Archives of “January 3, 2019” day

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Trader Vic’s Principles of Trading

  
  Education
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It’s a helpful book to return to when market conditions get tough. A great place to start is Vic’s “business philosophy,” as encapsulated in three rules:

1. Preservation of Capital

2. Consistent Profitability

3. Superior Returns

Below is Sperandeo in his own words:

 Preservation of Capital

Preservation of capital is the cornerstone of my business philosophy. This means that, in considering any potential market involvement, risk is my primeconcern. Before asking, “What personal profit can I realize?”, I first ask, “What potential loss can I suffer?”
…There is one, and only one, valid question for an investor to ask: “Have I made money?” The best insurance that the answer will always be “Yes!” is to consistently speculate or invest only when the odds are decidedly in your favor, which means keeping risk at a minimum.

Consistent Profitability

Obviously, the markets aren’t always at or near tops or bottoms. Generally speaking, a good speculator or investor should be able to capture between 60 and 80% of the long-term price trend (whether up or down) between bull market tops and bear market bottoms in any market. This is the period when the focus should be on making consistent profits with low risk.
…Anyone who enters the financial markets expecting to be right on most of their trades is in for a rude awakening. If you think about it, it’s a lot like hitting a baseball — the best players only get hits 30 to 40% of the time. But a good player knows that the hits usually help a lot more than the strikeouts hurt. The reward is greater than the risk.

Pursuit of Superior Returns

As profits accrue, I apply the same reasoning but take the process a step further to the pursuit of superior returns. If, and only if, a level of profits exists to justify aggressive risk, then I will take on a higher risk to produce greater percentage returns on capital. This does not mean that I change my risk/reward criteria; it means that I increase the size of my positions.

What banks will be burned by Greece ?

  
Analysis, Education, Global Indices
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Greeceflag“At end-Q3 foreigners held EUR216bn of Greek government debt (72.3% of the total market, 90.2% of GDP), having doubled their position since end-04. Given recent downgrades and another round of revisions to budget data from previous years, a sharp slowdown or even reversal of inflows from foreigners into the local debt market has become an increasing risk.”

Read the full story on FT Alphaville’s blog, by Tracy Alloway

Ed Easterling’s 12 Rules of Market Cycles

  
  Education
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Here are Ed Easterling’s 12 Rules of Market Cycles:

1. Secular cycles are driven by the inflation rate (deflation, price stability, and higher inflation)
2. Secular bulls occur when P/E starts low and ends high over an extended period
3. Secular bears occur when P/E starts high and ends low over an extended period
4. Cyclical bulls and bears are interim periods of directional swings within secular periods
5. Cyclical cycles are driven by market psychology, illiquidity, or other generally temporary condition(s)
6. Time is irrelevant to the length of secular stock market cycles
7. Secular bulls require a doubling or tripling of P/E
8. Secular bears occur as P/E stalls and falls by one-third to two-thirds or more
9. When real economic growth is near 3%, there is a natural floor for P/E between 5 and 10, a natural ceiling around the mid-20s, and a typical average in the mid-teens
10. If economic growth shifts upward or downward for the foreseeable future, the natural range moves upward or downward, respectively
11. Inflation drives P/Es location within the range; economic growth drives the level of the range
12. The stock market is not consistently predictable over months, quarters, or periods of a few years; the stock market is, however, quite predictable over periods approaching a decade or longer based upon starting P/E

 

Good stuff. That’s an interesting take on broad cycles.

Are you a successful speculator ?

  
  Education
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If you never trade, can you be a successful speculator?
If you dollar cost average, and are disciplined, are you a successful speculator?
If you compound at 50% per year for 10 years, and then lose everything in an afternoon, are you a successful speculator?
If you lose everything in an afternoon, and then learn from your mistake, and then compound at 50% for the next 10 years, are you a successful speculator?
If you compound at 6% per year for 10 years, and never have a meaningful drawdown, are you a successful speculator?
If the risk free rate is 6%, and you are making 12%, are you a more successful speculator then if the risk-free rate is 0% and you are making 6%?
If you think you are a successful speculator, can you really be a successful speculator?
If you think you are not a successful speculator, can you be a successful speculator?
Who are the most successful speculators of the past 100 years? Who are the least successful speculators of the past 100 years? 

Success is the mother of confidence

  
  Education
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How do you build confidence?  There are many ways but only one process: multiple small successes.  I am very much an advocate for boring trading.  What I mean by that is I trade the same edge over and over again without variation.  By trading the same edge over and over again I know when to get in and when to get out.  I know what to look for when a trade is working and I can safely add to my position.  On the other hand, I know what to look for when the trade is not working and I can exit with a small loss.  By following the rules EVERY TIME you can succeed, not in making money every time (impossible!), but by following the same plan every time.  These small successes give you the confidence to trust yourself each and every time your edge presents itself.  This is true in any new venture, whether it be golf, bowling, drawing, flying, etc.  Each small success gives birth to greater confidence which in turn brings further successes.  You can then replace a vicious circle of failure with a confident circle of success.  It is so EASY to want the lottery ticket or the home run every time at bat but HARD to accept when the numbers do not add up or when all the preparation leads to nothing more than the hard earned single.

Focus

  
  Education
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The goal of a successful professional in any field is to reach his personal best. You need to concentrate on trading right. Each trade has to be handled like a surgical procedure – seriously, soberly, without sloppiness or shortcuts. This is a stock trading risk management plan. A loser cannot cut his losses quickly. When a trade starts going sour, he hopes and hangs on, and his loses pile up. And as soon as he gets out of a trade, the market comes roaring back.

  • Trends reverse when they do because most losers are alike. They act on their gut feeling instead of using their heads. The emotions of people are similar, regardless of their cultural background or educational levels.
     
  • Emotional traders go into risky gambles to avoid taking certain losses. It is human nature to take profits quickly and postpone taking losses. Emotional trading destroys those who lose. Good money management and timing techniques will keep you out of the hole. Losing traders look for a “sure thing”, hang on to hope, and irrationally avoid accepting small losses.
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