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The Legends Are Abandoning the Markets

  
Analysis, Education
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The legends are abandoning the markets. 

Stanley Druckenmiller founded his hedge fund Duquesne Capital in 1981. From 1986 onward he maintained average annual returns of 30%. He also managed George Soros’ Quantum Fund from 1988-2000. During that latter period he famously facilitated Soros’ “breaking of the Bank of England” trade: the legendary trade which netted over $1 billion in a single day. 

Druckenmiller closed Duquesne Capital in 2010, stating that he was no longer able to meet his investment “standard[s]” in the post-2008 climate (he made money in 2008 before the Fed began to alter the risk landscape). 

Druckenmiller’s key strength has always been macro-economic forecasting. That he would feel the capital markets were not offering him the opportunities he needed says a lot. 

Seth Klarman is another investment legend who is returning capital to clients. Widely considered to be the Warren Buffett of his generation, Klarman recently cited a lack of “investment opportunities” as the cause for his decision to downsize his legendary Baupost Group hedge funds. 

Other legends or market outperformers who have returned capital to investors or closed their funds to outside investors are Carl Icahn and Michael Karsch. Indeed, even value legend Warren Buffett is sitting on the single largest amount of cash in the history of his 50+ year career as an investor, stating that stocks are “fully valued” at current levels (Buffett largely does not believe in shorting the market, so his decision to be in cash is a strong indicator of opportunities). (more…)

Top 17 Quotes from Buffett's Letter

  
  Education
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  1. “I needed no unusual knowledge or intelligence to conclude that the investment had no downside and potentially had substantial upside.”
  2. “You don’t need to be an expert in order to achieve satisfactory investment returns. But if you aren’t, you must recognize your limitations and follow a course certain to work reasonably well.”
  3. “Keep things simple and don’t swing for the fences.”
  4. “When promised quick profits, respond with a quick ‘no.'”
  5. “If you don’t feel comfortable making a rough estimate of the asset’s future earnings, just forget it and move on. No one has the ability to evaluate every investment possibility.” 
  6. “Games are won by players who focus on the playing field — not by those whose eyes are glued to the scoreboard.”
  7. “Forming macro opinions or listening to the macro or market predictions of others is a waste of time.” 
  8. “It should be an enormous advantage for investors in stocks to have those wildly fluctuating valuations placed on their holdings — and for some investors, it is.”
  9. “Owners of stocks…too often let the capricious and irrational behavior of their fellow owners cause them to behave irrationally as well.” 
  10. “In the 54 years (Charlie Munger and I) have worked together, we have never forgone an attractive purchase because of the macro or political environment, or the views of other people. In fact, these subjects never come up when we make decisions.” (more…)

Peter Lynch’s Rules

  
Analysis, Education
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Find your edge and put it to work by adhering to the following rules:

  • With every stock you own, keep track of its story in a logbook. Note any new developments and pay close attention to earnings. Is this a growth play, a cyclical play, or a value play? Stocks do well for a reason and do poorly for a reason. Make sure you know the reasons.
  • Pay attention to facts, not forecasts.
  • Ask yourself: What will I make if I’m right, and what could I lose if I’m wrong? Look for a risk-reward ratio of three to one or better.
  • Before you invest, check the balance sheet to see if the company is financially sound.
  • Don’t buy options, and don’t invest on margin. With options, time works against you, and if you’re on margin, a drop in the market can wipe you out.
  • When several insiders are buying the company’s stock at the same time, it’s a positive.
  • Average investors should be able to monitor five to ten companies at a time, but nobody is forcing you to own any of them. If you like seven, buy seven. If you like three, buy three. If you like zero, buy zero.
  • Be patient. The stocks that have been most rewarding to me have made their greatest gains in the third or fourth year I owned them. A few took ten years.
  • Enter early — but not too early. I often think of investing in growth companies in terms of baseball. Try to join the game in the third inning, because a company has proved itself by then. If you buy before the lineup is announced, you’re taking an unnecessary risk. There’s plenty of time (10 to 15 years in some cases) between the third and the seventh innings, which is where the 10- to 50-baggers are made. If you buy in the late innings, you may be too late.
  • Don’t buy “cheap” stocks just because they’re cheap. Buy them because the fundamentals are improving.
  • Buy small companies after they’ve had a chance to prove they can make a profit.
  • Long shots usually backfire or become “no shots.”
  • If you buy a stock for the dividend, make sure the company can comfortably afford to pay the dividend out of its earnings, even in an economic slump.
  • Investigate ten companies and you’re likely to find one with bright prospects that aren’t reflected in the price. Investigate 50 and you’re likely to find 5.

8 Rules For Traders

  
  Education
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  1. Don’t Fight the Tape – the trend is your friend, go with Mo (Momentum that is)
  2. Beware of the Crowd at Extremes – psychology and liquidity are linked, relative relationships revert, valuation = long-term extremes in psychology, general crowd psychology impacts the markets
  3. Rely on Objective Indicators – indicators are not perfect but objectively give you consistency, use observable evidence not theoretical
  4. Be Disciplined – anchor exposure to facts not gut reaction
  5. Practice Risk Management – being right is very difficult…thus, making money needs risk management
  6. Remain Flexible – adapt to changes in data, the environment, and the markets
  7. Money Management Rules – be humble and flexible – be able to turn emotions upside down, let profits run and cut losses short, think in terms of risk including opportunity risk of missing a bull market, buy the rumor and sell the news
  8. Those Who Do Not Study History Are Condemned to Repeat Its Mistakes

You’ll notice that nothing is profound among the 8. You likely have heard some version of each of them before. But when the voices get loud and volatility picks up, it’s nice to have a reminder in what’s important and why we do what we do.

19+1 Habits Of Wealthy Traders

  
  Education
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1. Wealthy traders are patient with winning trades and enormously impatient with losing trades. Yes, I often fell prone to that. I tend to hope too much when things are going bad. I have time stops, but tend to close positions/strategies too early when having a nice gain. Too often I hold on to exit time when losing. I’m constantly working on that bad habit.

2. Wealthy traders realise that making money is more important than being right. Yes, but always hard to realise a loss.

3. Wealthy traders view technical analysis as a picture of where traders are lining up to buy and sell.Disagree, I have never found any evidence that this actually is true.

4. Before they eneter every trade they know where they will exit for either a profit or loss. Disagree, I use time stops. I have never in my testing found any value whatsoever in using targets or stop-loss.

5. They approach trade number 5 with the same conviction as the previous four losing trades. Yes, agree, but noe easy as confidence drops the more losers I have.

6. Wealthy traders use “naked” charts. Yes, I use no traditional indicators. I only use price action.

7. Wealthy traders are comfortable making decisions with incomplete information. Yes, very true. I try to make my trading as simple as possible. I avoid reading news.The only newspaper I read is The Economist. Except from that I only read football/soccer news and investment blogs on the internet. (more…)

DON’T TRADE EVERY DAY

  
  Education
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Do not trade every day of every year. Trade only when the market is clearly bullish or bearish. Trade in the direction of the general market. If it’s rising you should be long, if it’s falling you should be short.

Jesse Livermore

This is a corollary of trade only when you have an edge. Don’t take part in the market unless you have an edge. And for most trading strategies, the edge comes from market trends.

In a bull trend, the market tends to rise. A trading edge is possible if you look to buy.

In a bear trend, the market tends to fall. If you are looking to sell, you might gain a trading edge.

When the market has no clear tendencies, it’s much harder to gain an edge. If that’s the case, be sure not to overtrade.

Remember that you are a trader, not a worker. A worker shows up for work every day. A trader shows up only when there’s money to be made.

What Winners Do

  
  Education
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“A losing trader can do little to transform himself into a winning trader. A losing trader is not going to want to transform himself. That’s the kind of thing winning traders do.”

– Ed Seykota

It may sound trivial, or overly simple. And yet it is so important. Being a winner starts with a firm commitment to winning.

And that commitment starts with a relentless determination to do what it takes to win — day in and day out, leaving no stone unturned.

Are you a committed winner? What steps are you taking to make 2014 your biggest and best year ever?

Right Trading Mindset

  
  Education
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  1. Back test, study charts, and only trade proven strategies: No trading should begin until you know that your system is a historically profitable one through multiple trading environments. There are many ways to do this and the depth of study into your specific trading system is up to you. But if you do not know how what you are currently doing performed historically then you need to stop until you do understand.

  2. Small losses: Keeping your losses small so you can keep your will and desire to trade strong. Nothing breaks a new traders mindset faster than big, painful losses of capital that are very hard to come back from.
  3. Build confidence through having winning trades: A lot of the great traders we get to see on social media have  built up themselves through many years of learning from failure and then hitting their stride with winning months and winning years. Even if your wins are small, wins will help you build the mindset that you can do this and be successful as a trader. Build yourself up through consistent disciplined trading and winning streaks.
  4. Trade with the right principles: Trading with the right core trading principles like going with the trend in your time frame, never losing more than 1% of your trading capital on any one trade, and follow your trading plan 100% can go a long way to solidifying your peace of mind as trader knowing you will not do anything that will really hurt yourself in the markets.

  5. Match your beliefs to your trading methodology: We can only effect trade a system that matched our strong beliefs about the markets. If you believe in the nature of trends you have to find the markets that trend and trade them. If you are convinced that market always revert to the mean then a robust mean reversion is what you can comfortably trade. Swing trading for traders that love trading ranges, and day trading for those that want action and no overnight risk. The question is who are you as a trader and what trading style matches your personality and risk tolerance.

High-frequency trading: when milliseconds mean millions

  
  Education
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Asked to imagine what a Wall Street share-dealing room looks like and the layman will describe a testosterone-fuelled bear pit crammed full of alpha males in brightly coloured jackets, frantically shouting out bid and offer prices.

He couldn’t be more wrong. Technological advances mean that stocks are now traded digitally on computer servers in often anonymous – but heavily guarded – buildings, generally miles away from the historic epicentres of finance, meaning the brash men in sharp suits depicted in films such as the The Wolf of Wall Street have been dethroned as the kings of finance.
Computer programmers have taken their crown thanks to the code they churn out, which is able to execute trades thousands of times faster than any human. (more…)
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