Wednesday, November 10, 2010

The Kirk Report

The Kirk Report


Do You Need A Trading Sabbatical?

Posted: 08 Nov 2010 08:03 AM PST

Trading Sabbatical

Here are the top 10 signs you might need a trading sabbatical

  1. You catch yourself talking to ticker symbols

  2. You are diagnosed with Trader’s Elbow

  3. Any time you hear a bell ring your mouse finger begins twitching

  4. You seriously contemplate adding more screens to your 6-screen trading workstation

  5. You think hooking yourself up to an IV treatment is a good way to “multi-task” while trading

  6. Fat finger trades have become a daily routine because your fingers have really become fat

  7. You get out of bed in the middle of the night for updates on overseas currency and futures markets

  8. Your Rip Van Winkle beard keeps getting caught in the keyboard

  9. You just received an award from your broker for the most trades ever made by a live human being

  10. You just paid the phone bill in gold-adjusted dollars

In all honesty, most of us need to take a break once in a while. The great thing about doing this for a living is that most of us who trade full-time on our own can take time off to work on other things and get away from the markets for awhile. Constant focus and dedication to trading at a very high-level can only be maintained so long as you do take much-needed breaks along the way to avoid burnout, overtrading, and achieve some much-needed balance.

As some of you already know, starting today I’m officially starting my first trading sabbatical (in over seven years) as I wrapped up a successful year last week. While I’ll keep existing positions in place (at least until they get stopped out) and keep up with my daily responsibilities here at The Kirk Report (i.e. premarket, after-hours reports, weekly interviews, mentoring, etc. will all continue like normal) I have decided to put my trading on hold for the rest of the year. The one primary exception will be Thanksgiving week where, like I’ve done every single year for the past 12 years, I’ll donate 100% of that week’s trading profits to charity.

Not spending in upwards of +50 hours every week dedicated solely to my trading will allow me to do some other things I’ve really been looking forward to including all of the following…

  • Final work and preparation of the new members’ only website

  • Complete research and work on the new screen machine to debut in 2011

  • Write a chapter of a book on trading and the markets

  • Meet with lawyers, accountants for tax prep and other future projects

  • Figure out ways to improve two very different trading systems

  • Clean out and organize computer files, bookmarks, office clutter, etc.

  • Sketch out ideas and thoughts for a new video tutorial series for next year

  • Learn how to use video editing software for my weekly chart shows

  • Prepare and review the annual membership survey

  • Do a couple of media interviews I’ve put on hold for several months

  • Lose 20 pounds through more exercise, new diet regimen

  • Read and review 11 books on trading and investing that have been sent to me for comments and reviews

Don’t worry, I’m also scheduling in some much need time for rest, travel and relaxation especially around the upcoming holiday weeks. But, if I spend my time wisely, I’ll have these items crossed of my list and be ready to “rock and roll” on January 3rd.

* The top 10 list was made in cooperation and with helpful assistance from Joshua Brown whose wit and intellect constantly make me smile.

Are You A Bull Or A Bear?

Posted: 28 Oct 2010 01:06 PM PDT

Casual acquaintances who come to learn know I trade for a living (something I rarely volunteer without being asked) will always ask whether I’m a bullish or bearish on the market or economy. My reply often irritates them when I say “I’m neither one – I’m just an opportunist.”

What I mean by that is that I go out of my way to avoid placing myself into a neat and tidy category that can influence my analysis of the markets and the stocks I trade. Although I’m far from perfect and sometimes let my opinions cloud my judgment (I am human after all), I do really try to do everything I can to look for opportunities on both sides of the market.

Opportunity

Many investors and also traders try to fit themselves into one neat category based on their opinions or of others who’ve they have come to respect. Even worse, those views are frequently tainted by how their portfolio is currently positioned (people want to be right after all) which can be both dangerous and quite unprofitable.

Believe it or not, some of the most profitable trades I’ve taken have been ones that run contrary to my personal views.

Case in point, I know several traders who are struggling now because they are very bearish about the market. While in principle I agree many of their views, I cannot let those views cloud both my analysis and trading. While I’m fairly certain there will be a time when their views will be proven correct, in this business timing is everything. Opinions after all, don’t pay the bills – only profitable trades do!

As you’ll soon learn if you haven’t already, there is no difference between being “early” and “wrong” in this market. Likewise, it pays to remember there were lots of hedge funds that went broke prior to March of 2000 because they shorted all of the Internet and tech stocks. These guys were proven to be right on the money much later on, but in reality they never were able to take full advantage of it because they lost so much money before the bear returned.

Remember this – in trading it isn’t about who is right or wrong. Instead it is all about who can make money and take advantage of the most opportunities in the present. Opinions are terrific things, but in most cases, you would be wise to set them aside and trade the market you see rather than the market you think you should or want to see.

* This report was originally published by The Kirk Report on April 6, 2004.

Mike Bellafiore

Posted: 22 Oct 2010 09:03 AM PDT

Mike Bellafiore

Mike Bellafiore at SMB Training has become one of my favorite traders to watch. His unique insight to the markets and perspective on successfully trading is one you will not find anywhere else. In fact, Mike’s One Good Trade was by far my favorite book of 2010.

Since our live interview last October, many of you have requested a more in-depth, focused interview. It is a tremendous pleasure to offer one for you today. We hope you find it helpful on your journey toward more success in the markets!

Q&A With Mike Bellafiore

Kirk:  Hi Bella. First off, thank you so much for taking the time for this interview. It is an honor to interview you once again and a privilege that you will share your perspectives with my members.

Mike Bellafiore:  Thank you Charles. Our traders are fan favorites of The Kirk Report.

Kirk:  For those who may not know you yet, please start today by providing a brief introduction of yourself and your firm SMB.

Mike Bellafiore:  I am Mike Bellafiore, co-founder of SMB Capital, a proprietary trading firm that sits in downtown Manhattan, and SMB Training, an educational trader training company. Also I am the author of One Good Trade: Inside the Highly Competitive World of Proprietary Trading, which has been called “the next trading classic.” I have traded professionally for over 12 years.

Kirk:  How did you first get started in trading and interested in the markets?

Mike Bellafiore:  I am not one of those who was interested in trading since 5. Actually I wanted to pitch for the NY Yankees. But in college I learned that was not a career option I needed to consider anymore.

Long story short, I was at a dinner party in NYC with my best friend from home, Steve Spencer (now partner), and his roommate from Wharton, while I was in law school. The two of them cornered me after two many imported beers, talking a first year take of $180k plus and a really fun job as a trader. It was a very convincing appeal (or maybe it was the imported beers?).

Kirk:  What would you say is one of the most important lessons you learned early on?

Mike Bellafiore:  In the late 90s and not to be glib……each lunch at your trading desk. The best traders are grinders. Didn’t Gordon Gecko in “Wall Street” say lunch is for sissies? Well trading is for grinders not two hour lunches, trips to the mall, and a midday siesta.

Kirk:  What were the most difficult lessons for you to learn?

Mike Bellafiore:  I still remember the 36k rip in CMRC. After having started to study technical analysis, reading a bunch of books and amateurishly concluding I had learned technical analysis – I learned quickly that I had no idea what the heck I was talking about when it came to technical analysis. Reading books and learning theories was one thing – developing skill another.

Kirk:  So very true! Was there anyone out there who helped you greatly during this time? If so, what did you learn most from them?

Mike Bellafiore:  I learned from one of the top 50 greatest day traders of all time (if such a list exists). I would ask questions when he had time (if he had time?), which was almost never. I learned mostly by being in a competitive environment where everyone wanted to be the best, gain a nickname like “Iceman” and be recognized as a top trader during our monthly blow out parties.

Kirk:  Who is the person you most admire in the trading arena?

Mike Bellafiore:  Dr. Steenbarger. No one has given more to the trading community without ever expecting anything back. His blogs are a treasure that all traders must devour. Presently I am not talking to Paul Tudor Jones. :)

Kirk:  I know it has been a big year for you and your firm. Can you tell us what you have been up to since our last interview?

Mike Bellafiore:  We are building an FX training program, an advanced technical analysis training program and an options training program. We are teaming with Trade-Ideas to offer a trading tool, SMB Radar, that should be on every serious trader’s desk.

Kirk:  What are your firm’s plans for the future and how are you improving what you offer?

Mike Bellafiore:  In the future we will offer a training program for the new trader. Presently we are the first stop for those most serious about being an elite professional equity trader. But through partnerships, tweaking our training, and some hard work, we will soon offer world class training for new and developing traders for all products.

Kirk:  Why did you decide to start a prop desk instead of just trading for a living?

Mike Bellafiore:  A much bigger challenge: to give everyone who wants to become a professional trader the training to achieve their goal. The market had changed substantially since we began and there was a need to create a training program that gave new and developing traders the best chance to succeed.

Kirk:  If you could change one thing about your trading career what would it be?

Mike Bellafiore:  I would have started SMB four years earlier. The education we share on SMB Blog and our training has positively influenced so many.

Kirk:  What would you say is the biggest difference between your training program and others out there right now?

Mike Bellafiore:  We treat our traders like elite athletes. There are four elements to become great at anything:

  1. Acquiring domain knowledge

  2. Motivation or sustained energy

  3. Critical feedback

  4. Purposeful practice (what we call simulation)

Most training is heavy on domain knowledge and lacks daily mentoring and the structure and tools to purposely practice. This is insufficient.

Kirk:  What is the your biggest pet peeve about trader training today?

Mike Bellafiore:  Again, an overemphasis on domain knowledge. Most training consists of some guru in a video or written blog or lecture as Franchise from One Good Trade would complain “waxing poetic” about some simple trading set up that makes sense to them. They talk at their students about a simple charting pattern. This is a nice first step. But this is not training. That is talking at someone. Teach, motivate, critique, and make them practice.

Kirk:  There are very good recommendations for anyone involved in investor education. In fact, hearing you say that clearly suggests that I need to emphasize the importance of critical reviews and structured practice, or at least show others how to do this on their own if they don’t do something like this already.

So, when interviewing prospective traders to join your firm, what are some of your favorite interview questions you like to ask?

Mike Bellafiore:  I’m not really allowed to interview anyone anymore. Seriously I have been benched. The firm view is that I am too tough on candidates. But if they would still let me I would ask the following: 1) Do you have a trading account and 2) What are your favorite trading blogs? I should add what do you think of The Kirk Report now that I think about it. If I receive a blank stare then they are out. Traders must possess intrinsic motivation to become great and if they do not have a demonstrable passion for the markets they probably should find other work.

Kirk:  When you examine the track record of a prospective employee at your firm, what are you really looking for as an indication that they will be successful?

Mike Bellafiore:  Something that took them a long time to become great at with little initial reward, a history of competitiveness, and low neuroticism.

Kirk:  That’s a very interesting combination. I can understand why you look for these thing things. I must ask, then, who is the best trader you have ever trained and why were they so successful?

Mike Bellafiore:  GMan presently. He was recently named one of the Top Three Traders Under 30. But, I suspect that the best trader I have ever trained I might learn about in the future as some find their own path outside of our firm, building from the foundation they developed with SMB.

Kirk:  Among the people you’ve successfully trained, what is a common problem you see most frequently?

Mike Bellafiore:  Trading on tilt. The more actively you trade the more likely for a trader to struggle with their emotions. We teach our guys vivid imagery exercises, which we learned from Dr. Steenbarger, to offer a different response than just frustration to that which sets them off.

Kirk:  I can see why that is such a big issue. In fact, I’m always frustrated by those who recommend traders “turn off their emotion” when you and I both know that when your money is on the line, emotion is always part of the equation.

I was recently asked by one of my younger members who is just starting college what courses they should take to help them prepare them for a career in trading. If you were asked the same question, what you recommend?

Mike Bellafiore:  Whatever you find most interesting! We become best at that which melds our passion with our talents.

Kirk:  Interesting response. I’m curious to know – if your son or daughter just graduated from college would you encourage them to become a trader? Why or why not?

Mike Bellafiore:  My dad told me when I was young to find something I enjoyed and stick with that. I would offer the same advice.

Kirk:  If someone wants to learn how to trade for a living, what steps do you recommend they take?

Mike Bellafiore:  As we read more and more about elite performance it has become very clear that elite training is essential for success. For example in the awesome book Bounce we learn there is little evidence of anyone reaching a high level of achievement without world-class coaching.

Kirk:  I couldn’t agree with this more. For example, my personal experience in mentoring others suggests there is no other best way to achieve high performance. However, beyond world-class coaching which is out of the reach of many, in your experience is there any real way to shorten the long and challenging learning curve that all traders must successfully navigate?

Mike Bellafiore:  Yes. Yes, Yes. And this is supported by the modern science of elite performance. Purposeful practice, what we call turning one trading day into ten, will speed your learning curve. At SMB we have developed a proprietary practice trading simulator, called Secret Project X. Our traders can trade specific set ups like Flag Patterns or Support Plays unlimitedly. New traders perform poorly not because they are not smart but because they haven’t developed their trading skills. It takes ten thousand hours of purposeful practice to master anything Malcolm Gladwell shared in Outliers.

If you are trying to get better at breakout trades you might sit all day and trade just one. Traders need a system to simulate their trading so they can turn that one day of experience into ten. We demand that our traders do the following each day to turn one day of trading experience into ten:

  1. Keep a detailed trading journal

  2. Talk trading with the desk

  3. Think about their trades after the close

  4. Watch video tape of their trading

  5. Watch video tape of their trading with critical feedback from the partners

  6. Perform visualization exercises

  7. Talk with their mentor one-on-one about their trades

  8. Practice on our simulator

Kirk:  Why do you think most traders fail?

Mike Bellafiore:  Traders fail because they do not develop the skills necessary to succeed. I wrote a whole chapter about this in One Good Trade including some great anecdotes about why some have failed.

Kirk:  I’m often asked how traders should find a good mentor. Do you have any suggestions?

Mike Bellafiore:  You need critical feedback to reach your potential in any performance field. A good mentor first is someone who cares, then is patient and finally can really teach. This is not necessarily the best trader but the best teacher (I wrote an SFO article on this important distinction). There are significantly fewer good mentors than good traders in the trading universe. Reach out to like-minded traders on StockTwits or in the blogosphere. Barry Ritholtz, from The Big Picture, has written that the trading community is very generous with sharing their wisdom. I have found this to be spot on.

Kirk:  One of the things I’ve talked about previously is the importance for a trader to find and develop a strategy that best suits their skills, interests, and personality. Would you agree with that recommendation?

Mike Bellafiore:  Yes. Find the plays that make the most sense to you and trade more of them with more size. A great exercise is to find a trade that made sense to you and made a chop. Go back and replay that trade a few times. Brand that trade in your head so the next time you can add some size and crush it.

Kirk:  There are many ways to trade, but all traders tend to find certain methods easier than others. While not forcing you to make an over generalization, what trading methods do you think are easier than others for people to learn and become successful with?

Mike Bellafiore:   Learning to trade off the order flow or Reading the Tape is the easiest way to start as a trader. Learning to trade off of held bids and offers, and levels developed by intraday volume can be understood quickly.

Kirk:  Very interesting, Mike. Are there trading methods you think tend to be especially difficult and should be avoided especially for new traders?

Mike Bellafiore:  Fading, taking a position counter to the majority of market players, is not a great strategy for most new traders to first learn. It’s too hard for them. We encourage our traders to follow the trend of a stock at the start.

Kirk:  That’s great advice. As I mentioned in the introduction, your book “One Good Trade” is by far my favorite this year. I know it also has been received quite well by others with excellent reviews at Amazon among other places. Why do you think the book has been so popular and well-received?

Mike Bellafiore:  Thank you Charles! And I am going to keep bugging you about writing a book.

I think the book has been successful primarily because we took the time to write a book that is jam packed with trading nuggets AND highly enjoyable to read. Look, we have read all the trading books and I am painfully aware of how hard many are to read. My goal was to write a book that was lasting, filled with important trading principles always wrapped inside real-life trading anecdotes, and also a page-turner. Fortunatley, this is also how the book has been received.

Kirk:  Among all of the unique insight provided in your book, what do you think was the single most important thing you wanted to convey about trading successfully?

Mike Bellafiore:  Make One Good Trade and then One Good Trade and then One Good Trade. At Duke Coach K screams whether his team is up or down by 30, “Next Play.” I could try that at my trading desk but I would receive weird stares aback from my guys. So we say, “One Good Trade” and then “One Good Trade” and then “One Good Trade”.

Kirk:  Thinking back now after some time has passed, is there anything you would have changed about the book or added to it if you could do it all over again?

Mike Bellafiore:  Nah. I have another four books in me so I will get to anything I missed. I spent about 15 months writing One Good Trade. I gave it everything I had. Frankly, One Good Trade came out so much better than I ever thought it could.

Kirk:  Many traders who are struggling seek out The Kirk Report for help. So, with your experience, I’d like to ask you a question regarding how I should help others in this way. For example, when a struggling trader who has been successful in the past runs into a “cold streak,” what recommendations do you think I should provide to help them to get back on the right track?

Mike Bellafiore:  First, The Kirk Report is a great resource for traders to seek out help. So very well done by those who find you.

There is a great passage from One Good Trade about getting out of a trading slump. Seriously anyone who has had a good run in the market can keep going forward. And that is very important to share with them. Specifically, we tell our guys to slow the game down. Only trade your A set ups. Trade them with less size. Put up a positive number. And repeat this process for three days. After the third day they never remember they were ever in a slump.

Kirk:  Excellent! In our live interview last October you spoke briefly about how, for your firm, it is very much a “group effort” to trade. Unfortunately, those of us in the trenches who work alone do not have that same luxury. So, what suggestions and recommendations do you have for traders who trade on their own to incorporate some group and collaborative support?

Mike Bellafiore:  Develop an online trading community. Find your like-minded traders on StockTwits or the blogosphere, set up a Skype call with them during market hours, Gchat them, etc. On our desk we have the advantage of fifty pairs of eyes as opposed to one. I have access to fifty great ideas as opposed to just mine. Also you could contact Roy Davis, Director of SMB Training, rdavis@smbcap.com, and ask about how you can become a member of SMB’s online trading community.

Kirk:  A lot of traders tell me that they struggle with information overload. I’m curious to know your opinion of this and what suggestions, if any, you can offer to help those who seem to experience information paralysis.

Mike Bellafiore:  Information overload is just code for a lack of skill development. An elite tennis player can tell you where a serve will be hit before his opponent serves. He is picking up subtle cues from his opponent that allows him to calculate where the ball is going. This is the same with trading. Often new traders say they are confused trying to follow the tape and the charts. They just do not know what to look at and haven’t developed the skill to quickly break down the information. This is called chunking. When they learn how to do this there will be no information overload, just info that helps them make excellent risk/reward decisions.

Kirk:  I know your firm really focuses on monitoring trading metrics to determine key patterns for both trade identification as well as to improve trading performance overall. So, what information do you think every trader needs to have in their trading journal?

Mike Bellafiore:  We have developed an extensive trading journal. It is long, detailed, and takes a half hour at a minimum to fill out each day. So I will not answer your question since including every aspect would bore your audience or get me in trouble with my partners for giving away too much proprietary information. But I will share that every day you should find the plays that worked best for you. Write down as many details as you can possibly remember. Brand the play in your head. Run through the trade again and find ways you would trade it better with more size. Also GMan developed the SMB Chop Tracker which breaks down our performance daily.

Kirk:  I think what you have said here is good enough to go on, Mike. Thank you!

In last year’s interview and early in this one, you said that you teach visualization techniques to ensure that mental hurdles are cleared. Can you talk about this a little bit further and perhaps provide a teaching example?

Mike Bellafiore:  Sure. Let’s say you have trouble hitting stocks that strike your exit price. And you hold and hold and hold a loser. This is a very common trading flaw that can be corrected through visualization exercises.

Find a quiet place, and breathe deeply in and out for two minutes. When your mind is still, replay in as much detail as possible a trade where you failed to hit out of the stock. Bring in the sounds around your during this trade, what you see, and how you feel. Now see yourself hitting the stock. Breathe deeply again in and out. Replay this scenario. Spend fifteen minutes a day seeing yourself hitting out of stocks that have touched your exit price for a few months. This will help you build the mental skill to automatically hit out of this loser.

Kirk:  One of the things I like most about your trading is that you focus on situations that have an excellent risk-reward ratio. In other words, what I know about how you trade is that you are looking for situations that offer a “downside one, upside five” kind of setup. In other words, you know statistically the trade is going to work six or seven times out of ten and you wait for those setups to occur. How does a trader learn how to identify stocks with good risk/reward
ratios?

Mike Bellafiore:  This is very difficult if not impossible for a beginning trader. What a solid training program will do is introduce set ups that offer this potential risk/reward. Then the trading student works to make these set ups their own. And build their trading skill so that the risk/reward to them is really one to five. After the Open I march our new guys into our training room and recap set ups that were worth their attention and offered excellent risk/reward opportunities. And we talk through these trades. And questions are asked to me and at them by me. And so they learn.

Kirk:  One of the most difficult things for experienced traders to recognize is when it is time to abandon a strategy they have used successfully in the past but is no longer working. Can you offer any recommendation on how to identify when the time is right to move on?

Mike Bellafiore:  This requires good mentorship. Steve started calling the bottom of the market in 2009. Day after day he would say during our AM Meeting, “the market is turning.” And then when HFTs hit we quickly started moving towards Trades2Hold and eliminated most of our scalp trades as you could see from our SMB Blog posts. It takes a great deal of trading experience to see what plays will work best when the market changes.

Kirk:  Good traders always are looking for ways to improve and I’m sure that you do as well. What have you been working on lately in this same regard?

Mike Bellafiore:  Three-day trades. I am holding positions started after a stock had fresh news and trends well intraday on the first day. LDK above 10.80, CHK and SPY above 115.15 are recent examples.

Kirk:  How has your trading approach changed and improved over the years?

Mike Bellafiore:  I am trading on a longer time frame. This allows me the opportunity to trade with more size and be in more positions. Essentially I have been focusing on stocks with fresh news, letting them trend after the 10am hour, with a clear path for that stock’s long term technicals and unencumbered by the overall market.

Kirk:  In an age when high frequency trading and computer-driven programs are supposedly “in charge,” I think it is interesting to see that you have lengthened your time frames which is also something I’m seeing among many successful traders of late.

Can you share some of your personal trading rules?

Mike Bellafiore:  Here you go…

  1. Never double down on a losing position.

  2. Always hit a stock when it hits your exit trigger.

  3. Put on 30 percent of your intraday risk for you’re A+ set ups.

  4. First start with a Stock In Play.

  5. Don’t exit stocks that are working until there is a reason to do so.

Kirk:  We recently learned through a study that many young people are shying away from the stock market and that most investors have been quite fearful following this year’s infamous flash crash. So, what words of wisdom if any would you provide to these folks?

Mike Bellafiore:  We do not see that. Our inboxes are at all time highs for interest in our firm. Three SMB members are needed to respond to all the interest. The upside to becoming a great trader is so amazing that interest in trading will never dissipate. That’s like saying it’s harder to become a rock star or play SS for the NY Yankees. So many are always gonna want to play.

Kirk:  How are you and your firm adjusting to programmed high-frequency trading? Is this something individual investors should
fear?

Mike Bellafiore:  I wrote a long article about this in SFO. HFTs cause more stops to be hit. They mask the true lack of liquidity in the markets. They will carve up active scalpers. We have been trading on a longer time frame and have chosen not to compete with them on most momentum and scalp trades.

Kirk:  Are there any tactics that individual traders can use to trade better in an environment ruled by Wall Street machines?

Mike Bellafiore:  Expand your trading time frame. Lay off the one minute trades and settle into five and fifteen and thirty minute plays. We call them Trades2Hold.

Kirk:  Finally, what is one specific thing that all developing traders could do to improve their results for the rest of this year?

Mike Bellafiore:  Follow some real pros daily like @alphatrends @afraidtotrade @weeklyta @tickerville @weeklyta @thekirkreport @stevenplace and so many others in the online trading community.

Kirk:  Thank you Mike! Again, those who haven’t read One Good Trade or who don’t follow the SMB blog should do so at their earliest opportunity.

Visualize Success

Posted: 21 Oct 2010 11:16 AM PDT

Arnold Schwarzenegger

“I made a picture in my mind of who I wanted to be, and then I lived into that picture.”Arnold Schwarzenegger

Every person who has tried or read about body building, has probably already heard that quote. Some of the most successful people in the world became that way because they were able to visualize their success and were not afraid of doing hard work to get there. They knew that they could achieve their goals if they set their mind to it.

Unfortunately, investors tend to be the self-defeating type – they search for easy answers, easy stock picks, and they don’t visualize success in a way that makes their trading and investing truly rewarding. They are also quick to blame others or search for the easy road. That’s why you have hundreds of very expensive investment newsletters and advisories, thousands of mutual funds, and trading systems that are sold to investors even though over the long term none of them manage to beat the major market averages.

The lesson that Arnold offers is an important one – you have to visualize success and do the hard work it takes to get there. There are no compromises or short-cuts to that destination. This is especially true when investing as well as anything you try to achieve in life.

* This report was originally published by The Kirk Report on November 17, 2003.

Life’s Not Fair – Get Over It!

Posted: 13 Oct 2010 07:58 AM PDT

Life's Not Fair

They say you learn everything you really need to know in life back in Kindergarten and in many ways that is so true. However, as adults we often forget some basic lessons that can serve us quite well in our careers, especially as traders and investors.

For me, I remember as a little guy that life wasn’t fair. After all, there were people who were better looking, much smarter, had far less strict parents and had much nicer and many more toys than I did as a child. However, I soon learned that if I did good things and was a good person, I would be rewarded and that what inequities existed, didn’t really matter!

I think this lesson is one that many traders need to relearn and remember. Take for example this email I received in my inbox this morning….

“While I greatly respect your technical trading skills, I think it would beneficial to you to realize the government is manipulating the markets. To deny this fact is pointless. They have wanted the DOW above 10,000 since March 2009. They manage news flow via Leesman on CNBC and use buy programs via JPM, MS and GS. I have been trading stocks for more than 10 years and I know the difference in a free market and a manipulated one. I realize you do not like to mix these thoughts with your trading but reading your comments on the web site, I feel you are in denial. I feel an occasional comment on the subject is needed.” – George

I have one simple question – how does having me talk endlessly about how “unfair” or “manipulated” the markets are make more money for you? Those who know me know that I am a doer, not a whiner. My #1 job as a trader is to profit, no matter what – not to sit here complaining to the cows come home how unfair or not I think the market is to the average individual investor!

Second, it is sad but true, in my experience those who complain the most are also those who tend to underperform the most. All of us unfortunately and far too frequently look for others to blame for our mistakes and losses and frankly right now there’s no better excuse than to blame widespread market manipulation. However, at the end of the day, how does that make you more money or, even more importantly, put you on the right track to improve yourself in the future?

Let me tell you a secret – the market has ALWAYS been manipulated to some extent AND always will. You can either choose to play and find ways to profit from the market or just go home and do other things with your money. Those who make money in this market don’t have time or energy to complain about how the markets are unfair unless they’re selling services and advice that pray on the fears of others. In my humble opinion, we have too much of that already and I’m not going to be part of that group!

Frankly, if you’re wasting more than one single second on such negative thoughts regarding market manipulation, you’re cheating yourself and your financial future. Such thoughts are nothing but a huge, time-sucking energy drain that you don’t need in your life! Part of being a good trader and investor is not letting such things get to you. Instead, let the herd worry about how unfair the markets are and go back to work!

In fact, the very next time you waste time and energy about how unfair things are, try to remember this excellent quote by Albert Ellis:

“The best years of your life are the ones in which you decide your problems are your own. You don't blame them on your mother, the ecology, or the President. You realize that you control your own destiny.”

I couldn’t have said it any better than this!

Finally, last Sunday I watched the 60 Minutes segment on HFT and a friend asked me what I thought. In particular he asked me if I thought I could still make money trading in such an environment with the Wall Street quants and math wizards taking control. My reply? All I know is that I am doing pretty well (up +54% right now on the year) and that eventually these quants are going to blow each other to Kingdom Come. As I told him, my plan now is to profit as much as possible while they are in control and then profit as much as I can when they eventually blow themselves up.

That’s the way I look at things! While others focus on unfairness and manipulation and being angry and upset about it, I channel that energy and focus on finding and exploiting opportunities. Which approach do you think is better?

Q&A With Howard Lindzon

Posted: 08 Oct 2010 11:06 AM PDT

Howard Lindzon

Unless you’ve been living on a different planet for the past decade, this month’s guest for our interview series requires very little introduction!

As a hedge fund manager, co-founder and CEO of StockTwits, and other various ventures, Howard Lindzon has become a major mover and shaker in today’s investment community. From the very beginning, his blog has been a “must read” resource and I’m excited to have Howard in for this casual, but interesting interview. We hope you enjoy it and find it helpful!

Q&A With Howard Lindzon

Kirk:  Hello Howard! It is so nice to have this special opportunity to interview a person with both your experience and unique insight for my interview series. Thank you for taking the time!

Howard Lindzon:  This is my pleasure. Always a win-win.

Kirk:  Let’s start at the very beginning. When and how did your interest in the market begin?

Howard Lindzon:  My interest started when I bought some Clearly Canadian stock on the Vancouver Stock Exchange. I was young and just listened to a broker. I lost money and got upset. I learned early that the business was all about dealing with losses and your emotions.

Kirk:  How did you begin to learn about the market and investing?

Howard Lindzon:  In 1987 after my undergraduate degree I took a job in the back office at a small brokerage in Toronto called Davidson Partners. I was in order entry. Brokers would fill out tickets and drop them in a box for me to be filled. Wow that seems archaic. Two months into my job, the market crashed. I saw people lose everything and was ground floor of a panic. Way too much responsibility for me!

Kirk:  What was one of the most important lessons you learned early on?

Howard Lindzon:  I learned that losses come often. My first boss in the brokerage business preached discipline and a focus on a long-term plan were key. I learned that microcaps were something to avoid.

Kirk:  Thinking back what was the most instrumental in your development toward becoming more successful in the market?

Howard Lindzon:  I don’t think I have ever been successful yet in the market. My partners in my hedge fund have been extremely patient over 12 years as I have definitely outperformed the indexes, but underachieved based on my expectations. If success means survival and doing something I love then I guess I am a success. I have only had one fantastic year in my career but the Nasdaq trounced me (1999). I do feel that I am slowly now getting better and more focused on my strengths. I have struggled finding my style and doing less over the years.

Kirk:  Doing what you love is so important Howard. Many people are in this game seeking fortune, but forget how important it is to love being involved in the markets win or lose. What would you say are your primary strengths and weaknesses as an investor?

Howard Lindzon:  My strength is conviction, my weakness is conviction. I have had a business implode on me so knowing big failure has given me great perspective. I am an emotional person so have had to learn to do less. I believe you can outwork everyone to get an edge but don’t need inside information to be successful. I am open minded but know that patterns exist and they repeat.

Kirk:  How have you learned to mitigate your weaknesses and focus on your strengths?

Howard Lindzon:  I do LESS in the markets. I have learned to watch and enjoy the markets, but invest more from positions of strength. I think the investing and stock market lifestyle are an amazing and knowing what I want to do has helped me focus on a plan. My strength is my network that I have built over 12 years as a hedge fund manager and investor. I have been very fortunate to benefit from the internet explosion during the meat of my investing years. Finding mentors has NEVER been easier. I use the term ‘Social Leverage’ for this phenomenon.

Kirk:  What have been some of the most challenging lessons you have learned?

Howard Lindzon:  In 2002, I was a partner in a broker-dealer that I was left to wind down. My one partner was stealing and banned from the industry for stealing from the firm account and my other partner blew himself up with leverage in a monumental way. I have had to make some very tough business calls in my life and they all came in 2002. I would not wish the phone calls on anyone.

Kirk:  What doesn’t kill you, makes you stronger. Going back to your own approach, how do you evaluate a potential investment opportunity and what steps do you take to determine its forward potential?

Howard Lindzon:  Great question. First off I believe that you should pay as little (valuation) as you can for illiquid investments and not worry about valuations or P/E on your liquid investments. Valuation only matters when you can’t sell. I don’t think anyone can successfully determine forward potential. If they could, markets would be way more efficient. Markets are efficient only occasionally so having a defined strategy is all that matters. I do believe that my best trades have started as an investment. I am known as an ‘early seller’ but I like the moniker. I just don’t like being an early buyer!

Kirk:  How has your approach toward the markets changed and improved over the years?

Howard Lindzon:  I used to trade and hire traders. Daily performance mattered. Now 10-year performance matters to me. I mean, I survived ten years with pretty much my original book of business, despite making every mistake in the book. Daily performance anxiety is the bain of the whole financial industry. To think it will ever go away though is ridiculous. The world is shrinking and the markets will get more volatile.

Kirk:  Very good point Howard. This is something I’ve talked about as well that performance anxiety, self-imposed or not, can wreak utter havoc and force emotionally-based analysis and trades.

How would you describe your personal philosophy toward the market?

Howard Lindzon:  I mentioned earlier that the markets are ‘opportunity machines’. That is my philosophy. All investors have to do is stay in the game. Do ANYTHING well for 10 years and you will be a success. PERIOD. How great is that? I wish I had that perspective in 1998 when I started my hedge fund. I would be way further ahead. I also can’t believe how much time you can spend AWAY from your screens and be successful as a trader and investor. In a nutshell ‘Less is More.’

Kirk:  Do you utilize any ETFs or index funds in your approach? Why or why not?

Howard Lindzon:  Another great question. I prefer not to use indexes or ETF’s. If I am investing in an area I know nothing about (Brazil, China, Biotech, Commodities), ETF’s are a godsend but have learned from experience that the marketers have taken control of the ETF space and you better mistrust first. Leveraged ETF’s are like any leverage product, a tool, not something to build a strategy around. I think all financial leverage products are unnecessary, but what do I know.

Kirk:  Please tell us a little about what you’re doing right now professionally. You seem to have your hand in a lot of different pots.

Howard Lindzon:  Basically I have three pots professionally. I am an entrepreneur in the financial web space (Stocktwits.com currently and Wallstrip.com in the past), an investor in early stage consumer businesses (formally through Social Leverage LLC) and a hedge fund manager (Lindzon Capital Partners since 1998). Most of my time is now spent as CEO of Stocktwits.com which my hedge fund is a large shareholder. I love my jobs and feel lucky to have created them. It’s a miracle if you know me.

Kirk:  Do you think entrepreneurs make good investors? Why or why not?

Howard Lindzon:  Investors and traders ARE entrepreneurs! I think we get no respect. There is WAAAAAY too much mystery and bullshit in the financial world. That IS THE OPPORTUNITY.

You, me, the blogosphere and hopefully Stocktwits can tear down the walls. Why should there be no smiles in finance? Jon Stewart built an incredible brand around the most ridiculous group of yutz’s (politicians) and we all can build smiles and honesty into finance. The markets and low cost brokerages are the greatest freedom we have ever been afforded and we are screwing it up. It is a tragedy that we can’t let happen!

Back to your question. Entrepreneurs are the best investors because we gain experience. We need massive tax cuts to make more traders/investors and everyone will benefit. It is a trade you can learn in your teens. Investing/Entrepreneuring should be taught in junior high and there will be venture capital funds focused at the high school level within 3 years. I have never been more optimistic and scared at the same time. Don’t worry – it’s probably just my age.

Kirk:  I, for one, congratulate you on what you’ve done for everyone Howard. StockTwits has become so popular and successful for good reason and it is clear that you’ve got a winner there. On a more personal basis, what does your daily routine look like? Can you take us through a typical day for you and how you manage your time?

Howard Lindzon:  I wake at 4-5 am pst. The routine of a hedge fund manager and a slave to east coast time are just too ingrained. The mornings are my favorite time of day. I live in Coronado, California now so it is very quiet. I spent 20 years in the desert (Phoenix) and there is no better place for mornings. I return email and send email mostly in the AM PST and late PM PST. I now spend most of my market hours reading, making sales calls and writing. I love that the markets close at 1 pm PST. After the kids go to bed I usually work for 2-3 more hours and than take an Ambien. I am a slave to the pharmaceuticals in the PM but rarely own their shares.

Travel is the difficult part of my job and I spend at least a week a month on the road doing sales calls and business development. Face to face work with customers is underrated and, if you are willing, can afford and have an understanding family, you must do it to have any edge. Travel throws off my routine so I have learned over time to chill and not pressure myself with schedules on the road.

Kirk:  What role do you serve at the hedge fund?

Howard Lindzon:  Today, I communicate quarterly with my limited partners formally, but they can read my blog and tweets to see what I (we) are up to. Transparency is the NEW way to manage money. I believe it so I live it. If I managed many billions I am sure I would have a different philosophy and honestly don’t care to have the dilemma. I make EVERY investment. If I am right I get the credit and if I am wrong it is my fault.

Kirk:  Where did you get the idea of StockTwits originally?

Howard Lindzon:  In 2007, I had passed on a Twitter investment (what a putz) and declared on my blog that tweeting about stocks made more sense. That is yet unproven? My co-founder Soren responded to my blog post and wanted to build something so I said “you build and I will raise the money.” I believe Soren came up with the idea of tagging tickers with $ and I that $$ at the end of market related tweets would make sense. This would give intent, context and structure to the messages. Away we went!

Kirk:  What is your favorite feature in StockTwits?

Howard Lindzon:  I love that I can follow certain tickers and the people that I like as they talk about the tickers. I love that I can filter in that way and have the ‘ALL’ stream to give me a feel for the ticker, something I coined as ‘The Human Ticker.’

But, I guess if I had to pick my favorite feature is our ‘House Rules’ which has become important to us. We believe that the message board model and the ‘open’ communication models as they pertain to stocks and markets was manageable and people will behave and share.

Kirk:  Who are your “favorite” follows and why?

Howard Lindzon:  I have no FAVE five because I believe the ‘ALL’ Stream (stocktwits.com) is the perfect follow. I get a real smart sense of the mood of the market and that’s all I really need. I am a momentum and trend investor so I lean towards big thinkers and humor – mostly venture capitalists, angel investors and traders are on my follow list. The people that share interesting links that speed up my day are the key and should be every beginners focus when they sign up for Stocktwits.com. We have created many suggested streams and the ‘Most Liked’ stream gets better every day.

Kirk:  How do you recommend both investors and traders use StockTwits?

Howard Lindzon:  Traders should follow the ‘All Stream’ and our suggested stream of traders and technicians to get started. I think beginners should just sign up and be quiet for a few days and watch. Maybe share some insightful and fun market links and introduce themselves publicly to people they find interesting. We call them ‘shoutouts’. Eavesdropping is done by 80-90 percent of the total audience so if you don’t want to interact it is normal. Investors have an amazing free blog network at their disposal.

Our ‘Premium’ subscription sites run by thoughtful traders/investors is an inexpensive way to get mentors and day to day attention. We are launching a ‘Data’ store in October that will allow investors/traders to buy and load actionable ideas ‘a la carte’ as separate streams. Apple opened the floodgates with their iTunes store to unbundle media. We will try hard to do the same around data.

I also believe that the microblog is the most efficient vehicle ever to build a voice. Use our platform to build your voice and flesh out ideas.

Kirk:  Without letting the proverbial cat out of the bag, what are some things you and your team are working on to improve StockTwits?

Howard Lindzon:  Mobile and HTML5 are the future it seems so hopefully Apple has approved our iPhone app by the time the interview runs. We have two ‘Android’ apps under rapid development and many more for their more open and wider distributed platform. As soon as the killer iPad app gets traction, we will fast follow with partnerships and our own versions. We don’t have the capital to make big bets.

I would love to have access to $100 million of capital right now to go faster in web and mobile finance. If you promise to give it to me, I will share my plan.

Kirk:  If I had $100 million laying around, I’d think about it Howard! So, looking ahead, as a self-proclaimed trend follower, what are some big picture trends you think we should be watching closely for potential investment opportunities?

Howard Lindzon:  Personalization is here to stay. Curation as well. Mobile is the big fat trend. My smartest, most connected friends can’t all be wrong. They are betting big money and have been right before. I think localization is the best investment we can all make. Small business is back and so is ‘exporting culture’. The world likes both smoking and American culture. Biotech, Agriculture and Drugs bore me and I am too impatient and old to understand them so despite them being maybe the biggest trends, I will invest peripherally or through ETF’s. The simplest, most underatted trend is freedom from a tiny bit of wealth. The BRIC’s and Emerging markets have gotten a taste and they like it. They will now want to live longer.

Kirk:  Are there any companies you are especially interested in right now?

Howard Lindzon:  Everyone has their favorites and their hopefuls. I think Intuit $INTU is perfectly positioned to make a new amazing run and so is Rackspace $RAX. I have been long both from much lower prices. Obviously, Apple and Amazon have been very good to me but don’t own much of either lately. On these public companies that I own, strong and healthy markets are needed. I pay up for liquidity as I mentioned earlier.

On the private side I believe web video is inning one and so is real – time sharing so my investments in Betaworks (indirectly Twitter), Bitly, Stocktwits, Tubemogul, Assistly and Buddy Media are who I root for.

I love the consumer web meets inventory so I also have a healthy interest in rooting for Ticketfly.com and Limos.com.

I recently made a large investment in Forex by putting together a syndicate for Etoro.com.

Kirk:  Given your unique position in the investment community, what are some of your key perspectives about the state of the U.S. economy now?

Howard Lindzon:  We are in a super super super bull market for start-ups. Like $CMGI when it started and Internet Capital group, there are massive runs ahead. It just won’t be broad and like the last one and you won’t be able to invest in anything and have the markets bail you out.

Funny, but in 2008, the $VIX was at 90 and the once in a lifetime panic was in full motion. Venture Capitalists were writing death knells. I was investing. I was speaking at a conference in Toronto and showing charts of the $VIX and $SPY and saying it was NEVER a better time to start a business. I can’t find the post but I know Jevon was there and will vouch for the speech and slides. I was talking my book and had been heavily investing since 2005, but it so far looks like I might be right.

It turns out, only Wall Street died. Sure bonuses are back, but as Andy Kessler accurately describes: “There are too many traders, bankers and salesmen to support the new level of business. Thanks to Dodd-Frank, the shrinking of finance will continue.”

The only thing that will kill angel investing in the foreseeable future is the government. I have to say it’s a ginormous risk. Idiots are in charge and idiots do the wrong things at the wrong time. That said, there will never be enough optimistic angels looking to roll up their sleeves and put money to work. Most, if not all of these angels could give a rat’s ass about Wall Street, derivatives, mortgages and stocks – maybe even taxes. It is getting super competitive and crowded, but it will evolve and spread. Groupon is in Chiitown!

Personally, harnessing this momentum is where I see the opportunity going forward but as always, I am fleshing out my thesis and flying by the seat of my pants. If I practiced just what I preached, I would be retired and just tweeting goofy stuff. But, bottom line, there is just too much optimistic and patient angel money wanting to get put to work. It won’t end well, but it is likely just the middle innings of this run. There are deals and exits by the minute and although top lines and bottom lines are pretty hard to grow, the 2008 depression made the bonanza ahead happen for start-ups and angels.

The super smart money is snickering and moved on, but take a look at the price action in momentum stocks like $BIDU, $NFLX and $AMZN (hundreds more) and tell me that a bazillion acquisitions using high stock prices and cash won’t continue. It will, it should and we should be supporting it, not trying to break it down and overthink it.

Kirk:  Looking ahead what are some things that would make you both more or less optimistic?

Howard Lindzon:  I would be more optimistic if I could see an end to the job dilemma and I believed we were trending to smaller government, not bigger. I would be insanely optimistic if all investment banks were forced to go private, Barney Frank were imprisoned for being a complete putz (new laws that make sense) and someone from Goldman Sachs admitted to defrauding the American pensioners. Just a token Goldman imprisonment would also help. I would be more optimistic if CNBC were replaced with Hogan’s Heroes, Welcome Back Kotter and WKRP in Cincinatti reruns, not for me, but for people that think they have to watch. Take away the choice. Despite my belief that none of these will happen, Apple, Google, Netflix, Stocktwits, WordPress, Facebook and Twitter make me pretty optimistic.

Little surprises me or disappoints me anymore. Random hate chips away at my confidence sometimes.

Kirk:  With your crystal ball out, how do you think the markets will fare over the next six to twelve months?

Howard Lindzon:  I think Dow 20,000 is in the cards – maybe Dow 5,000 as well. I honestly have no idea. If you want me to make a prediction, in 12 months we will be lower. It is September 26th and momentum stocks are ripping and I have had a great year, but I don’t see the real profits out there for America and our balance sheets at the household level suck. I have been trying to lead by example since 2005, by actively writing about a smaller footprint and conservative living. ‘Small is the New Big’ and ‘Too Small to Fail’ are two themes I love and live by.

Kirk:  Given your unique experience with the markets, why do you think so many people have trouble matching and beating the market consistently?

Howard Lindzon:  Define beating? I think everyone is measuring their performance over too short a timeline. It’s not going to change though and that’s my advantage of being old and open. I have built trust so one bad year or even two won’t kill me (knocking on wood right now). I truly measure myself differently so I guess that helps. I remember in Caddyshack when Chevy Chase was asked how he measured himself against other golfers and he replied – ‘my height!’

Investing truly is a marathon. There are a few legends but I doubt most could live with the risk those few have taken.

I don’t think their has been a big enough support group for investors until Stocktwits so hopefully we can all build on that. If you are honest with yourself and your clients when selling yourself and financial products, expectations are more easily set. From that point, consistent communication is the key.

Kirk:  What would you say to those who are just starting to learn about the markets and investing their own money? What advice would you give to others who are just starting to learn about the markets?

Howard Lindzon:  I am not so big on practice accounts. Maybe because I never used one! I would read every book you can on trend and momentum investing. Read books from successful investors. I am an awful trader, but do think every investor should try and trade and therefore learn. The tools for education are abundant and I will use this point to plug Stocktwits as a fantastic place to find your voice and mentors. I would open an account at a brokerage like Schwab or Fidelity, focus at first on extremely low costs and turnover and no more than three stocks at a time. I would make sure to cut losses at 5-10 percent maximum. Get used to losing money. There is NO RUSH. The markets are opportunity machines!

Kirk:  What mistakes do you see other investors make and what are some things they can do to avoid them?

Howard Lindzon:  Every mistake starts small. It’s that simple. We all remember our wins and that great feeling AND BLOCK OUT OUR LOSSES. WE HIDE THEM. They fester in our accounts and we avoid looking at them. Another big mistake is letting profits become losses. To avoid them you need to take responsibility when your money is at stake. You need to set goals and you need to garden/prune your accounts. Investors need to let winners ride as well. Investors press losses and don’t pyramid into winners. I don’t!

Kirk:   Finally, if you had one piece of advice to share with all investors and traders what would it be?

Howard Lindzon:  There is only one piece of advice that matters – prune your portfolio and cut losses. You need to manage your losses. If you can find a great mentor or two, make that a first priority before you start trading/investing.

Kirk:  Thank you Howard. We appreciate all that you have and continue to do for the investment community! If you are ever in my neck of the woods and can spare a few hours – golf is on me!

Howard Lindzon:  This was fun and helpful for me too so thank you!

Lessons & Rules

Posted: 06 Oct 2010 09:51 AM PDT

Success & Failure

I’ll start this report off with a little testimonial that arrived in my inbox this morning…

“I’m currently on track to have my best year ever (up +71% year-to-date) after struggling for over ten years to learn this trading game. Your daily insight, wisdom, and resources you share coupled with practice have made a world of difference for me. My only regret is that I wish I became a member years ago when I first visited your website!

Beyond my sincere gratitude of which I know you receive plenty by others who follow you, the other reason why I am writing is to also let you know how valuable it has been to write down some of the lessons and rules you’ve shared from others previously. In fact, two of my favorites “9 Business Lessons” and “30 Trading Rules” were quite helpful to me this year. Although I don’t think you need the suggestion, if you’re looking for something to write about you may want to focus an entire report on one or both as I found these particularly helpful as I created my own personal rules from both that I review at the start of each and every day. Thank you.” – David H.

Both articles this member mentioned was previously shared in my “three to read” section which I provide in the daily newsletter which I send out to members. Here are excerpts from both in case you missed them:

Nine Business Lessons From Celebrities

If you pay attention, you can find inspiration and lessons that you can apply to your business everywhere you look…

  • Lance Armstrong: Be disciplined. No business will succeed without a lot of hard work and discipline. Commit to it. Stick with it. Eventually, you'll reach your destination.

  • Paula Deen: Be yourself (and be bold about it). You will naturally succeed if you build a base of followers who are naturally attracted to your personality. Don't worry about being liked by everybody. Just let your own unique personality shine through.

  • Mr. Rogers: Be positive. I can't imagine making it in business without a whole lot of optimism.

  • Ellen Degeneres: Have fun. The daily grind, even when you work for yourself, can be dull at times. Doing something you love, surrounding yourself with clients and connections that energize you, and taking time to appreciate the good things in life make it all worthwhile, and who doesn't enjoy a good laugh every once in a while?

  • Bill Cosby: Keep learning. I used to be so intimidated by what I didn't know. But I've come to realize that such a list is endless, so I just continue to work at it, and I learn more and more each day about how to build a successful business.

  • Carol Burnett: Be creative. Sometimes you have to improvise. You figure it out, and you come to enjoy the journey.

  • Oprah: Build a platform. To succeed in business, you have to have a group of people who believe in you, who want to hear what you have to say, and who want to support you in everything you do.

  • Jim Carrey & Steve Carell: Don’t take it all so seriously. You're going to mess up, and you will look silly on occasion. Learn to be OK with that.

  • Maya Angelou: Be resilient. Things will not always be easy, but if you refuse to give up and keep bouncing back, they manage to work themselves out.

 

30 Trading Rules From Tyler Bollhorn

Make it a habit to reread those trading rules lists every now and then. You want those important concepts to become deeply ingrained. Today's timeless wisdom is from Tyler Bollhorn…

  1. Buying a weak stock is like betting on a slow horse. It is retarded.

  2. Stocks are only cheap if they are going higher after you buy them.

  3. Never trust a person more than the market. People lie, the market does not.

  4. Controlling losers is a must; let your winners run out of control.

  5. Simplicity in trading demonstrates wisdom. Complexity is the sign of inexperience.

  6. Have loyalty to your family, your dog, your team. Have no loyalty to your stocks.

  7. Emotional traders want to give the disciplined their money.

  8. Trends have counter trends to shake the weak hands out of the market.

  9. The market is usually efficient and can not be beat. Exploit inefficiencies.

  10. To beat the market, you must have an edge.

  11. Being wrong is a necessary part of trading profitably. Admit when you are wrong.

  12. If you do what everyone is doing you will be average, so goes the definition.

  13. Information is only valuable if no one knows about it.

  14. Lower your risk till you sleep like a baby.

  15. There is always a reason why stocks go up or down, we usually only learn the reason when it is too late.

  16. Trades that make a lot of intellectual sense are likely to be losers.

  17. You do not have to be right more than you are wrong to make money in the market.

  18. Don't worry about the trades that you miss, there will always be another.

  19. Fear is more powerful than greed and so down trends are sharper than up trends.

  20. Analyze the people, not the stock.

  21. Trading is a dictators game; you can not trade by committee.

  22. The best traders are the ones who do not care about the money.

  23. Do not think you are smarter than the market, you are not.

  24. For most traders, profits are short term loans from the market.

  25. The stock market can not be predicted, we can only play the probabilities.

  26. The farther price is from a linear trend, the more likely it is to correct.

  27. Learn from your losses, you paid for them.

  28. The market is cruel, it gives the test first and the lesson afterward.

  29. Trading is simple but it is not easy.

  30. The easiest time to make money is when there is a trend.

Have you found rules like this to be an inspiration in your trading? If so, let me know your favorites and I’ll share them with others if I haven’t already done so!

Trading Wisdom of William Eckhardt

Posted: 30 Sep 2010 10:09 AM PDT

William Eckhardt

Recently I had the pleasure to read an in-depth interview with legendary commodities and futures trader William Eckhardt. William is perhaps best known for the big bet he lost with Richard Dennis of Turtles fame in which he argued that successful trading cannot be taught.

In that old interview, William shared the following observations that are helpful for all of us to remember…

  • “If a betting game among a certain number of participants is played long enough, eventually one player will have all the money. If there is any skill involved, it will accelerate the process of concentrating all the stakes in a few hands. Something like this happens in the market. There is a persistent overall tendency for equity to flow from the many to the few. In the long run, the majority loses. The implication for the trader is that to win you have to act like the minority. If you bring normal human habits and tendencies to trading, you’ll gravitate toward the majority and inevitably lose.” – William Eckhardt

  • “It’s much easier to learn what you should do in trading than to do it. Good systems tend to violate normal human tendencies.” – William Eckhardt

  • “One common adage on this subject that is completely wrongheaded is: you can’t go broke taking profits. That’s precisely how many traders do go broke. While amateurs go broke by taking large losses, professionals go broke by taking small profits. The problem in a nutshell is that human nature does not operate to maximize gain but rather to maximize the chance of gain. The desire to maximize the number of winning trades (or minimize the number of losing trades) works against the trader. The success rate of trades is the least important performance statistic and may even be inversely related to performance.” – William Eckhardt

  • “The people who survive avoid snowball scenarios in which bad trades cause them to become emotionally destabilized and make more bad trades. They are also able to feel the pain of losing. If you don’t feel the pain of a loss, then you’re in the same position as those unfortunate people who have no pain sensors. If they leave their hand on a hot stove, it will burn off. There is no way to survive in the world without pain. Similarly, in the markets, if the losses don’t hurt, your financial survival is tenuous.” – William Eckhardt

  • “I know of a few multimillionaires who started trading with inherited wealth. In each case, they lost it all because they didn’t feel the pain when they were losing. In those formative first few years of trading, they felt they could afford to lose. You’re much better off going into the market on a shoestring, feeling that you can’t afford to lose. I’d rather bet on somebody starting out with a few thousand dollars than on somebody who came in with millions.” – William Eckhardt

  • “In many ways, large profits are even more insidious than large losses in terms of emotional destabilization. I think it’s important not to be emotionally attached to large profits. I’ve certainly made some of my worst trades after long periods of winning. When you’re on a big winning streak, there’s a temptation to think that you’re doing something special, which will allow you to continue to propel yourself upward. You start to think that you can afford to make shoddy decisions. You can imagine what happens next. As a general rule, losses make you strong and profits make you weak.” – William Eckhardt

  • “If you’re playing for emotional satisfaction, you’re bound to lose, because what feels good is often the wrong thing to do. Richard Dennis used to say, somewhat facetiously, “If it feels good, don’t do it.” In fact, one rule we taught the Turtles was: When all the criteria are in balance, do the thing you least want to do. You have to decide early on whether you’re playing for the fun or for the success. Whether you measure it in money or in some other way, to win at trading you have to be playing for the success.” – William Eckhardt

  • “Trading is also highly addictive. When behavioral psychologists have compared the relative addictiveness of various reinforcement schedules, they found that intermittent reinforcement – positive and negative dispensed randomly (for example, the rat doesn’t know whether it will get pleasure or pain when it hits the bar) – is the most addictive alternative of all, more addictive than positive reinforcement only. Intermittent reinforcement describes the experience of the compulsive gambler as well as the future trader. The difference is that, just perhaps, the trader can make money.” However, as with most affective aspects of trading, its addictiveness constantly threatens ruin. Addictiveness is the reason why so many players who make fortunes leave the game broke.” – William Eckhardt

  • “Don’t think about what the market’s going to do; you have absolutely no control over that. Think about what you’re going to do if it gets there. In particular, you should spend no time at all thinking about those rosy scenarios in which the market goes your way, since in those situations, there’s nothing more for you to do. Focus instead on those things you want least to happen and on what your response will be.” – William Eckhardt

If you don’t think these principles are true, you haven’t been trading very long. Print these out and refer to them often!

* This report was originally published by The Kirk Report on February 21, 2008.

Six Rules

Posted: 23 Sep 2010 10:12 AM PDT

Six Rules

Michael Steinhardt is considered one of the most successful hedge fund managers. One dollar invested with Steinhardt Partners LP, his flagship hedge fund, at its launch in 1967 would have been worth $481 when Steinhardt retired in 1995.

I’ve been reading about Mr. Steinhardt and recently came across a speech in which he provided six rules in order to become a successful hedge fund manager. Since I think the same apply to all investors, not just those who run hedge funds, I decided to provide them for you as well. They include the following:

  1. Make all your mistakes early in life. He says the more tough lessons you learn early on, the fewer errors you make later. A common mistake of all young investors is to be too trusting with brokers, analysts, and newsletters who are trying to sell you bad stocks.

  2. Always make your living doing something you enjoy. This way, you devote your full intensity to it which is required for success over the long-term.

  3. Be intellectually competitive. This involves doing constant research on subjects that make you money. The trick, he says, in plowing through such data is to be able to sense a major change coming in a situation before anyone else.

  4. Make good decisions even with incomplete information. In the real world, he argues, investors never have all the data they need before they put their money at risk. You will never have all the information you need. What matters is what you do with the information you have. Do your homework and focus on the facts that matter most in any investing situation.

  5. Always trust your intuition. For him, intuition is more than just a hunch. He says intuition resembles a hidden supercomputer in the mind that you’re not even aware is there. It can help you do the right thing at the right time if you give it a chance. In fact, over time your own trading experience will help develop your intuition so that major pitfalls can be avoided.

  6. Don’t make small investments. You only have so much time and energy so when you put your money in play. So, if you’re going to put money at risk, make sure the reward is high enough to justify it.

* This report was originally published by The Kirk Report on June 2, 2004.

The Investor Sentiment Cycle

Posted: 16 Sep 2010 03:51 PM PDT

A number of smart people seem to think that we are at another crucial crossroads for the market. To help acquire and share some perspective on this point, I sent out a private poll yesterday asking over 100 top professionals I know to share their views on where they think we are in this current investor sentiment cycle and why.

Of those who dared to offer take the poll and go on record (most I asked never responded), 63% thought the cycle had already bottomed out while 37% see further downside to go in this cycle.

How did I figure that out? When you look at the overall votes, the most popular response was that we are currently in the hope phase as 26% of those who I polled offered that as their view. This was followed closely by 21% who said we are in the depression phase, followed by 16% who think we are in the optimism phase. If these people are correct, as a combined group 63% of them think we’ve already bottomed out and are headed higher at least in terms of this current sentiment cycle. Please note where each of the three areas of the cycle – hope, depression & optimism – fall within the cycle. After each phase, the market moved higher.

In reviewing the minority votes (i.e. the other 37%), the good news if one can be had here is virtually no one thinks we are anywhere near the top of the market. Instead, the most popular response was that 21% think we are in the denial phase, 12% think we are in the fear phase, and 4% in the desperation phase. Also, note where each of these three fit within the cycle. Following each of those phases, the market moved subsequently lower. But, overall this still consisted as the minority view.

The bottom line, most think the market has bottomed out, as least in terms of this investor sentiment cycle, but reasonable doubts do remain. To provide addition food for thought, here are some of the more noteworthy perspectives offered in support of their particular viewpoint:

 

Hope

“As much naysaying as we are hearing in the media and in the blogosphere, we are still holding above Dow 10,000 – efforts to drive equities below the current trading range have been met with vicious snapback rallies. People are not excited per se, but they are hoping that a reason to be excited will come along soon.”Joshua Brown, The Reformed Broker

“The market has recovered from the big shock last year, however sentiments in recent months have become very bearish with talk of crash and double dip recession. In recent month growth stocks are doing well and IPO’s have been rallying. This tends to be sign of impending rally in next few months. At this stage the range is likely to breakout to upside in late October.”Pradeep Bonde, StockBee

“I believe we are in the ‘hope’ stage simply because there are two main camps, 1) some believe we will break higher and above major resistance and 2) some are short anticipating a repeat of early August. The end of August low resembles the March 2009 low because it was a non-capitulatory bottom. As long as we maintain a flag and do not have a breakaway gap down, then the market should be fine. Objectively, we are still in the large neutral range, but I am cautiously bullish here.”John Lee, Charts Gone Wild

“Somewhere depression and hope. There continues to be a mixed message from economic data and price action which leaves investors hopeful but with an underlying sense of pessimism from the jobs situation.”Brian Shannon, AlphaTrends

“The S&P is down around 20% over the past 3 years. Mean reversion says it will probably outperform its long-term average over the next 3 years by a large margin. Too bad real life isn’t as simple as that!”Less Antman, Simply Rich

 

Depression

“This is 1982 all over again. There was no hope due to high interest rates and then they started dropping interest rates. Today there is no hope because of jobs and once there is any sign of job growth, the market will begin to soar as it did in 1982.”Larry Connors, Trading Markets

“Sentiment reflects reality, so we hit bottom post-Lehman. The depression and capitulation came in March, 2009. The slow and halting economic recovery will be accompanied by improved sentiment — a process including feedback.”Jeff Miller, Dash Of Insight

“Hard to look back on Fall 08 as anything other than capitulation, followed by a glimmer of hope as 2009 went on. While that puts us beyond the trough, I see more of a public “apathy” than hope…a period of global innovation and startups that the public misses while they stare at mixed US growth reports.” - Derek Hernquist, Integrative Capital

“We provide investment research and money management services to more 1,000 investors and it feels like we are somewhere between Depression & Hope. Overall investor sentiment still seems very negative and even long term investors appear to be fearful of losses and are suspect of the economic and market recovery.”Justin Carbonneau, Validea

“The global financial crisis and VIX spikes into the 80s were so vivid and memorable – and so thoroughly discussed in the media – that they continue to cast a shadow over investor sentiment and decision-making, even though arguably most of the risks associated with a VIX of 80 have since passed. Disaster imprinting refers to a phenomenon in which the threats of financial and psychological disaster were so severe that they continue to leave a permanent or semi-permanent scar in one's psyche. Another way to describe disaster imprinting might be to liken it to a low level financial post-traumatic stress disorder.”Bill Luby, Vix & More

 

Optimism

“We’ve just emerged from a bear market, so what’s not to like? After the recent run-up, we’ll go sideways for a year and then move to new highs but a sustained economic recovery will take time. Investors are looking for an excuse to push this market upward.”Thomas Bulkowski, The Pattern Site

“The period between optimism and fear is now incredibly short. I see it as either flat line between optimism and fear completely bypassing market euphoria and depression. Look to the real clues of the economy from businesses rather than CNBC.”Jae Jun, Old Schol Value

“The bulls see a higher low and potential breakout from resistance. The bears see waning volume going into said resistance. Consider the economy and we have two parties optimistic about their chances of being correct.”Darren Miller, Attitrade

 

Denial

“Elevated equity call volume and heavy NASDAQ volume relative to NYSE volume suggest small investors are trying to maintain a positive outlook in the hopes that 2010 marks a consolidation phase rather than a topping phase. Smart money indicators (TICKscore, Last Hour, Market Vane) suggest otherwise.”Rennie Yang, Market Tells

“The recent rally is smoke and mirrors in the market right now due to the fact that investors don't know what the government is going to do next. The economy and the market appears to be artificially propped up without making a new high. No one knows how future government policies will affect decisions that are made now based on our unsustainable debt and obligations.”Chris Perruna, ChrisPerruna.com

“One more sell-off in the tank but this shouldn’t undercut the March 2009 low. I would give the sentiment cycle a 2-year window with the ‘Despondency’ phase kicking in for Q1 2011. However, cyclical bull market in play which should keep a modest bullish trend intact for the next 2-3 years.”Declan Fallon, Zignals

 

Fear

“The long term uptrend since March 2009 reached a top in April 2010. Since then there is a reaction and I think there is fear now that price will not reach that previous top. Basically that will confirm a finished up moving Elliott B-correction wave and a downward C-wave coming soon with much lower prices.”Sylvain Vervoort, Stocata

“The volume tells me a vast majority of the trading public is not in the markets, and not trading. Many have come to believe the game is rigged against them by the big computers. There is a lot of uncertainty and zero trust. Will that change – sure someday. Reminds me a good deal of 1974.”Bill Zimmer, The Prudent Trader

“I can’t really place investor sentiment on this continuum. I would say that July 2007 was euphoria, March 2009 was despondency and April 2010 was optimism. However, the last five months have backslid and are more like “stagnation/uncertainty.”Greg Feirman, Top Gun Financial Planning

 

So, where do I stand here in this? Interestingly enough, I’m with the majority on this one – the hope phase. From what I’ve seen and everything I know about this investor sentiment cycle, that indicates at least for me the most likely among all of the choices here. The problem, as you know, is that investor sentiment does seem to change by the day as the markets and investors right along with them have become so short-term focused. In fact, one could easily argue that by just looking at the markets since the beginning of August, we’ve gone through the entire cycle in just a number of weeks!

Finally, I must take a moment to offer my sincere appreciation for everyone who took precious time and to offer their personal replies to this unusual, and unexpected poll. Most who I contacted were not willing to go on record, which also is interesting and offers a clue to how much uncertainty there really is out there at the moment. In due time, the road ahead will become far more clear, and as always our #1 job is to make sure to profit no matter which way we go next.

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