January 4, 2015
Happy New Year! The start of a fresh trading season is the perfect opportunity to refine your approach to investing. It’s crucial to think through what has gone right in your investing strategies and, just as importantly, what hasn’t. What did you do particularly well? Think through a specific thesis that proved correct; ride a trend well; capture a breakout at a predefined chart pattern entry? As the saying goes “do more of what worked, and less of what didn’t.”
We must resolve to focus on what has worked well for us and limit what has not:
- Longer Time Frame. One aspect that we’ll focus on in 2015 is providing longer-term investment theses combined with detailed rationale. We will continue to provide compelling charts with defined entry points. But after spending time thinking about the purpose of this site and what we are trying to achieve, it became clear that we’ve been focusing our energy explaining the technicals at the expense of other investing opportunities. We trust our valuation work and will use technicals to aid in the entry and exit of longer-term positions.
- Defined Exits. Any time emotion enters the equation, our trading has underperformed. We will continue to place contingent sell orders on options positions (or a stop loss if using shares) each and every time we trade. It takes all emotion out of trading and forces us to determine the exact entry and exit levels prior to taking a position.
- Don’t Force Opportunities. By far, our most significant successes have come when we’re able to take advantage of a clear opportunity in the markets. Times like the October (and early December) pullback, where the markets bounced off numerous indicators that we were watching closely. Conversely, our weakest trades came when the markets were boring and we forced trades. Over-trading is a dangerous game to play in the markets.
- Build Into Positions. One of the most pertinent messages in “Reminiscences of a Stock Operator” is the advantage of incrementally building positions. When our trading thesis is wrong, it’s usually wrong early in the trade. By keeping position size small at that point, we limit our losses and get stopped out quickly. On the flip side, this strategy allows us to add to our position incrementally if it unfolds according to plan. As Jesse Livermore opined, big movements take time to develop. As long as a stock is acting right, do not be in a hurry to take profits.
- Dangers of External Validation. There are two types of threats posed by validation. The first is social validation, which is the tendency to look to others to decide what to do. It is during those times that we are most uncertain that we will most look to others to decide how to proceed. The second is that the more uncertain you are, the more you defend your idea. When there aren’t clear facts forcing us to change our belief, the tendency is to deny the new information and further defend our previous belief. Both of these are very dangerous in trading and investing. The more confident we are in a trade, the more we seek out information that confirms our point of view. We must strive to do just the opposite: do not look to others (especially twitter traders) when uncertain on a chart; and search explicitly for reasons why your thesis might fail.