You can never stop learning!

I went to Atlanta Georgia for a few days last week to go to a special closed door training bootcamp that my mentor Phil Town was doing.  I can’t say anything about what was taught as I signed a non-disclosure document and gave my word.

Suffice to say that it was a very rewarding experience.  As you get into trading and investing, there are some methodologies that are just common sense and Phil’s method, which is similar to Warren Buffet’s just makes sense.

As you may or may not be aware, I trade my own system, but I choose stocks based on my own version of value investing.  Buying a stock that is expected to grow every year based on future projected earnings is the only thing can be relied on.  And getting it for a bargain i.e. fifty cents on the dollar is a great way to get rich.

Not only is Phil a great teacher, he’s also a genuine nice guy that like me, just wants to see people succeed.  If you ever get the chance to see him speak, grab a hold of it.  He is very charismatic and engaging.

Phil is embarking on a year long speaking tour of the US and Canada, sharing the stage with Tony Robbins, Bill Clinton, George Bush, Mayor Giuliani, General Powell to name a few.

May today be a profitable day…for all of us.

John


Outguessing your trading system?

Understanding why we do things that are not in our best interest and how we correct and continue in our trading methodology is an insight into human behaviour itself.

Why we sometimes outguess our trading system:

We like to think of ourselves as risk takers, but what we really want is a guaranteed outcome with some momentary suspense to make it feel like the outcome was in doubt. The momentary suspense adds the thrill factor necessary to keep our lives from getting too boring.  The feeling is not unlike going to a horse race and having your horse come from behind and win the race.

However, when it comes right down to it, no one trades to lose or places a trade believing it is going to be a loser, and all systems will definitely have some percentage of losing trades. So it’s difficult not to be tempted into trying to guess which ones are going to be the losers and therefore not participate in those trades.

Secondly, we often convince ourselves that “in this case” our expectations about a particular trade will be different because our method or previous back-testing doesn’t take into account current market momentum or news etc. Consequently this sets up a conflict between what our system says we should be doing and our own contradictory prediction of what will happen in the future.

Lastly, if we risk our money on a gambling event that we know has a random outcome, then there’s no rational way we could have predicted what actually happened. Back to our horse racing example, if you picked the horse because you liked the name as opposed to an analysis of the form, trainer, handicap, race history, age, betting odds and jockey, you could be forgiven for not predicting the outcome of the race.  Therefore, you wouldn’t need to take responsibility for the outcome if it isn’t positive. Whereas, with trading or investing, we believe the future is not completely random. So we form a concept of future price i.e. based on valuations of fundamentals of a stock. This adds an element of responsibility, a desire to over analyze which allows us to outguess our method.

My own experience in trying to outguess my systems had led to some successes and some failures.  The difference being that the failures caused a lot more stress than the small losses I took when my system told me to get out, so it’s just not worth it.  Sometimes the signals we get from our trading method will have us trading in ways that are contrary to our reasoning and turn out to be right. Other times, you will agree with the method and it will be wrong.  Bottom line is that it is better to have a robust method and follow it to the letter than it is to incur the stress of guesswork.  By following a method flawlessly you can only pat yourself on the back.  By deviating and getting it wrong, the pat turns into a big stick to beat yourself with!

May today be a profitable day…for all of us.

John


Value Investing…where the smart money goes!

There is a book sitting on my desk, where it always sits, only an arm’s length away.  It’s looking a little old and dog eared now, as it has been read so many times, and it’s spine is cracked and worn from being left open for reference.  That book is Rule #1.

I remember my first tentative steps into buying my first stock using Phil’s rules.  It was exciting and scary at the same time.  A number of years on, even though I now apply my own proprietary trading system, I am still using the principles I learned from Rule #1 when choosing a company to trade…simply because they make sense.

Phil turned on a light for me when he wrote that book.  He made me believe that “I can do that” and I will be forever grateful to him for it.  I hope that this site can do that for some of you.  I remind myself often that I did not launch this site for me, but for you.  It’s not about me, it about serving you whether you are a friend or an anonymous stranger.  I am here to help make a difference.

Speaking of making a difference, I’m off to Atlanta, Georgia on Thursday to re-train with Phil Town.  He is starting a new speaking tour in the US and Canada this year and is holding his first workshop this weekend.  This one is special as the few people that are going are there to help  give him and his team feedback on his latest course before he makes it available to the general public.  I also get to have dinner at his place on Friday night, so looking forward to getting to know Phil and his wife on this trip.

Phil is very much a value investor in the mold of Warren Buffet.  This will be a good refresher for me in value investing; only buying wonderful companies that are on sale!

May today be a profitable day…for all of us!

John


Maintaining a Positive Trading Psychology

Below is an excerpt from an article from Psychologist Brett Steenbarger, author of The Psychology of Trading (Wiley, 2003)

“It is common to hear traders assert that mental self-control is the key to stock market and futures profits….the reverse is equally true.  Staying grounded in solid trading rules and systems is one of the most powerful ways of maintaining a positive trading psychology. When we are rule-governed, we are in a mental state that promotes efficient perception, problem solving, and action. Indeed, training ourselves to stay rule governed during trading rehearsals is an effective strategy for cultivating rule governance in real time.”

Wise words indeed, a positive trading psychology is SO key to trading success.  Essentially, for the members of this site, I am your rule based system, by following my trades you will keep a positive trading psychology, as you won’t be beating yourself up for making mistakes, or having a “woulda, coulda, shoulda, didn’t” conversation with yourself.

Part of the reason that I am so attracted to trading a system is one, in the past I have had too many of the aforementioned conversations with myself after a trade had gone really bad and second, because I do not believe that I would have the consistent metal strength to make decisions day to day if I were purely relying on instinct, intuition or even experience.

Different rule based systems may work better for different traders, depending on time frames and markets traded…some people like trading 24 hours a day!  My own rules require 15 minutes a day and are very mechanical and that’s the way I like it.

If we believe many of the “Wizard” traders interviewed by Jack Schwager, a key to trading success is surviving our own learning curve.  Identifying the system(s) and trading time frames that work for you.  As not everybody wants to be a day trader, myself included, but you gotta have rules!

May today be a profitable day…for all of us.

John


In answer to a great question…

I received a really great question this week and as suggested, I am answering it for everyone, not just the person who sent it to me.  It came in two parts – the first being regarding QCOR, and the second being ULTA.

I will answer the easier of the two first – ULTA.  The question was, why am I getting out of ULTA if I am only looking to jump right back in?

In the method that I use, which I call Volatility Value Trading System, I use certain indicators to tell me when to buy, where to put my stop and when to exit a trade.  In the case of ULTA, one of my indicators – the one that says, “Get out now – you’ve taken what you can from this stock and it is about to start going down.” gave me the signal, so I placed an order to get out.  Saying this – the stock market is far from being an exact science.  My indicator in this case was wrong, so now that the stock is moving up again I am getting in tomorrow at market.  It’s a great stock, so hopefully it will keep going up.

The next question is about QCOR.  As we all know QCOR has been beating me up pretty good over the last few weeks since the generally agreed unfounded blog posting about the company sank the stock on January 11.  The question is – why do I keep going back in?  This answer is about using a system to trade with and the psychology of using that system, as oppose to getting emotional about a stock.  It is very easy to get emotional about a stock when it keeps kicking lumps out of you, and it feels as if one is being a bit of a glutton for punishment by going in again and again. I agree with the person who asked the question, as many would, it doesn’t feel good at all.  But this is what I have learned, and many have learned before me and many will learn after me, when it comes to trading, the most important thing you can learn is to stop “feeling” about it.

The system is a system as a whole.  It is not about one stock.  The overall performance of the system – the positive expectancy of the system – is that the system ultimately wins.  So while QCOR has been playing some nasty playground games with me for a few weeks, LULU and ULTA and PAY and GMCR and many of my other stocks, even RVBD – have delivered way above average results repeatedly.  I also took nearly 30% out of QCOR a couple of months ago, and QCORs overall performance in the portfolio has been exemplary when I look back over time (it made 123% last year without using margin).  On reviewing what stocks to stick with and what stocks to let go of, QCOR filled all of my criteria and then some.  When we look at the preliminary quarterly results we can see that this company is not going to the dogs by any stretch.

“ANAHEIM, Calif., Feb. 3, 2012 — /PRNewswire/ — Questcor Pharmaceuticals, Inc. (NASDAQ: QCOR) today announced that it expects to report net sales of approximately $75 million and operating income of approximately $41 million to $43 million for the quarter ended December 31, 2011, as compared to $29.3 million in net sales and $10.8 million in operating income for the quarter ended December 31, 2010. The Company’s cash, cash equivalents and short-term investments as of January 31, 2012 was approximately $214 million.  For the full year ended December 31, 2011, Questcor expects to report net sales of approximately $218 million and operating income of approximately $111 million to $113 million, as compared to $115.1 million in net sales and $53.8 million in operating income for the year ended December 31, 2010.”

So herein lies the emotional decision that traders have to make, do I keep taking the buy signals only to keep getting kicked out with small losses?  How do I know that I am going to get kicked out again?  I personally do not have a crystal ball, but what I have is analysis tools and a system.  This allows me to remove the emotion and say, “I will keep taking my buy signals because that is what I do.  I execute flawlessly at all times.  It is the only power I have.”

This is a good stock.  Analysts are questioning the motivation of the blog post that put this stock in trouble.  This stock has a great rating across the board and yet there is an emotional response to the post.  The results look phenomenal.  There is no reason that this stock should be in trouble.  When reviewing its value pricing (Value price of a business regardless of the price it is selling for on the market.) it shows at a moderate estimate to be $68 +.  So, do I back out now?  No way.  Murphy’s Law says, if I make an emotional decision about this stock I will have taken all the hits, but I will miss the big surge when the volatility calms down.

We must Execute Flawlessly!

May today be a profitable day…for all of us.

John