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Reminiscences of Marty Zweig: What I Learned From a Market Great

  
  Education
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The early years

After degrees from Wharton, University of Miami and Michigan State, Marty started his career in academia but ultimately became one of the most respected stock market “gurus” in the modern era. I have years’ worth of memories of Marty, and hope readers will indulge me as I reminisce and share some of the most important market lessons I learned from one of the greats.

But first, the personal stuff. Marty was brilliant, there’s no doubt; but he was also quirky, goofy and affable. He was the consummate worrier… but he was also the ultimate warrior. He lived, ate and breathed the markets and perpetually (and tirelessly) strived to “figure it out.”

One of my greatest memories is getting to see first-hand his now-famous memorabilia collection—to which there are no comparables. Among them, there was the dress Marilyn Monroe wore while singing Happy Birthday to John F. Kennedy in 1962; the suits worn by the Beatles on the Ed Sullivan Show in 1964; the 1992 Olympics’ US “Dream Team” basketball jerseys; the booking sheet from one of Al Capone’s arrests; a letter from Madonna to Michigan State declining acceptance so she could pursue a music career; guitars of many rock stars, including Bruce Springsteen and Jimi Hendrix; the fedora worn by Humphrey Bogart in Casablanca; the original Terminator costume worn by Arnold Schwarzenegger; and multiple boxing championship belts, Super Bowl rings and Heisman Trophies. (more…)

9 Rules For Risk Management

  
  Education
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Rule No. 1- Do not venture in markets and products you do not understand. You will be a sitting duck.

Rule No. 2- The large hit you will take next will not resemble the one you took last. Do not listen to the consensus as to where the risks are (that is, risks shown by VAR). What will hurt you is what you expect the least.

Rule No. 3- Believe half of what you read, none of what you hear. Never study a theory before doing your own observation and thinking. Read every piece of theoretical research you can-but stay a trader. An unguarded study of lower quantitative methods will rob you of your insight.

Rule No. 4- Beware of the nonmarket-making traders who make a steady income-they tend to blow up. Traders with frequent losses might hurt you, but they are not likely to blow you up. Long volatility traders lose money most days of the week.

Rule No. 5- The markets will follow the path to hurt the highest number of hedgers. The best hedges are those you alone put on. (more…)

Managing the Mind to Stay in the Game

  
  Education
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  • “The creation of bad trades is easy:  trade your opinion, trade big, don’t cut your losses, just hold on and hope.  Bad trades fight trends; they put out a lot money with the risk of making little.  The entry and exit signals for bad trades are hope and fear, with the ego stepping in and refusing to honor the stop loss.”
  • “Dramatic and emotional trading experiences tend to be negative; pride is a great banana peel, as are hope, fear, and greed.  My biggest slipups occurred shortly after I got emotionally involved with positions.”  -Ed Seykota
  • A good trade is taken with complete confidence and follows your trading method; a bad trade is taken on an opinion.
  • A good trade is taken with a disciplined entry and position size; a bad trade is taken to win back losses the market owes you.
  • “Ninety-five percent of the trading errors you are likely to make–causing the money to just evaporate before you eyes–will stem from you attitudes about being wrong, losing money, missing out, and leaving money on the table.”  -Mark Douglas
    • A loss is not when I lose money; it’s when I don’t follow my plan
    • Turn down the heat when you are getting smoked (pare back position size, trade smaller in a drawdown)
  • A good trade is taken when your entry parameters line up; a bad trade is taken out of fear of missing a move
  • A good trade is taken to be profitable in the context of your trading plan; a bad trade is taken out of greed to make a lot of money quickly.
  • A good trade is taken according to your trading plan; a bad trade is taken to inflate the ego.
  • A good trade is taken without regret or internal conflict; a bad trade is taken when a trader is double-minded.

10 Characteristics Among Successful Traders

  
  Education
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1) The amount of time spent on their trading outside of trading hours (preparation, reading, etc.);

2) Dedicated periods to reviewing trading performance and making adjustments to shifting market conditions;

3) The ability to stop trading when not trading well to institute reviews and when conviction is lacking;

4) The ability to become more aggressive and risk taking when trading well and with conviction;

5) A keen awareness of risk management in the sizing of positions and in daily, weekly, and monthly loss limits, as well as loss limits per position;

6) Ongoing ability to learn new skills, markets, and strategies;

7) Distinctive ways of viewing and following markets that leverage their skills;

8) Persistence and emotional resilience: the ability to keep going in the face of setback;

9) Competitiveness: a relentless drive for self-improvement;

10) Balance: sources of well-being outside of trading that help sustain energy and focus.

Metaphors and Similes

  
  Education
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Similes and metaphors play an important role in both the internal thought-process of a day trader as well as in communication between two traders.  To describe the emotional reactions coupled to the movement of a stock in likeness to a rollercoaster, or to compare averaging down in hopes of breaking even to digging one’s self out of a hole is to use simile to quickly illustrate a particular situation as clearly and succinctly as possible.  Every trader uses these analogies, each having his own favorites, and they are used to add structure to an environment that often lacks useful tools for explaining particular occurrences. 

Sports metaphors also play an important role in quickly passing information to another trader with a small chance for confusion.  Traders use base-hit as a metaphor to describe a solid but ultimately small-scale win in the market, and home run for when a trade is “out of the park”.  

Ultimately, metaphors and similes can be used by a trader to keep his mind in the right place, and maintain emotional control.  By metaphorically comparing trading to baseball or basketball, the Michael Jordan truism about never missing a shot he didn’t take or Babe Ruth’s statistical record for strikeouts helps the trader keep in the back of his mind the inalienable reality that he won’t get a hit every time he swings the bat.  (more…)

Russell Napier’s Anatomy of the Bear -Book Review

  
  Education
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Described as “a cult classic in the investment community,” Russell Napier’s Anatomy of the Bear: Lessons from Wall Street’s Four Great Bottoms, first published in 2005, is now in its fourth edition, with a new foreword and preface (Harriman House, 2016).

Napier remains a bear. He believes that the run-up in the markets we have seen since 2009 is merely a bear market rally. The “inexorable pressure” from rising consumption in China and increasing retirement in the U.S. “augurs deflation and thus can unleash the force that will push equities to valuation levels associated with the bear market bottoms of 1921, 1932, 1949 and 1982.” (p. 13)

August 1921, July 1932, June 1949, and August 1982: four summer bottoms. What do they have in common? And what can we learn from them to steer ourselves through the next “big one,” whenever it may occur?

To study the nature of bear market bottoms, and how investors reacted to them, Napier analyzed “some 70,000 articles from the Wall Street Journal written in the two months either side of the four great bear market bottoms.” From his research he unearths “approaches that have worked in assessing when the bear is about to become the bull. What also emerges is an understanding of how similar the great four bear-market bottoms were, in turn leading us to a set of signals to guide investment strategy.” (p. 27)

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7 Things Each Trader Has To Accept

  
  Education
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If you truly are serious about being a trader then there are seven things that you will have to accept.

  1. You will have to accept that over the long term at best only 60% of your trades will be winners. It will be much less with some strategies.

  2. Accept that the key to being a successful trader is having big wins and small losses, not big bets paying off. Big bets can lead quickly to you being out of the game after a string of losses.

  3. Accept that the best traders are also the best risk managers, even the best traders do not have crystal balls so they ALWAYS manage their capital at risk on EVERY trade.

  4. If you want to be a better trader then you need to accept that trading smaller and risking less is a key to your success. Risking 1% to 2% of your capital on any single trade is the first step to winning at trading. Use stops and position sizing to limit your losses and get out when your losses grow to these levels.

  5. You must accept that you will have 10 trading losses in a row a few times each year. The question is what your account will look like when they happen.

  6. You have to accept that you will be wrong, a lot.  The sooner you accept you are wrong and change your mind the better off you will be.

  7. If you really want to be a trader then you are going to have to accept the fact that trading is not easy money. It is a profession like any other and requires much work and effort and even years to become proficient. Expect to work for free and pay tuition to the markets through losses until you learn to trade consistently and profitably.

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10 Ways to Move From Peril to Profits

  
  Education
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  1. The first question to ask in any option trade is how much of my capital could I lose in the worst case scenario not how much can I make.
  2. Long options are tools that can be used to create asymmetric trades with a built in downside and unlimited upside.
  3. Short options should only be sold when the probabilities are deeply in your favor that they will expire worthless, also a small hedge can pay for itself in the long run.
  4. Understand that in long options you have to overcome the time priced into the premium to be profitable even if you are right on the direction of the move.
  5. Long  weekly deep-in-the-money options can be used like stock with much less out lay of capital.
  6. The reason that deeper in the money options have so little time and volatility priced in is becasue you are ensuring someones profits in that stock. That is where the risk is:intrinsic value, and that risk is on the buyer.
  7. When you buy out-of-the-money options understand that you must be right about direction, time period of move, and amount of move to make money. Also understand this is already priced in.
  8. When trading a high volatility event that price move will be priced into the option, after the event the option price will remove that volatility value and the option value will collapse. You can only make money through those events with options if the increase in intrinsic value increases enough to replace the vega value that comes out.
  9. Only trade in options with high volume so you do not lose a large amount of money on the bid/ask spread when entering and exiting trades.
  10. When used correctly options can be tools for managing risk, used incorrectly they can blow up your account. I suggest never risking more than 1% of your trading capital on any one option trade.

 

11 Rules for Better Trading

  
  Education
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11rulesbettertrading

Trading in the markets is a process, and there is always room for self improvement. So as we start the new year, here are my 11 rules that help me navigate the markets. By no means is this list exhaustive or exclusive.

Rule #1 Be data centric in your approach : Take the time and make the effort to understand what works and what doesn’t. Trading decisions should be objective and based upon the data.
Rule #2 Be disciplined : The data should guide you in your decisions. This is the only way to navigate a potentially hostile and fearful environment. (more…)

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