By Simon Maierhofer
On 1:31 pm EDT, Wednesday October 21, 2009
Buzz up! 6
'By the time a man realizes that maybe his father was right, he usually has a son who thinks he's wrong' - Musician Charles Wadsworth.
Delayed reactions are often the investor's worst enemy.
By the time the average Joe realized that the 2007 prices were not sustainable, the market had already plummeted 20%, 30%, or more. By the time the average Joe realized that March 9th marked the bottom of the ferocious decline from the October 2007 highs, the S&P 500 (SNP: ^GSPC), Dow Jones (DJI: ^DJI), Nasdaq (Nasdaq: ^IXIC), and other indexes had already gained 20%, 30%, or more.
There is no 'better late than never' in investing
The epitome of delay might be the National Bureau of Economic Research (NBER), the organization in charge of declaring the beginning and end of recessions. It took NBER over a year to figure out that we had actually been in a recession.
It wasn't until Friday, November 28th, that the NBER determined a recession had indeed started in December 2007. By that time, the S&P 500 (NYSEArca: SPY - News) had lost 669 points or 43%, the Dow Jones (NYSEArca: DIA - News) was down 5335 points or 38%.
Wall Street and the financial media didn't do much better. Up until September 2008, the market's decline was merely viewed as a correction spurred on by the collapse of Lehman Brothers and the troubled Fannie Mae and Freddie Mac.
In early September 2008, the Volatility Index (VIX), also called the 'fear index' because it measures option traders concerns about lower prices, sat at 21.50. Any reading below 25 indicates that investors are complacent and are not worried about a decline. As you can tell, the VIX is a contrarian indicator; extreme complacency usually precedes a major correction. Right now, the VIX is at 21.35, the lowest level since September 3rd, 2008, so watch out.
Does the fact that the VIX is at its lowest levels since the beginning of the real financial (NYSEArca: XLF - News) meltdown foreshadow dire times ahead?
A history of major recessions
Before we discuss some of the indicators that actually have a record of long-term accuracy, we need to point out that this bear market is much different than any other we've seen in decades. In fact, we haven't seen anything similar in over 80 years.
Those who have relied on indicators with track records of less than 80 years, have found themselves startled by the post-2007 market meltdown and will likely continue to be on the wrong side. It seems that about once every century, a market collapse comes along that defies most normal economic gauges.
In the 18th century, the South Sea Bubble caused financial ruin for many. This bubble burst in 1720.
A serious depression in the late 1830s sent the markets tumbling by some 70% (based on British stock prices). We all know what happened from 1929 - 1932 (the anniversary of Black Monday is coming up later this month).
Those wanting to go back even further, will find that the Tulip mania - where tulips (yes, the flower) contracts sold for more than 10 times the annual income of a skilled craftsman - collapsed in 1637.
Things are different
If you look around, you will see that the investment environment has changed. The freefall from the 2007 highs to the March lows, was deeper than any other since the Great Depression. The rally from the March lows was more powerful than any other rally since the Great Depression.
Additionally, the concept of 'decoupling' was proven wrong on numerous levels. There was no decoupling between emerging markets (NYSEArca: EEM - News) and developed markets (NYSEArca: EFA - News).
There was no decoupling between stocks and commodities, either. There wasn't even a decoupling between defensive and offensive sectors.
Following the bust of the dot.com bubble, four of the nine S&P industry sectors were up even though the Nasdaq (Nasdaq: QQQQ - News) and technology sector (NYSEArca: XLK - News) lost about 40% in 2000. 2008 saw all industry sectors decline. Consumer discretionary (NYSEArca: XLP - News) was the best performing sector with a loss of 15%.
How about oil? Ever since I can remember, high oil prices have been viewed as a downer for stocks and the economy. Crude oil is up more than 150% since its February 2009 low of $33/barrel. Over the same period, stocks have gained over 50%.
CNNMoney.com reports concerning this phenomenon: 'Oil prices were hovering around a low of near $30/barrel back in February. But how good did you feel about the economy back then? Fears about a massive wave of big bank failures and another depression were running rampant. So, cheaper oil and gas were little consolation.'
Contrary to the fears of another depression, the ETF Profit Strategy Newsletter issued a Trend Change Alert on March 2nd. This alert predicted the most powerful rally since October 2007 with a target range of Dow 9,000 - 10,000. ETFs recommended at the time included the Ultra Financial ProShares (NYSEArca: UYG - News), Ultra S&P 500 ProShares (NYSEArca: SSO - News), and many other ETFs which gained 100% or more.
Some things never change
Long before tech geeks starting using their skills to devise high-tech, hypothetical trading models designed to track and predict the market's day-to-day, hour-to-hour, and minute-to-minute swings, there were old-time indicators that graced Wall Street.
Unfortunately, Ivy League type analysts chose to ignore, simple, common sense valuation metrics even the average Joe investor could understand. Perhaps it's the simplicity of those indicators that makes them unattractive to such hyper-educated, overconfident, high-tech analysts.
Unfortunately, the new breed of analysis had a glitch. It wasn't able to predict the 2007 meltdown. It simply didn't show up on the radar.
Like a seasoned, skilled craftsman knows all the tricks of the trade; the old-time indicators know all the ins and outs of the market. As such, they don't just focus on short-term, hypothetical schemes and are not fooled as easily. As it turns out, the simplicity of those old-time indicators proved much more accurate than its 'sophisticated' modern-day counter parts.
Allow me to introduce - the 'Four Horsemen'
Numerous times in the past, the ETF Profit Strategy Newsletter has referred to the 'Four Horsemen,' four simple common sense, easy to understand, yet evergreen indicators. The four horsemen have an outstanding track record in determining the market's long-term direction. They are:
1) P/E ratios
2) dividend yields
3) sentiment measured by mutual fund managers cash reserves
4) the Dow measured in the only true currency - gold (NYSEArca: GLD - News)
A quick glance at historic charts plotting stock prices against indicators 1 - 3, shows that the market has never reached a lasting bottom unless P/E ratios, dividend yields, and mutual fund cash reserves has clocked in at levels indicative of a market bottom.
For example, historically P/E ratios range between 15 - 25. Currently, the P/E ratio based on actual third quarter earnings is 138. It seems like stock are over-valued since much lower P/E ratios are needed for a market bottom to be considered lasting (see chart below).
Dividend yields are near all-time lows. Market bottoms see significantly elevated dividend yields. Mutual fund cash reserves are at about the same level they were in late 2007, when the market topped. Market bottoms are associated with highly elevated cash reserves, as even fund managers cave in and sell at the worst time.
The Dow measured in gold has been falling since 1999, and it's fallen harder than the Dow measured in U.S. dollars. Eventually, the dollar-Dow will catch up with the gold-Dow.
Indicative of their implications, we've dubbed those four indicators the four horsemen. Every single one of them points towards significantly lower prices. Their message is unanimous.
The November issue of the ETF Profit Strategy Newsletter plots the historical market bottoms of the last 100 years against the P/E ratios, dividend yields, and cash reserves and the time. Additionally, the newsletter features a range for the ultimate market bottom, based on the indicators' readings associated with each major market bottom.
Thursday, October 22, 2009
Sunday, September 13, 2009
The Biggest Stock Scams Of All Time
by Investopedia Staff, (Investopedia.com)
It is unfortunate, but words often associated with money and fortune are "cheat," "steal," and "lie." Who among us hasn't "accidentally" taken two $500 bills from the Monopoly bank, or forgotten at least once to pay $5 back to a friend? Chances are you were never called on it because your friends trusted you. Just as we trust our friends, we put faith in the investing world. Investing in a stock takes a lot of research, but it also requires us to make a lot of assumptions. For example, we assume reported earnings and revenue figures are correct, and that management is competent and honest. But these assumptions can be disastrous.
IN PICTURES: Stock Scams Slideshow
Understanding how disasters happened in the past can help investors avoid them in the future. With that in mind, we'll look at some of the all-time greatest cases of companies betraying their investors. Some of these cases are truly amazing; try to look at them from a shareholder's standpoint. Unfortunately, these shareholders had no way of knowing what was really happening as they were being tricked into investing.
ZZZZ Best Inc., 1986 - Barry Minkow, the owner of this business, posited that this carpet cleaning company of the 1980s would become the "General Motors of carpet cleaning". Minkow appeared to be building a multi-million dollar corporation, but he did so through forgery and theft. He created more than 10,000 phony documents and sales receipts without anybody suspecting anything. Although his business was a complete fraud designed to deceive auditors and investors, Minkow shelled out more than $4 million to lease and renovate an office building in San Diego. ZZZZ Best went public in December of 1986, eventually reaching a market capitalization of more than $200 million. Amazingly, Barry Minkow was only a teenager at the time! He was sentenced to 25 years in prison.
Centennial Technologies Inc., 1996 - In December 1996, Emanuel Pinez, the CEO of Centennial Technologies, and his management recorded that the company made $2 million in revenue from PC memory cards - the company was really shipping fruit baskets to customers. But the employees then created fake documents to appear as though they were recording sales. Centennial's stock rose 451% to $55.50 per share on the New York Stock Exchange (NYSE). According to the Securities and Exchange Commission (SEC), between April 1994 and December 1996, Centennial overstated its earnings by about $40 million. Amazingly, the company reported profits of $12 million when it really lost about $28 million! The stock plunged to less than $3. Over 20,000 investors lost almost all of their investment in a company that was once considered a Wall Street darling.
Bre-X Minerals, 1997 - This Canadian company was involved in one of the largest stock swindles in history. Its Indonesian gold property, which was reported to contain more than 200 million ounces, was said to be the richest gold mine ever. The stock price for Bre-X skyrocketed to a high of $280 (split adjusted), making millionaires out of ordinary people overnight. At its peak, Bre-X had a market capitalization of US$4.4 billion. But the party ended on March 19, 1997, when the gold mine proved to be fraudulent, and the stock tumbled to pennies shortly after. The major losers were the Quebec public sector pension fund, which lost $70 million; the Ontario Teachers' Pension Plan, which lost $100 million and the Ontario Municipal Employees' Retirement Board, which lost $45 million.
Enron, 2001 – Prior to this debacle, Enron, a Houston-based energy trading company was, based on revenue, the seventh largest company in the U.S. Through some fairly complicated accounting practices that involved the use of shell companies, Enron was able to keep hundreds of millions worth of debt off its books. Doing so fooled investors and analysts into thinking this company was more fundamentally stable than it actually was. Additionally, the shell companies, run by Enron executives, recorded fictitious revenues, essentially recording one dollar of revenue multiple times, thus creating the appearance of incredible earnings figures. Eventually, the complex web of deceit unraveled, and the share price dove from over $90 to less than $0.70. As Enron fell, it took down with it Arthur Andersen, the fifth leading accounting firm in the world at the time. Andersen, Enron's auditor, basically imploded after David Duncan, Enron's chief auditor, ordered the shredding of thousands of documents. The fiasco at Enron made the phrase "cook the books" a household term once again.
WorldCom, 2002 - Not long after the collapse of Enron, the equities market was rocked by another billion-dollar accounting scandal. Telecommunications giant WorldCom came under intense scrutiny after yet another instance of some serious "book cooking". WorldCom recorded operating expenses as investments. Apparently, the company felt that office pens, pencils and paper were an investment in the future of the company and therefore expensed (or capitalized) the cost of these items over a number of years. In total $3.8 billion (yes, with a 'b') worth of normal operating expenses - which should all be recorded as expenses for the fiscal year in which they were incurred - were treated as investments and were recorded over a number of years. This little accounting trick grossly exaggerated profits for the year the expenses were incurred; in 2001, WorldCom reported profits of around $1.3 billion. In fact, its business was becoming increasingly unprofitable. Who suffered the most in this deal? The employees - tens of thousands of them lost their jobs. The next ones to feel the betrayal were the investors who had to watch the gut-wrenching downfall of WorldCom's stock price, as it plummeted from more than $60 to less than $0.20.
Tyco International (NYSE: TYC), 2002 - With WorldCom having already shaken investor confidence, the executives at Tyco ensured that 2002 would be an unforgettable year for stocks. Before the scandal, Tyco was considered a safe blue chip investment, manufacturing electronic components, healthcare and safety equipment. During his reign as CEO, Dennis Kozlowski, who was reported as one of the top 25 corporate managers by BusinessWeek, siphoned hordes of money from Tyco in the form of unapproved loans and fraudulent stock sales. Along with CFO Mark Swartz and CLO Mark Belnick, Kozlowski received $170 million in low-to-no interest loans, without shareholder approval. Kozlowski and Belnick arranged to sell 7.5 million shares of unauthorized Tyco stock for a reported $450 million. These funds were smuggled out of the company, usually disguised as executive bonuses or benefits. Kozlowski used the funds to further his lavish lifestyle, which included handfuls of houses, an infamous $6,000 shower curtain and a $2 million birthday party for his wife. In early 2002, the scandal slowly began to unravel and Tyco's share price plummeted nearly 80% in a six-week period. The executives escaped their first hearing due to a mistrial, but were eventually convicted and sentenced to 25 years in jail.
HealthSouth (NYSE: HLS), 2003 - Accounting for large corporations can be a difficult task especially when your boss instructs you to falsify earnings reports. In the late 1990s, CEO and founder Richard Scrushy began instructing employees to inflate revenues and overstate HealthSouth's net income. At the time, the company was one of America's largest healthcare service providers, experiencing rapid growth and acquiring a number of other healthcare related firms. The first sign of trouble surfaced in late 2002, when Scrushy reportedly sold HealthSouth shares worth $75 million, prior to releasing an earnings loss. An independent law firm concluded the sale was not directly related to the loss, but investors should have taken the warning. The scandal unfolded in March, 2003, when the SEC announced that HealthSouth exaggerated revenues by $1.4 billion. The information came to light when CFO William Owens, working with the FBI, taped caught Scrushy talking about the fraud. The repercussions were swift, as the stock fell from a high of $20 to a close of $0.45 in a single day. Amazingly, the CEO was acquitted of 36 counts of fraud, but was later convicted on charges of bribery. Apparently, Scrushy arranged political contributions of $500,000, allowing him to ensure a seat on the hospital regulatory board.
Conclusion
The worst thing about these scams is that you never know until it's too late. Those convicted of fraud might serve several years in prison, which in turn costs investors/taxpayers even more money. These scammers can pick a lifetime's worth of garbage and not even come close to repaying those who lost their fortunes. The SEC works hard to prevent such scams from happening, but with thousands of public companies in North America, it is nearly impossible to ensure that disaster never strikes again.
Is there a moral to this story? Sure. Always invest with care and diversify, diversify, diversify. Maintaining a well-diversified portfolio will ensure that occurrences like these don't run you off the road, but instead remain mere speed bumps on your path to financial independence.
It is unfortunate, but words often associated with money and fortune are "cheat," "steal," and "lie." Who among us hasn't "accidentally" taken two $500 bills from the Monopoly bank, or forgotten at least once to pay $5 back to a friend? Chances are you were never called on it because your friends trusted you. Just as we trust our friends, we put faith in the investing world. Investing in a stock takes a lot of research, but it also requires us to make a lot of assumptions. For example, we assume reported earnings and revenue figures are correct, and that management is competent and honest. But these assumptions can be disastrous.
IN PICTURES: Stock Scams Slideshow
Understanding how disasters happened in the past can help investors avoid them in the future. With that in mind, we'll look at some of the all-time greatest cases of companies betraying their investors. Some of these cases are truly amazing; try to look at them from a shareholder's standpoint. Unfortunately, these shareholders had no way of knowing what was really happening as they were being tricked into investing.
ZZZZ Best Inc., 1986 - Barry Minkow, the owner of this business, posited that this carpet cleaning company of the 1980s would become the "General Motors of carpet cleaning". Minkow appeared to be building a multi-million dollar corporation, but he did so through forgery and theft. He created more than 10,000 phony documents and sales receipts without anybody suspecting anything. Although his business was a complete fraud designed to deceive auditors and investors, Minkow shelled out more than $4 million to lease and renovate an office building in San Diego. ZZZZ Best went public in December of 1986, eventually reaching a market capitalization of more than $200 million. Amazingly, Barry Minkow was only a teenager at the time! He was sentenced to 25 years in prison.
Centennial Technologies Inc., 1996 - In December 1996, Emanuel Pinez, the CEO of Centennial Technologies, and his management recorded that the company made $2 million in revenue from PC memory cards - the company was really shipping fruit baskets to customers. But the employees then created fake documents to appear as though they were recording sales. Centennial's stock rose 451% to $55.50 per share on the New York Stock Exchange (NYSE). According to the Securities and Exchange Commission (SEC), between April 1994 and December 1996, Centennial overstated its earnings by about $40 million. Amazingly, the company reported profits of $12 million when it really lost about $28 million! The stock plunged to less than $3. Over 20,000 investors lost almost all of their investment in a company that was once considered a Wall Street darling.
Bre-X Minerals, 1997 - This Canadian company was involved in one of the largest stock swindles in history. Its Indonesian gold property, which was reported to contain more than 200 million ounces, was said to be the richest gold mine ever. The stock price for Bre-X skyrocketed to a high of $280 (split adjusted), making millionaires out of ordinary people overnight. At its peak, Bre-X had a market capitalization of US$4.4 billion. But the party ended on March 19, 1997, when the gold mine proved to be fraudulent, and the stock tumbled to pennies shortly after. The major losers were the Quebec public sector pension fund, which lost $70 million; the Ontario Teachers' Pension Plan, which lost $100 million and the Ontario Municipal Employees' Retirement Board, which lost $45 million.
Enron, 2001 – Prior to this debacle, Enron, a Houston-based energy trading company was, based on revenue, the seventh largest company in the U.S. Through some fairly complicated accounting practices that involved the use of shell companies, Enron was able to keep hundreds of millions worth of debt off its books. Doing so fooled investors and analysts into thinking this company was more fundamentally stable than it actually was. Additionally, the shell companies, run by Enron executives, recorded fictitious revenues, essentially recording one dollar of revenue multiple times, thus creating the appearance of incredible earnings figures. Eventually, the complex web of deceit unraveled, and the share price dove from over $90 to less than $0.70. As Enron fell, it took down with it Arthur Andersen, the fifth leading accounting firm in the world at the time. Andersen, Enron's auditor, basically imploded after David Duncan, Enron's chief auditor, ordered the shredding of thousands of documents. The fiasco at Enron made the phrase "cook the books" a household term once again.
WorldCom, 2002 - Not long after the collapse of Enron, the equities market was rocked by another billion-dollar accounting scandal. Telecommunications giant WorldCom came under intense scrutiny after yet another instance of some serious "book cooking". WorldCom recorded operating expenses as investments. Apparently, the company felt that office pens, pencils and paper were an investment in the future of the company and therefore expensed (or capitalized) the cost of these items over a number of years. In total $3.8 billion (yes, with a 'b') worth of normal operating expenses - which should all be recorded as expenses for the fiscal year in which they were incurred - were treated as investments and were recorded over a number of years. This little accounting trick grossly exaggerated profits for the year the expenses were incurred; in 2001, WorldCom reported profits of around $1.3 billion. In fact, its business was becoming increasingly unprofitable. Who suffered the most in this deal? The employees - tens of thousands of them lost their jobs. The next ones to feel the betrayal were the investors who had to watch the gut-wrenching downfall of WorldCom's stock price, as it plummeted from more than $60 to less than $0.20.
Tyco International (NYSE: TYC), 2002 - With WorldCom having already shaken investor confidence, the executives at Tyco ensured that 2002 would be an unforgettable year for stocks. Before the scandal, Tyco was considered a safe blue chip investment, manufacturing electronic components, healthcare and safety equipment. During his reign as CEO, Dennis Kozlowski, who was reported as one of the top 25 corporate managers by BusinessWeek, siphoned hordes of money from Tyco in the form of unapproved loans and fraudulent stock sales. Along with CFO Mark Swartz and CLO Mark Belnick, Kozlowski received $170 million in low-to-no interest loans, without shareholder approval. Kozlowski and Belnick arranged to sell 7.5 million shares of unauthorized Tyco stock for a reported $450 million. These funds were smuggled out of the company, usually disguised as executive bonuses or benefits. Kozlowski used the funds to further his lavish lifestyle, which included handfuls of houses, an infamous $6,000 shower curtain and a $2 million birthday party for his wife. In early 2002, the scandal slowly began to unravel and Tyco's share price plummeted nearly 80% in a six-week period. The executives escaped their first hearing due to a mistrial, but were eventually convicted and sentenced to 25 years in jail.
HealthSouth (NYSE: HLS), 2003 - Accounting for large corporations can be a difficult task especially when your boss instructs you to falsify earnings reports. In the late 1990s, CEO and founder Richard Scrushy began instructing employees to inflate revenues and overstate HealthSouth's net income. At the time, the company was one of America's largest healthcare service providers, experiencing rapid growth and acquiring a number of other healthcare related firms. The first sign of trouble surfaced in late 2002, when Scrushy reportedly sold HealthSouth shares worth $75 million, prior to releasing an earnings loss. An independent law firm concluded the sale was not directly related to the loss, but investors should have taken the warning. The scandal unfolded in March, 2003, when the SEC announced that HealthSouth exaggerated revenues by $1.4 billion. The information came to light when CFO William Owens, working with the FBI, taped caught Scrushy talking about the fraud. The repercussions were swift, as the stock fell from a high of $20 to a close of $0.45 in a single day. Amazingly, the CEO was acquitted of 36 counts of fraud, but was later convicted on charges of bribery. Apparently, Scrushy arranged political contributions of $500,000, allowing him to ensure a seat on the hospital regulatory board.
Conclusion
The worst thing about these scams is that you never know until it's too late. Those convicted of fraud might serve several years in prison, which in turn costs investors/taxpayers even more money. These scammers can pick a lifetime's worth of garbage and not even come close to repaying those who lost their fortunes. The SEC works hard to prevent such scams from happening, but with thousands of public companies in North America, it is nearly impossible to ensure that disaster never strikes again.
Is there a moral to this story? Sure. Always invest with care and diversify, diversify, diversify. Maintaining a well-diversified portfolio will ensure that occurrences like these don't run you off the road, but instead remain mere speed bumps on your path to financial independence.
Friday, September 04, 2009
5 Lessons From The Recession
Lisa Smith
On Wednesday September 2, 2009, 6:56 pm EDT
The bear market of 2008 was a game-changer for many investors. Prior to 2008, a market decline of staggering proportions was a philosophical idea. The Great Depression was a distant event that few people alive today were even around to experience it - and most them were so young when it occurred that it had little or no impact on their personal investment portfolios. (Remember, the 401(k) wasn’t even introduced until 1978, so even the Great Depression did little to derail the retirement dreams of the average investor.) Now that we've lived through a stock market decline in 2008-2009 that not only wiped out a decade's worth of growth but also changed the face of Wall Street forever, what have we learned? Here we look at the top lessons.
1. Risk Matters
Clearly, the amount of risk taken in one's investment portfolio will capture a significantly greater degree of attention in the years ahead. The decline of 2008 taught us that once-in-a-lifetime events can occur. We've also learned that diversification means more than just stocks and bonds. The simultaneous decline of stocks, bonds, housing and commodities is a stark reminder that there are no "sure bets," and that a cash cushion could save the day when times get tough. The blind pursuit of profit with no thought to the downside is a strategy that failed spectacularly.
Moving forward, investors should learn to be leery. Protecting what you've got is just as important as trying to get more. Keeping one eye on risk and the other on growth is a lesson worth remembering.
2. Experts Don't Know Everything
We put a lot of trust in experts, including stock analysts, economists, fund managers, CEOs, accounting firms, industry regulators, government and a host of other smart people. They all let us down. A great many of them lied to us, intentionally misleading us in the name of greed and personal profit. Even index fund providers let us down, charging us a fee for the "privilege" of losing 38% of our money.
While the collapse of long-term capital management in the late 1990s demonstrated that genius does fail, the lesson was seen by all but felt by few. The crash of 2008 was the complete reverse. Few saw it coming, but most felt it arrive. If we've learned anything from the experience, it should be that blind trust is a bad idea and that even experts can't predict the market.
3. You Can't Live on Averages
Market projections, such as those seen in the hypothetical examples included in many 401(k) enrollment kits, always seem to show an 8% return per year, on average doubling your money every eight years. Those pretty pictures make it easy to forget that markets don't usually move in a straight line. All of those projections are based on the idea that investors should buy and hold, but 2008 showed that that strategy doesn't always work, particularly for investors who are approaching retirement.
Next time the markets start to take a dive, people on the cusp of retirement should pay more attention to the possibility of severe declines damaging their odds of leaving the work force any time soon.
What to do? If you see the train coming, get off of the tracks.
4. You Shouldn't Buy What You Don't Understand
The marketplace if filled with complex and exotic offerings that promise the world to investors. Derivatives, special investment vehicles, adjustable-rate mortgages and other new-fangled investments that may be too complex for the average investor racked up huge fees for financial services firms and huge losses for investors. Don't buy what you don't understand is a trite but true sentiment that may be the biggest lesson from the recession.
5. You Can't Delegate Your Future
Far too many investors operate on the "set it and forget it" plan. They dutifully make their biweekly contributions to their 401(k) plans and let the years pass, hoping for magic by the time they retire. Anyone on that plan who expected to retire anytime between 2008 and 2018 or so is likely in for a rude awakening. Set it and forget it failed. Even target-date-funds, which are supposed to automatically move assets to a more conservative stance as retirement approaches, didn't all do the job investors expected them to do. Moving, forward, "pay attention" may be a better mantra than set it and forget it.
The Bottom Line
If your investments are doing well and you get a good run, rebalance to remove risk. If the markets have fallen as far as you can stand, take what you have left and get out. You should know your risk tolerance and know how much damage you have the stomach to take. When you hit your limit, there's no shame in crying "uncle." It's your money, so manage it. Even if you delegate the investment management to experts, educate yourself so that you understand what your money is buying, what your hired experts are doing and what course of action you will take if things don't go your way.
On Wednesday September 2, 2009, 6:56 pm EDT
The bear market of 2008 was a game-changer for many investors. Prior to 2008, a market decline of staggering proportions was a philosophical idea. The Great Depression was a distant event that few people alive today were even around to experience it - and most them were so young when it occurred that it had little or no impact on their personal investment portfolios. (Remember, the 401(k) wasn’t even introduced until 1978, so even the Great Depression did little to derail the retirement dreams of the average investor.) Now that we've lived through a stock market decline in 2008-2009 that not only wiped out a decade's worth of growth but also changed the face of Wall Street forever, what have we learned? Here we look at the top lessons.
1. Risk Matters
Clearly, the amount of risk taken in one's investment portfolio will capture a significantly greater degree of attention in the years ahead. The decline of 2008 taught us that once-in-a-lifetime events can occur. We've also learned that diversification means more than just stocks and bonds. The simultaneous decline of stocks, bonds, housing and commodities is a stark reminder that there are no "sure bets," and that a cash cushion could save the day when times get tough. The blind pursuit of profit with no thought to the downside is a strategy that failed spectacularly.
Moving forward, investors should learn to be leery. Protecting what you've got is just as important as trying to get more. Keeping one eye on risk and the other on growth is a lesson worth remembering.
2. Experts Don't Know Everything
We put a lot of trust in experts, including stock analysts, economists, fund managers, CEOs, accounting firms, industry regulators, government and a host of other smart people. They all let us down. A great many of them lied to us, intentionally misleading us in the name of greed and personal profit. Even index fund providers let us down, charging us a fee for the "privilege" of losing 38% of our money.
While the collapse of long-term capital management in the late 1990s demonstrated that genius does fail, the lesson was seen by all but felt by few. The crash of 2008 was the complete reverse. Few saw it coming, but most felt it arrive. If we've learned anything from the experience, it should be that blind trust is a bad idea and that even experts can't predict the market.
3. You Can't Live on Averages
Market projections, such as those seen in the hypothetical examples included in many 401(k) enrollment kits, always seem to show an 8% return per year, on average doubling your money every eight years. Those pretty pictures make it easy to forget that markets don't usually move in a straight line. All of those projections are based on the idea that investors should buy and hold, but 2008 showed that that strategy doesn't always work, particularly for investors who are approaching retirement.
Next time the markets start to take a dive, people on the cusp of retirement should pay more attention to the possibility of severe declines damaging their odds of leaving the work force any time soon.
What to do? If you see the train coming, get off of the tracks.
4. You Shouldn't Buy What You Don't Understand
The marketplace if filled with complex and exotic offerings that promise the world to investors. Derivatives, special investment vehicles, adjustable-rate mortgages and other new-fangled investments that may be too complex for the average investor racked up huge fees for financial services firms and huge losses for investors. Don't buy what you don't understand is a trite but true sentiment that may be the biggest lesson from the recession.
5. You Can't Delegate Your Future
Far too many investors operate on the "set it and forget it" plan. They dutifully make their biweekly contributions to their 401(k) plans and let the years pass, hoping for magic by the time they retire. Anyone on that plan who expected to retire anytime between 2008 and 2018 or so is likely in for a rude awakening. Set it and forget it failed. Even target-date-funds, which are supposed to automatically move assets to a more conservative stance as retirement approaches, didn't all do the job investors expected them to do. Moving, forward, "pay attention" may be a better mantra than set it and forget it.
The Bottom Line
If your investments are doing well and you get a good run, rebalance to remove risk. If the markets have fallen as far as you can stand, take what you have left and get out. You should know your risk tolerance and know how much damage you have the stomach to take. When you hit your limit, there's no shame in crying "uncle." It's your money, so manage it. Even if you delegate the investment management to experts, educate yourself so that you understand what your money is buying, what your hired experts are doing and what course of action you will take if things don't go your way.
Monday, August 10, 2009
Whither the market now?
Looks like the market will not reverse any time now. If history is any guide, it's odds on that the market will go on from strength to strength. New birds are probably waiting in the wings. Once these newbies come into the market in droves, completely convinced, that "this time it's different," will the market reverse direction. Presently the market is firmly embedded in an uptrend. A glance at the chart will quickly confirm this.
The market is strongest at or near the top, so the saying goes. Today's volume is less than 1.3 billion. This is a far cry from the historic high of more than 4.2 billion shares traded in a single day. The majority of investors and speculators are still not convinced that this market is sustainable. Beaten by the bears of yesteryear, they are still controlled by fear. But as the market gathers momentum positively, this fear will soon give way to greed. When that happens, the market will explode to the upside. All hell will break lose and cautious will be thrown to the wind. Rises will be phenomenal and the next day taken as a certainty of more rises. Everywhere people will be talking about the market. From shoeshine boys and ice cream sellers to company executives and business tycoons, their topic will be the stock market. This will then be a sure sign that the market is coming to an end.
Savvy investors will sense this as a golden opportunity to sell and unload their shares as quickly as possible. The naive and the not-so-experienced will rush in to buy. At the most unexpected moment, the market will reverse. Suddenly, there are no more buyers. Prices will retreat at an alarming rate and soon the market will be back to square one. By then millions and millions of shares would have changed hands. The smart laugh all the way to the banks while unintelligent ones are left holding the "babies".
The stock market is not the place for you to have fun. You need to know fundamental and technical analysis if you want to have any chance to come out unscathed in this jungle where survival is of the fittest.
Good luck.
The market is strongest at or near the top, so the saying goes. Today's volume is less than 1.3 billion. This is a far cry from the historic high of more than 4.2 billion shares traded in a single day. The majority of investors and speculators are still not convinced that this market is sustainable. Beaten by the bears of yesteryear, they are still controlled by fear. But as the market gathers momentum positively, this fear will soon give way to greed. When that happens, the market will explode to the upside. All hell will break lose and cautious will be thrown to the wind. Rises will be phenomenal and the next day taken as a certainty of more rises. Everywhere people will be talking about the market. From shoeshine boys and ice cream sellers to company executives and business tycoons, their topic will be the stock market. This will then be a sure sign that the market is coming to an end.
Savvy investors will sense this as a golden opportunity to sell and unload their shares as quickly as possible. The naive and the not-so-experienced will rush in to buy. At the most unexpected moment, the market will reverse. Suddenly, there are no more buyers. Prices will retreat at an alarming rate and soon the market will be back to square one. By then millions and millions of shares would have changed hands. The smart laugh all the way to the banks while unintelligent ones are left holding the "babies".
The stock market is not the place for you to have fun. You need to know fundamental and technical analysis if you want to have any chance to come out unscathed in this jungle where survival is of the fittest.
Good luck.
Thursday, August 06, 2009
Different colors mean different things
I have a friend, who shall be nameless for obvious reasons as I love her dearly. This friends favourite colour is red. Her car is red, flowers in her garden are red, she wears red, her lipstick is red. Need I say more – everything is red. She is a go-getter and the speed with which she embraces life is past the speed limit. So recently I was very interested to read on how wearing certain colours can reflect our mood.
We do react to colour, and scientists have ascertained that each colour transmits a unique message to the brain which impacts our moods in different ways. Consider the list of colours below and consider how your own clothes and decor can enhance particular moods.
Red
Red is a stimulating and energizing colour. It also enhances self-assurance; what woman in a fiery red dress doesn’t exude confidence. Red will produce an illusion of fantasy. It can promote opposition in others ( you have been warned) If you want to be attention-getting, feel powerful and dominate – wear red. The colour also symbolizes love. It is a hot and passionate color. Red is said to increase the appetite, so you may want to keep it out of the dining room unless you’re having a dinner party. In the bedroom, red light helps sexual activity, and could lead to active nights.
Yellow
To wear yellow will rejuvenate and balance the mind. It wipes out the feeling of heaviness and oppression. Yellow is a sunny and reflective and is a pensive colour. It will lift ones mood to be positive and optimistic.
Orange
This is also the colour of love. It is perhaps a little less serious and a little more fun. Wear it to lift your love life. Orange is a very high energy colour imparting boldness and distinction. Is about being different. Like red and yellow, orange is stimulating. It is an antidepressant and also stimulates the mind. Anyone with a desire to sharpen and add focus and purpose to their life can do with a little orange. ( It is potent, do not add too much)
Green
Green is relaxing and tranquil to the eyes. It reduces stress and brings a feeling of tranquility. It presents natural healing and balance. Wear it to inspire harmony in others and restore your energy. It is the second most popular color. Green is symbolic of faithfulness and unity and hope. It is quick to help others even at their own expense. It represents dependability and tactfulness.
Pink
The colour pink is trendy. Its a girly color and is a symbol of innocence and beauty. Pink has a soothing effect. It also speaks of pure love. It is a romantic color, while red is hot and passionate. It also is bright, vibrant, a strong and healthy color.
Blue
Blue relaxes muscles, lowers blood pressure and was found to have a calming effect on hyperactive children. Blue causes a slight psychological change which results in people feeling less hungry. I don’t think you could call it a weight loss program though. Blue is also regarded to be effective for increasing wisdom energy. It is the color of peace, tranquility and is excellent in increasing spiritual meditation and healing.
Purple
Purple balances the mind, brings serenity and combats fear. It’s connected with psychic powers and helps wake up that aspect. Its also the colour that speaks of royalty. Purple stands out in a crowd.
In conclusion; consider the colours you are wearing – maybe you can create the mood you want to reflect. The chose is yours!
Resource Box:
Lynn Zingel is the author and editor of http://www.icando.co.nz. Here you will find words of http://www.icando.co.nz/ encouragement, inspiration, and challenge to change/ whatever you focus your mind upon
We do react to colour, and scientists have ascertained that each colour transmits a unique message to the brain which impacts our moods in different ways. Consider the list of colours below and consider how your own clothes and decor can enhance particular moods.
Red
Red is a stimulating and energizing colour. It also enhances self-assurance; what woman in a fiery red dress doesn’t exude confidence. Red will produce an illusion of fantasy. It can promote opposition in others ( you have been warned) If you want to be attention-getting, feel powerful and dominate – wear red. The colour also symbolizes love. It is a hot and passionate color. Red is said to increase the appetite, so you may want to keep it out of the dining room unless you’re having a dinner party. In the bedroom, red light helps sexual activity, and could lead to active nights.
Yellow
To wear yellow will rejuvenate and balance the mind. It wipes out the feeling of heaviness and oppression. Yellow is a sunny and reflective and is a pensive colour. It will lift ones mood to be positive and optimistic.
Orange
This is also the colour of love. It is perhaps a little less serious and a little more fun. Wear it to lift your love life. Orange is a very high energy colour imparting boldness and distinction. Is about being different. Like red and yellow, orange is stimulating. It is an antidepressant and also stimulates the mind. Anyone with a desire to sharpen and add focus and purpose to their life can do with a little orange. ( It is potent, do not add too much)
Green
Green is relaxing and tranquil to the eyes. It reduces stress and brings a feeling of tranquility. It presents natural healing and balance. Wear it to inspire harmony in others and restore your energy. It is the second most popular color. Green is symbolic of faithfulness and unity and hope. It is quick to help others even at their own expense. It represents dependability and tactfulness.
Pink
The colour pink is trendy. Its a girly color and is a symbol of innocence and beauty. Pink has a soothing effect. It also speaks of pure love. It is a romantic color, while red is hot and passionate. It also is bright, vibrant, a strong and healthy color.
Blue
Blue relaxes muscles, lowers blood pressure and was found to have a calming effect on hyperactive children. Blue causes a slight psychological change which results in people feeling less hungry. I don’t think you could call it a weight loss program though. Blue is also regarded to be effective for increasing wisdom energy. It is the color of peace, tranquility and is excellent in increasing spiritual meditation and healing.
Purple
Purple balances the mind, brings serenity and combats fear. It’s connected with psychic powers and helps wake up that aspect. Its also the colour that speaks of royalty. Purple stands out in a crowd.
In conclusion; consider the colours you are wearing – maybe you can create the mood you want to reflect. The chose is yours!
Resource Box:
Lynn Zingel is the author and editor of http://www.icando.co.nz. Here you will find words of http://www.icando.co.nz/ encouragement, inspiration, and challenge to change/ whatever you focus your mind upon
Saturday, August 01, 2009
Tongue twisters
Tongue Twisters are great for your tongue-twisting exercise. Below are some for you to try.
I wish to wish the wish you wish to wish, but if you wish the wish the witch wishes, I won't wish the wish you wish to wish.
I see a sea down by the seashore.
But which sea do you see down by the seashore?
If you notice this notice,
you will notice that this notice is not worth noticing.
If you understand, say ""understand"".
If you don't understand, say ""don't understand"".
But if you understand and say ""don't understand"".
how do I understand that you understand. Understand!?
Love's a feeling you feel when you feel
you're going to feel the feeling you've never felt before.
If coloured caterpillars could change their colours constantly could they keep their coloured coat coloured properly?
How may saws could a see-saw saw if a see-saw could saw saws?
A fly and flea flew into a flue,
said the fly to the flea 'what shall we do?'
'let us fly' said the flea
said the fly 'shall we flee'
so they flew through a flaw in the flue.
If Kantie can tie a tie and untie a tie,
why can't I tie a tie and untie a tie like Kantie can.
Fresh fried fish,
Fish fresh fried,
Fried fish fresh,
Fish fried fresh.
Peter Piper picked a peck of pickled peppers.
A peck of pickled peppers Peter Piper picked.
If Peter Piper picked a peck of pickled peppers,
Where's the peck of pickled peppers Peter Piper picked?
She sells seashells by the seashore.
The shells she sells are surely seashells.
So if she sells shells on the seashore,
I'm sure she sells seashore shells.
You can't can cans as well as a canner cans for the cans a canner cans are the best cans.
I wish to wish the wish you wish to wish, but if you wish the wish the witch wishes, I won't wish the wish you wish to wish.
I see a sea down by the seashore.
But which sea do you see down by the seashore?
If you notice this notice,
you will notice that this notice is not worth noticing.
If you understand, say ""understand"".
If you don't understand, say ""don't understand"".
But if you understand and say ""don't understand"".
how do I understand that you understand. Understand!?
Love's a feeling you feel when you feel
you're going to feel the feeling you've never felt before.
If coloured caterpillars could change their colours constantly could they keep their coloured coat coloured properly?
How may saws could a see-saw saw if a see-saw could saw saws?
A fly and flea flew into a flue,
said the fly to the flea 'what shall we do?'
'let us fly' said the flea
said the fly 'shall we flee'
so they flew through a flaw in the flue.
If Kantie can tie a tie and untie a tie,
why can't I tie a tie and untie a tie like Kantie can.
Fresh fried fish,
Fish fresh fried,
Fried fish fresh,
Fish fried fresh.
Peter Piper picked a peck of pickled peppers.
A peck of pickled peppers Peter Piper picked.
If Peter Piper picked a peck of pickled peppers,
Where's the peck of pickled peppers Peter Piper picked?
She sells seashells by the seashore.
The shells she sells are surely seashells.
So if she sells shells on the seashore,
I'm sure she sells seashore shells.
You can't can cans as well as a canner cans for the cans a canner cans are the best cans.
Sunday, June 28, 2009
Five Fatal Flaws of Trading
Posted: 26 Jun 2009 03:03 PM PDT
By Jeffrey Kennedy
Close to ninety percent of all traders lose money. The remaining ten percent somehow manage to either break even or even turn a profit – and more importantly, do it consistently. How do they do that?
That’s an age-old question. While there is no magic formula, one of Elliott Wave International’s senior instructors Jeffrey Kennedy has identified five fundamental flaws that, in his opinion, stop most traders from being consistently successful. We don’t claim to have found The Holy Grail of trading here, but sometimes a single idea can change a person’s life. Maybe you’ll find one in Jeffrey’s take on trading? We sincerely hope so.
The following is an excerpt from Jeffrey Kennedy’s Trader’s Classroom Collection. For a limited time, Elliott Wave International is offering Jeffrey Kennedy’s report
How to Use Bar Patterns to Spot Trade Setups, free.
Why Do Traders Lose?
If you’ve been trading for a long time, you no doubt have felt that a monstrous, invisible hand sometimes reaches into your trading account and takes out money. It doesn’t seem to matter how many books you buy, how many seminars you attend or how many hours you spend analyzing price charts, you just can’t seem to prevent that invisible hand from depleting your trading account funds.
Which brings us to the question: Why do traders lose? Or maybe we should ask, ‘How do you stop the Hand?’ Whether you are a seasoned professional or just thinking about opening your first trading account, the ability to stop the Hand is proportional to how well you understand and overcome the Five Fatal Flaws of trading. For each fatal flaw represents a finger on the invisible hand that wreaks havoc with your trading account.
Fatal Flaw No. 1 – Lack of Methodology
If you aim to be a consistently successful trader, then you must have a defined trading methodology, which is simply a clear and concise way of looking at markets. Guessing or going by gut instinct won’t work over the long run. If you don’t have a defined trading methodology, then you don’t have a way to know what constitutes a buy or sell signal. Moreover, you can’t even consistently correctly identify the trend.
How to overcome this fatal flaw? Answer: Write down your methodology. Define in writing what your analytical tools are and, more importantly, how you use them. It doesn’t matter whether you use the Wave Principle, Point and Figure charts, Stochastics, RSI or a combination of all of the above. What does matter is that you actually take the effort to define it (i.e., what constitutes a buy, a sell, your trailing stop and instructions on exiting a position). And the best hint I can give you regarding developing a defined trading methodology is this: If you can’t fit it on the back of a business card, it’s probably too complicated.
Fatal Flaw No. 2 – Lack of Discipline
When you have clearly outlined and identified your trading methodology, then you must have the discipline to follow your system. A Lack of Discipline in this regard is the second fatal flaw. If the way you view a price chart or evaluate a potential trade setup is different from how you did it a month ago, then you have either not identified your methodology or you lack the discipline to follow the methodology you have identified. The formula for success is to consistently apply a proven methodology. So the best advice I can give you to overcome a lack of discipline is to define a trading methodology that works best for you and follow it religiously.
Fatal Flaw No. 3 – Unrealistic Expectations
Between you and me, nothing makes me angrier than those commercials that say something like, “…$5,000 properly positioned in Natural Gas can give you returns of over $40,000…” Advertisements like this are a disservice to the financial industry as a whole and end up costing uneducated investors a lot more than $5,000. In addition, they help to create the third fatal flaw: Unrealistic Expectations.
Yes, it is possible to experience above-average returns trading your own account. However, it’s difficult to do it without taking on above-average risk. So what is a realistic return to shoot for in your first year as a trader – 50%, 100%, 200%? Whoa, let’s rein in those unrealistic expectations. In my opinion, the goal for every trader their first year out should be not to lose money. In other words, shoot for a 0% return your first year. If you can manage that, then in year two, try to beat the Dow or the S&P. These goals may not be flashy but they are realistic, and if you can learn to live with them – and achieve them – you will fend off the Hand.
For a limited time, Elliott Wave International is offering Jeffrey Kennedy’s report,
How to Use Bar Patterns to Spot Trade Setups, free.
Fatal Flaw No. 4 – Lack of Patience
The fourth finger of the invisible hand that robs your trading account is Lack of Patience. I forget where, but I once read that markets trend only 20% of the time, and, from my experience, I would say that this is an accurate statement. So think about it, the other 80% of the time the markets are not trending in one clear direction.
That may explain why I believe that for any given time frame, there are only two or three really good trading opportunities. For example, if you’re a long-term trader, there are typically only two or three compelling tradable moves in a market during any given year. Similarly, if you are a short-term trader, there are only two or three high-quality trade setups in a given week.
All too often, because trading is inherently exciting (and anything involving money usually is exciting), it’s easy to feel like you’re missing the party if you don’t trade a lot. As a result, you start taking trade setups of lesser and lesser quality and begin to over-trade.
How do you overcome this lack of patience? The advice I have found to be most valuable is to remind yourself that every week, there is another trade-of-the-year. In other words, don’t worry about missing an opportunity today, because there will be another one tomorrow, next week and next month … I promise.
I remember a line from a movie (either Sergeant York with Gary Cooper or The Patriot with Mel Gibson) in which one character gives advice to another on how to shoot a rifle: ‘Aim small, miss small.’ I offer the same advice in this new context. To aim small requires patience. So be patient, and you’ll miss small.”
Fatal Flaw No. 5 – Lack of Money Management
The final fatal flaw to overcome as a trader is a Lack of Money Management, and this topic deserves more than just a few paragraphs, because money management encompasses risk/reward analysis, probability of success and failure, protective stops and so much more. Even so, I would like to address the subject of money management with a focus on risk as a function of portfolio size.
Now the big boys (i.e., the professional traders) tend to limit their risk on any given position to 1% - 3% of their portfolio. If we apply this rule to ourselves, then for every $5,000 we have in our trading account, we can risk only $50-$150 on any given trade. Stocks might be a little different, but a $50 stop in Corn, which is one point, is simply too tight a stop, especially when the 10-day average trading range in Corn recently has been more than 10 points. A more plausible stop might be five points or 10, in which case, depending on what percentage of your total portfolio you want to risk, you would need an account size between $15,000 and $50,000.
Simply put, I believe that many traders begin to trade either under-funded or without sufficient capital in their trading account to trade the markets they choose to trade. And that doesn’t even address the size that they trade (i.e., multiple contracts).
To overcome this fatal flaw, let me expand on the logic from the ‘aim small, miss small’ movie line. If you have a small trading account, then trade small. You can accomplish this by trading fewer contracts, or trading e-mini contracts or even stocks. Bottom line, on your way to becoming a consistently successful trader, you must realize that one key is longevity. If your risk on any given position is relatively small, then you can weather the rough spots. Conversely, if you risk 25% of your portfolio on each trade, after four consecutive losers, you’re out all together.
Break the Hand’s Grip
Trading successfully is not easy. It’s hard work … damn hard. And if anyone leads you to believe otherwise, run the other way, and fast. But this hard work can be rewarding, above-average gains are possible and the sense of satisfaction one feels after a few nice trades is absolutely priceless. To get to that point, though, you must first break the fingers of the Hand that is holding you back and stealing money from your trading account. I can guarantee that if you attend to the five fatal flaws I’ve outlined, you won’t be caught red-handed stealing from your own account.
For more information on trading successfully, visit Elliott Wave International to download Jeffrey Kennedy’s free report, How to Use Bar Patterns to Spot Trade Setups.
Jeffrey Kennedy is the Chief Commodity Analyst at Elliott Wave International (EWI). With more than 15 years of experience as a technical analyst, he writes and edits Futures Junctures, EWI’s premier commodity forecasting package.
If you liked this, also check out: How to Fail as a Trader in 10 Easy Steps
discipline, Elliott Wave, EWI, expectations, free, Jeffrey Kennedy, methodology, money management, patience, trading
By Jeffrey Kennedy
Close to ninety percent of all traders lose money. The remaining ten percent somehow manage to either break even or even turn a profit – and more importantly, do it consistently. How do they do that?
That’s an age-old question. While there is no magic formula, one of Elliott Wave International’s senior instructors Jeffrey Kennedy has identified five fundamental flaws that, in his opinion, stop most traders from being consistently successful. We don’t claim to have found The Holy Grail of trading here, but sometimes a single idea can change a person’s life. Maybe you’ll find one in Jeffrey’s take on trading? We sincerely hope so.
The following is an excerpt from Jeffrey Kennedy’s Trader’s Classroom Collection. For a limited time, Elliott Wave International is offering Jeffrey Kennedy’s report
How to Use Bar Patterns to Spot Trade Setups, free.
Why Do Traders Lose?
If you’ve been trading for a long time, you no doubt have felt that a monstrous, invisible hand sometimes reaches into your trading account and takes out money. It doesn’t seem to matter how many books you buy, how many seminars you attend or how many hours you spend analyzing price charts, you just can’t seem to prevent that invisible hand from depleting your trading account funds.
Which brings us to the question: Why do traders lose? Or maybe we should ask, ‘How do you stop the Hand?’ Whether you are a seasoned professional or just thinking about opening your first trading account, the ability to stop the Hand is proportional to how well you understand and overcome the Five Fatal Flaws of trading. For each fatal flaw represents a finger on the invisible hand that wreaks havoc with your trading account.
Fatal Flaw No. 1 – Lack of Methodology
If you aim to be a consistently successful trader, then you must have a defined trading methodology, which is simply a clear and concise way of looking at markets. Guessing or going by gut instinct won’t work over the long run. If you don’t have a defined trading methodology, then you don’t have a way to know what constitutes a buy or sell signal. Moreover, you can’t even consistently correctly identify the trend.
How to overcome this fatal flaw? Answer: Write down your methodology. Define in writing what your analytical tools are and, more importantly, how you use them. It doesn’t matter whether you use the Wave Principle, Point and Figure charts, Stochastics, RSI or a combination of all of the above. What does matter is that you actually take the effort to define it (i.e., what constitutes a buy, a sell, your trailing stop and instructions on exiting a position). And the best hint I can give you regarding developing a defined trading methodology is this: If you can’t fit it on the back of a business card, it’s probably too complicated.
Fatal Flaw No. 2 – Lack of Discipline
When you have clearly outlined and identified your trading methodology, then you must have the discipline to follow your system. A Lack of Discipline in this regard is the second fatal flaw. If the way you view a price chart or evaluate a potential trade setup is different from how you did it a month ago, then you have either not identified your methodology or you lack the discipline to follow the methodology you have identified. The formula for success is to consistently apply a proven methodology. So the best advice I can give you to overcome a lack of discipline is to define a trading methodology that works best for you and follow it religiously.
Fatal Flaw No. 3 – Unrealistic Expectations
Between you and me, nothing makes me angrier than those commercials that say something like, “…$5,000 properly positioned in Natural Gas can give you returns of over $40,000…” Advertisements like this are a disservice to the financial industry as a whole and end up costing uneducated investors a lot more than $5,000. In addition, they help to create the third fatal flaw: Unrealistic Expectations.
Yes, it is possible to experience above-average returns trading your own account. However, it’s difficult to do it without taking on above-average risk. So what is a realistic return to shoot for in your first year as a trader – 50%, 100%, 200%? Whoa, let’s rein in those unrealistic expectations. In my opinion, the goal for every trader their first year out should be not to lose money. In other words, shoot for a 0% return your first year. If you can manage that, then in year two, try to beat the Dow or the S&P. These goals may not be flashy but they are realistic, and if you can learn to live with them – and achieve them – you will fend off the Hand.
For a limited time, Elliott Wave International is offering Jeffrey Kennedy’s report,
How to Use Bar Patterns to Spot Trade Setups, free.
Fatal Flaw No. 4 – Lack of Patience
The fourth finger of the invisible hand that robs your trading account is Lack of Patience. I forget where, but I once read that markets trend only 20% of the time, and, from my experience, I would say that this is an accurate statement. So think about it, the other 80% of the time the markets are not trending in one clear direction.
That may explain why I believe that for any given time frame, there are only two or three really good trading opportunities. For example, if you’re a long-term trader, there are typically only two or three compelling tradable moves in a market during any given year. Similarly, if you are a short-term trader, there are only two or three high-quality trade setups in a given week.
All too often, because trading is inherently exciting (and anything involving money usually is exciting), it’s easy to feel like you’re missing the party if you don’t trade a lot. As a result, you start taking trade setups of lesser and lesser quality and begin to over-trade.
How do you overcome this lack of patience? The advice I have found to be most valuable is to remind yourself that every week, there is another trade-of-the-year. In other words, don’t worry about missing an opportunity today, because there will be another one tomorrow, next week and next month … I promise.
I remember a line from a movie (either Sergeant York with Gary Cooper or The Patriot with Mel Gibson) in which one character gives advice to another on how to shoot a rifle: ‘Aim small, miss small.’ I offer the same advice in this new context. To aim small requires patience. So be patient, and you’ll miss small.”
Fatal Flaw No. 5 – Lack of Money Management
The final fatal flaw to overcome as a trader is a Lack of Money Management, and this topic deserves more than just a few paragraphs, because money management encompasses risk/reward analysis, probability of success and failure, protective stops and so much more. Even so, I would like to address the subject of money management with a focus on risk as a function of portfolio size.
Now the big boys (i.e., the professional traders) tend to limit their risk on any given position to 1% - 3% of their portfolio. If we apply this rule to ourselves, then for every $5,000 we have in our trading account, we can risk only $50-$150 on any given trade. Stocks might be a little different, but a $50 stop in Corn, which is one point, is simply too tight a stop, especially when the 10-day average trading range in Corn recently has been more than 10 points. A more plausible stop might be five points or 10, in which case, depending on what percentage of your total portfolio you want to risk, you would need an account size between $15,000 and $50,000.
Simply put, I believe that many traders begin to trade either under-funded or without sufficient capital in their trading account to trade the markets they choose to trade. And that doesn’t even address the size that they trade (i.e., multiple contracts).
To overcome this fatal flaw, let me expand on the logic from the ‘aim small, miss small’ movie line. If you have a small trading account, then trade small. You can accomplish this by trading fewer contracts, or trading e-mini contracts or even stocks. Bottom line, on your way to becoming a consistently successful trader, you must realize that one key is longevity. If your risk on any given position is relatively small, then you can weather the rough spots. Conversely, if you risk 25% of your portfolio on each trade, after four consecutive losers, you’re out all together.
Break the Hand’s Grip
Trading successfully is not easy. It’s hard work … damn hard. And if anyone leads you to believe otherwise, run the other way, and fast. But this hard work can be rewarding, above-average gains are possible and the sense of satisfaction one feels after a few nice trades is absolutely priceless. To get to that point, though, you must first break the fingers of the Hand that is holding you back and stealing money from your trading account. I can guarantee that if you attend to the five fatal flaws I’ve outlined, you won’t be caught red-handed stealing from your own account.
For more information on trading successfully, visit Elliott Wave International to download Jeffrey Kennedy’s free report, How to Use Bar Patterns to Spot Trade Setups.
Jeffrey Kennedy is the Chief Commodity Analyst at Elliott Wave International (EWI). With more than 15 years of experience as a technical analyst, he writes and edits Futures Junctures, EWI’s premier commodity forecasting package.
If you liked this, also check out: How to Fail as a Trader in 10 Easy Steps
discipline, Elliott Wave, EWI, expectations, free, Jeffrey Kennedy, methodology, money management, patience, trading
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