease. But the process is more complex and is often hidden from us.
One of two things (sometimes a bit of both) can unite great investors: process and randomness (luck). Unfortunately, there is not much we can learn from randomness, as it has no predictive power. But the process we should study and learn from.
To be a successful investor, all you need is a successful process and the ability (or mental strength) to stick to it. Several years ago, I was on a business trip. I had some time to kill so I went to a casino to play blackjack. Aware that the odds were stacked against me, I set a $40 limit on how much I was willing to lose in the game.
I figured a couple hours of entertainment, plus the free drinks provided by the casino, were worth it. I was never a big gambler (as I never won much). However, several days before the trip I had picked up a book on blackjack on the deep discount rack in a local bookstore. All the dos and don’ts from the book were still fresh in…
As the world grows used to hearing of reserve depletion among less-developed nations defending their currencies from collapse, we thought the following chart might open a few eyes as to the real driver of attempting to create 'stability' by intervention. In the run-up to October's parliamentary election in Ukraine, the Hryvnia became oddly stable - signaling to the world that the current government had everything under control and should be re-elected. Since the re-election, the Ukrainian currency has re-collapsed to record lows. How did the Ukrainian government 'ensure' re-election via 'stability'? By blowing almost $4bn (a record 23% of reserves) in one month to maintain the currency's level......
Analysts at Oppenheimer initiated coverage of Twitter Inc (NYSE: TWTR) Friday by issuing a Perform rating and setting a $36.00 price target. Twitter is a global social networking platform with over 280 million active users.
While Oppenheimer analysts fully recognize the strength in Twitter as a company, they believe that Twitter’s stock is appropriately priced at current levels. “While TWTR is the best Internet platform for real-time content discovery, we believe that the stock’s current valuation of 10x 2015E sales, a 52% premium to peers, fully reflects future prospects based on current growth rates.”
Between November and December 2014, Twitter insiders have sold more than $...
Those who took advantage of markets at Fib levels were rewarded. However, this looked more a 'dead cat' style bounce than a genuine bottom forming low. This can of course change, and one thing I will want to see is narrow action near today's high. Volume was a little light, but with Christmas fast approaching I would expect this trend to continue.
The S&P inched above 2,009, but I would like to see any subsequent weakness hold the 38.2% Fib level at 1,989.
The Nasdaq offered itself more as a support bounce, with a picture perfect play off its 38.2% Fib level. Unlike the S&P, volume did climb in confirmed accumulation. The next upside c...
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Stocks have needed a reason to take a breather and pull back in this long-standing ultra-bullish climate, with strong economic data and seasonality providing impressive tailwinds -- and plummeting oil prices certainly have given it to them. But this minor pullback was fully expected and indeed desirable for market health. The future remains bright for the U.S. economy and corporate profits despite the collapse in oil, and now the overbought technical condition has been relieved. While most sectors are gathering fundamental support and our sector rotation model remains bullish, the Energy sector looks fundamentally weak and continues to ran...
Stocks got off to a rocky start on the first trading day in December, with the S&P 500 Index slipping just below 2050 on Monday. Based on one large bullish SPX options trade executed on Wednesday, however, such price action is not likely to break the trend of strong gains observed in the benchmark index since mid-October. It looks like one options market participant purchased 25,000 of the 31Dec’14 2105/2115 call spreads at a net premium of $2.70 each. The trade cost $6.75mm to put on, and represents the maximum potential loss on the position should the 2105 calls expire worthless at the end of December. The call spread could reap profits of as much as $7.30 per spread, or $18.25mm, in the event that the SPX ends the year above 2115. The index would need to rally 2.0% over the current level...
I officially bought 250 shares of EZCH at $18.76 and sold 300 shares of IGT at $17.09 in Market Shadows' Virtual Portfolio yesterday (Fri. 11-21).
Click here for Thursday's post where I was thinking about buying EZCH. After further reading, I decided to add it to the virtual portfolio and to sell IGT and several other stocks, which we'll be saying goodbye to next week.
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Well PSW Subscribers....I am still here, barely. From my last post a few months ago to now, nothing has changed much, but there are a few bargins out there that as investors, should be put on the watch list (again) and if so desired....buy a small amount.
First, the media is on a tear against biotechs/pharma, ripping companies for their drug prices. Gilead's HepC drug, Sovaldi, is priced at $84K for the 12-week treatment. Pundits were screaming bloody murder that it was a total rip off, but when one investigates the other drugs out there, and the consequences of not taking Sovaldi vs. another drug combinations, then things become clearer. For instance, Olysio (JNJ) is about $66,000 for a 12-week treatment, but is approved for fewer types of patients AND...
This is a non-trading topic, but I wanted to post it during trading hours so as many eyes can see it as possible. Feel free to contact me directly at email@example.com with any questions.
Last fall there was some discussion on the PSW board regarding setting up a YouCaring donation page for a PSW member, Shadowfax. Since then, we have been looking into ways to help get him additional medical services and to pay down his medical debts. After following those leads, we are ready to move ahead with the YouCaring site. (Link is posted below.) Any help you can give will be greatly appreciated; not only to help aid in his medical bill debt, but to also show what a great community this group is.
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