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The Master Trader-Book Review

  
  Education

Occasionally one comes across a sleeper in markets — a man of great practical and systematic wisdom who has written a book that is widely overlooked and should be read by all market people for great profit. Such is the case with The Master Trader by Laszlo Birinyi. He is well known as a Hall of Fame Market elf from WallStreet Week, and winner of the outstanding elf of the 1990-1999 decade in performance and analysis. He is the inventor of the money flow method of investing, based on counting the market value of upticks and downticks. When you walk with him on the street, people are likely to come up to him and thank him profusely— You recommended apple in 1994 when it was four and I bought it and now I am a wealthy man. He has a number of great calls like this including catching the market bottom in 2008 with a 850 S&P call, catching the bottom of the bond market in 1994, and maintaining a bullish mien throughout the great expansion of 2012 and 2013.

His approach is somewhat diametrically opposed to mine, so I was particularly interested in interviewing him for an upcoming book review. He loves anecdotes. He publishes a market letter, and runs a money management service. He doesn’t deign to compute the proximity of his results to randomness, and he trades mainly individual stocks. Here are some of the things I learned from him.

1. Look for stocks showing a sprained ankle, i.e. a drop of 5 to 10% on such things as a trading loss, an earnings loss. Sprained ankles coming from ratings changes by inferior analysts is particularly poignant of future appreciation.

2. Do things physically. Enter all your trades yourself, and read the newspapers in original form so you can see the placement on the page, the size of the type and headline.

3. Pay attention to divergences in the performance of individual stocks from the consensus about the importance of external events. For example, the housing stocks have been strong throughout all the talk about tapering. How could interest rates be going way up if housing stocks so strong. He likes to look at NVR, Whirlpool, and Sherwin Williams for clues to the real effect of things. These stocks have the virtue of being high priced enough so as not to have high frequency trading interfere with it.

4. Little changes in the institutional structure can have tremendous effects on markets. The importance of big blocks and money flows has been negated by the black pools, multiple market makers, and payments for order flows.

5. Making money in the markets is as hard as making money as a architect or accountant. It requires constant study, practical experience, and openness to new ideas. The best traders are frequently art history majors. (more…)

To Trade or Not to Trade: The Most Important Question

  
  Education
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In trading activity alone does not make money, the right activity at the right time is what makes money. Many times the right thing, is to do nothing.

In your actual trading you have to do four things very well to make money.

You have to know when to get in.

Only enter trades that have the highest probability of success and the best risk/reward ratio. Buy the best monster stocks during up trends. Short the fallen leaders when the game changes and they are under the 50 day. Buy the monster stocks at the gift of the 200 day moving average. Short down trending junk stocks. Go where the trends are.

You have to know when to get out. (more…)

The Five Investing Essential Truths

  
  Education
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5-number

Markets are notoriously hard to read and people see only what they themselves want to see.

Bulls will find reasons why certain stocks will go higher, while at the same time, Bears will find many reasons for the same stocks to go lower.

The seldom-admitted truth is that most of the time, markets exist in some indeterminate state!

The main thing is that you cannot trust consensus and you cannot rely on the “Establishment.”

You can’t find refuge in the herd and you must resist the urge to join the crowd.

Your passion of the moment will most certainly create a disaster over the years!

On the other hand, if you do stick with the following five essential truths, you do stand a better than average chance to invest profitably:

1. Markets are unpredictable and ill-suited to forecasts.

2. Long-term fundamentals are key.

3. Investor emotion leads to volatility.

4. Valuation discipline should guide investment selection.

5. Perspective and patience are always well rewarded.

 

Hitler's definition of democracy

  
  Education
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Hitler, February 1945

Hitler, in speeches in Nuremberg and Munich, has given us definitions of democracy, yet these definitions are nowhere near explicit or conclusive. “Democracy in our eyes is a regime that is supported by the will of the people.” (My New Order, 554) It is unclear as to whom Hitler means by “our eyes…”; one can assume he is talking of the German people. Furthermore, according to Webster, a regime is simply “a form of government or administration”. Hitler’s definition, in turn, becomes simple and obvious; the above definition taken literally does not waver from the consensus definition mentioned in the introduction; in fact it is broader, leading one to suggest that the word “regime” had negative connotations that were lost in the English translation.

Fortunately, Hitler has given us a more intricate definition of democracy, even likening it to an aqueduct or blood vessel: “Democracy is the canal through which bolshevism lets its poisons flow into the separate countries and lets work there long enough for these infections to lead to a crippling of intelligence and of the force of resistance.” (My New Order, 405)

Trade Sizing Depends on Risk Aversion and Volatility

  
  Education
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  • Risk aversion
    • When I was a young man I wanted to devise objective risk systems. In other words, once you have a system, what is the right size to trade, period.
    • After years of working on this I convinced myself that it did not have a unique answer. You need at least one subjective piece of the puzzle to put it together, and that is an individual’s risk aversion. Now that is subjective.
    • There is no rule that says how averse you should be to risk, that is an integral element of your personality. But unless you know how averse to risk you are or unless you can impute risk aversion to your clients, you really can’t settle the question of how big you should trade.
  • Volatility
    • Estimating volatility determines to a large extent what your position sizes should be.
    • A slight improvement in our volatility estimators can potentially produce a significant long-term benefit.

Be Proactive and Not Reactive

  
  Education
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If you want to stay positive even after some losing trades, then it’s also worth taking a proactive approach to losing -as oppose to being reactive to it.

For many, they use the visualising technique. This involves relaxing and trying to see yourself already having lost the trade before it happens. This is some what similar to having no expectations but you make an effort to mentally rehearse the lost. By rehearsing it, you will include your emotions in the rehearsal and start to anticipate how you will feel so that you will not react to it if it does happen.

Many Master Traders probably do not use this technique but they have gone through enough winners and losers to know how they feel. In my view, that is an reactive approach and that is in line with my next point below.

Don’t get me wrong, I’m not saying that visualisation is the best way. But I’m suggesting that you should find the method that best fits your personality. And, to me, that is being proactive.

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