Being on the wrong side of the trade
Steve Cook on Disciplined Investing

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The Market
    
    Technical

    The Averages (DJIA 11731, S&P 1283) remain within their intermediate up trend (11076-14551, 1158-1593) and short term up trend (11466-12350, 1240-1343).  Additional resistance exists at 11811, 1311.

    Volume was flat; breadth declined; the VIX rose slightly.  It remains between the lower boundary of a trading range and above the upper boundary of the recent down trend--hence, directionless.  Its price action of late appears to have negated the developing reverse head and shoulders formation--which is a positive for stocks.

    Gold (GLD) traded down but continues to gyrate within the very narrow 133.80-139.60 trading range.  If history repeats itself, then the longer this goes on, the bigger the break when it occurs.  Unfortunately, we just don’t know the direction of the break.

    Bottom line: I remain committed to enjoying this move up but refraining from putting additional cash to work.  However, given the improving economic outlook, any retreat that would bring more stocks into their Buy Value Range would likely be a Buying opportunity.  On the other hand, several of our stocks are approaching their Sell Half Range--if they get there sales will be made.  In other words, when stocks in general are in the Fair Value Range, there will be a few that trail (remain in their Buy Value Range) and a few that leap ahead (enter their Sell Half Range).  Those few are our focus.

    The latest from Fusion IQ (short):
    http://www.ritholtz.com/blog/2011/01/fusioniq-sp500-technical-snapshot/

   Fundamental
      
     Headlines

    Yesterday was a fairly quiet day.  The early morning news was positive as overnight a bond sale by the Spanish government went very well, further assuaging investor concern (remember Portugal had a similar successful sale the day before) over the EU debt.

    Offsetting that perceived good news was some poor economic data.  Jobless claims were much higher than expected as was the headline producer price index number.  Those stats set the negative tone for the day.
    http://www.capitalspectator.com/archives/2011/01/jobless_claims_13.html#more

    All of this was just noise, in my opinion.  First, because the Spanish bond auction notwithstanding, the EU is no closer to a real solution to its debt problem than it was before the Portuguese and Spanish bond sales.  In my opinion, the EU, investors et al are whistling through the graveyard.  Nothing has changed (improved).  Second, the trend in jobless claims is still down.  Maybe not as much as some would hope, but certainly in line with our forecast.  Ditto the PPI.  I have been harping on the uselessness nay the counter productiveness of QE2 and the likelihood that it would fuel inflationary pressures.  That is also in our forecast; so there is no reason to get negative over the manifestation of a known outcome.

    There was one bright spot in yesterday’s news.  Marathon Oil (Aggressive Growth Portfolio) announced that it was splitting the company into two in an attempt to enhance shareholder value.  This is actually the second such action in as many days--Wednesday ITT reported that it was splitting itself into three entities.  The point here is that at least some corporate managements believe that their companies are undervalued and are prepared to take substantive steps to recognize that value.  That suggests that stocks are undervalued and would point to yet another reason why I (our Valuation Model) am currently too conservative in my economic/valuation assumptions.  Clearly, it only further exacerbates my cognitive dissonance.

    Bottom line: everything is coming up roses at the moment.  I don’t think that this is likely to last even if ultimately our elected representatives enact fiscally responsible measures which serve to buoy business sentiment (investment and hiring)--which by the  way I am not at all convinced that they will do.  My attitude is that given that stock prices are at a minimum Fairly Valued by our Models calculation, the best strategy is to simply ride out this period in which I am not in sync with the Market and avoid compounding my error by chasing prices up.

    A great 6 minute video with Professor Burt Malkiel on the efficient market hypothesis (today’s must read/see):
    http://gregmankiw.blogspot.com/2011/01/interview-with-burt-malkiel.html
 
    Thoughts on Investing--from the Apprenticed Investor
 
How many times have you asked yourself that question? Don't worry, you're not alone. It's an all-too-common lament among individual investors, whose portfolios are often littered with these losers. Almost as bad as the financial hit is the nagging related question, "How could I have ever been so stupid?"

Today, we address that issue. Included in our discussion are two basic tools that will help you look back and understand your own thought, and the analytical steps you took -- or failed to take -- before buying that sow. More importantly, this process can help before you buy the next pig.

The Best Constantly Improve

Developing a way to both evaluate and improve your performance is one of the most important skills any investor can have. Yet far too few individuals have a mechanism by which they can review their stock picks, evaluate their trade management and assess their market calls.

This is a pity. Constantly reviewing your trading, recognizing what went wrong -- and right -- and adjusting your methods on the basis of what you learn is one of the simplest ways anyone can improve their skill set.

Reviewing strategy for weak spots and making incremental improvements is especially important for the Apprenticed Investor -- someone in the early stages of developing methodology. Indeed, fine-tuning your investing approach should be an ongoing process for all market participants. If you want your strategy to be competitive -- and have the returns to prove it -- you must constantly evaluate and refine your approach.

Today, we are going to outline a three-step approach:

•  Serializing your pre-purchase thinking.
•  Regularly reviewing your trades and existing holdings.
•  Adapting what you learn to your strategy.

The Trading Diary

One of the best ways to evaluate your stock purchases, as well as their subsequent market performance, is to keep a trading diary.

The key idea is to do more than merely track your returns. Dozens of Web sites can do that for you, as does your monthly brokerage statement. Our goal is much more comprehensive. We want you to create a paper (pixel?) trail, memorializing your thought process prior to your purchases. More importantly, you need a way to evaluate -- after the trade -- what you could have done better.

Keeping a trading diary will help you accomplish these things: It will force you to maintain your pre-purchase checklist . It will also make you articulate why you made certain purchases. That often turns out to be important in the evaluation process later on, when trying to determine just why you bought that pig.

Having a clear idea of why you own a specific name will put you in a better position to see your entire investing picture. It gives you insight into your own performance. On an individual stock level, you may discover what tactical errors you may be making. Are you being too impatient? Are your stop losses too tight? Or are you letting stocks get too far away from you before you finally cut them loose? Technical traders might find that they are getting sucked into a false breakout; value investors might be buying cheap stocks that keep getting even cheaper.

The diary is also a good way to avoid repeating the same errors. I much prefer to discover new and different errors (and do so all the time!).

I don't mind the occasional error -- if I can learn something from it -- but I try never to repeat the same mistake twice.

Lastly, and perhaps most importantly, your trading diary will help you improve your overall strategic performance. Doing a post-mortem on your trades will help you adjust your strategy and philosophy. Are you over-trading? Are your positions too large? Perhaps you are bucking the major trend. Regardless, a good trading diary will help you understand exactly what you are doing right and wrong.

Words and Numbers

Let's get into the nitty-gritty of your trading diary.

There are two aspects to this. The first consists of documenting each individual position before purchase; this is simply another part of your pre-purchase research, and it will help you in your review process. The second aspect is analyzing your investing performance afterward, something we will get into in more detail in a later column.

The pre-purchase diary should be a simple one-pager; You should have down, in one place, all of the specific info you accumulated before making the purchase decision. More than mere info, however: These are the key data points you use to make your purchase decision. It can be on paper or in your computer; you can even blog it if you like. But the important thing is to go through the exercise of gathering all the data prior to making your actual purchase.

This attached Word doc is general, so it can be easily adapted to your own investing style. It includes elements of fundamentals (price-to-earnings, price-to-cash flow, catalysts, etc.); technical analysis (trend, volume, moving averages, etc.); and trade management (stop-loss, risk/reward ratio, holding period). If you do quantitative screening of any sort, this is also the place where you would describe the parameters.

Your trading diary is also the place where you write out what your "purchase thesis" is. It may be as simple as "This is an undervalued stock" or "I like the technical breakout." It could be "I think this new iPod thingie is going to be a big hit for Apple (AAPL)."

Lastly, I rank my potential trades on a scale of 1 to 10. I want to see if my own gut-level expectations for a position turn out to be accurate. Am I better off only buying 8s, 9s and the very rare 10s? Should I own a broader basket of stocks? The ranking process helps me understand my own analytical abilities.

You should play with the trading diary -- add to it, personalize it, make it your own.

Economics

   This Week’s Data

    December retail sales were up 0.6% versus expectations of a 0.8% increase; ex autos, they were up 0.5% versus estimates of a rise of 0.7%.
    http://www.calculatedriskblog.com/2011/01/retail-sales-increased-06-in-december.html

    The December consumer price index (CPI) rose 0.5% versus forecasts of a 0.4% increase; core CPI was up 0.1%, in line with expectations.

   Other

    There are still problems in housing (medium):
    http://www.cnbc.com/id/41059824

    This is an interesting piece on the necessity of the Federal Reserve.  As you read, think carefully about the concept of debt-free money (i.e. the Treasury just issuing money) versus the US Treasury issuing debt and then the Fed buying it (issuing money to buy it) (medium):
    http://www.zerohedge.com/article/guest-post-10-things-would-be-different-if-federal-reserve-had-never-been-created

    Whither oil prices (medium):
    http://www.zerohedge.com/article/guest-post-who-how-and-why-140-oil-and-5-gas

    More on Illinois fiscal problems (medium):
    http://www.zerohedge.com/article/illinois-seeks-issue-875-billion-bond-pay-overdue-bills-muni-issuance-market-verge-shutdown

    Inflation is rising (medium):
    http://www.investmentpostcards.com/2011/01/14/rising-consumer-inflation-new-world-order-by-commodity/?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+wordpress%2FVYxj+%28Investment+Postcards+from+Cape+Town%29&utm_content=Yahoo!+Mail

    The US is still the world’s leading manufacturer (short):
    http://mjperry.blogspot.com/2011/01/us-is-still-worlds-1-manufacturer.html

Politics

  Domestic

More on my number one soap box issue of late: this is a long expose on how the government/Fed in concert with the big banks is screwing the rest of America:
http://www.ritholtz.com/blog/2011/01/government-says-no-to-helping-states-and-main-street-while-continuing-to-throw-trillions-at-the-giant-banks/










Posted 01-14-2011 8:24 AM by Steve Cook