Saturday, October 01, 2011

Discipline (a sit down lecture)

After accounts were gently whacked late in the week, I got to thinking (typically a dangerous endeavor in my line of work).

I realized I should be warning readers more on the difficulty of trading a bear market. And specifically, that if you're relying on me to make money, I can guarantee you losing in the long run (clients not included!).

Certainly, we're capable of having similar ideas and disciplines and it is only natural that we'll be on the same trades and playing the same direction from time to time (albeit, uncomfortable for me). But I'm a trained maniac and there is no way to follow along with that, seriously. Every investor has to develop his own disciplined strategy, which is suitable for his specific skill-set, personality and purse strings. You will suffer otherwise and I would take the other side of your trades blindly, if I knew you were matching me trade for trade. I'd short myself!

I'm presenting my strategy, my principles and my individual trades (every trade since February, 2009) for specific reasons. There are some negatives to being this transparent, but it works for larger reasons. First, it's a way to communicate with clients (who tend to care about this stuff; fill-prices vs. others, whys and wherefores, etc.). But more important, I wanted a public record of my late-career machinations (blow by every blow) and I knew it would make me only more disciplined in adhering to my rules and principles - knowing that if I was to contradict those principles (holding a broken stock, for example, in hopes of exiting at a higher price), then I would have to hold that position publicly for all to see. It's much easier to bend the rules when no one is there to scrutinize. We tend to behave better in public, right? We straiten-up when presenting to an audience. We fart less when pretending our shit smells brighter, no?

This game requires behaving better.

Lately (you may have noticed), we're in a difficult market. So until the larger trend has changed for the better, if you see me attacking long (even if I'm good at picking good spots and decent stocks), I'll be fighting the larger trend and likely to lose money (especially if I am you!).

Decent people should never fight the larger trend, especially in a bear market. Leave the Jim Rose antics for the freaks. Don't swallow swords or hang cinder blocks from your nads because you see someone who can do it. You'll exhaust yourself when successful (thus, you'll still miss the easier trend when stocks finally do go higher) and you're only one hiccup from a bloody throat.

While I largely missed the month of August due to travel, I can assure you I would have leaned short into that death-bed of weakness (shorting is a hands-on endeavor, whereas a trending bull market is easier to manage when away from the desk). Sentiment was still fairly positive in August, while action resembled the plague. Today though, we have a slightly better tape, coincident to a plague in sentiment. Charts of indices suggest further weakness (this week clarified any doubts), but there remains a larger handful of individual charts I would buy today, than the number I saw in August (while inhaling volcanic dust in Iceland). Any name which can manage now a higher-low from September, and subsequently marked a higher September low compared to August AND has the support of it's larger industry group (meaning the group itself is of the highest rated, in terms of relative strength), is a candidate for future success.

If only the bear market would end.

I like this set-up at this time of year, largely because I've been rewarded so many times for attacking similar. In recent years, however (due to old age!), when volatility is high, I don't like getting ahead of the market (apparently I was feeling 60 again, getting ahead of the larger trend this last week). In the modern era (post 9-11) the reason I've cleaned-up every year since 2003 (and this one so far) is because, as volatility increased, I moved to a one-step behind approach and followed the market (while every genius in the biz remains bent on predicting where markets are headed, or beheaded!). I got off track with that discipline this week, even if for a good reason (as these stalwarts have all learned now and are fundamentally negative, coincident to signs of life under the market's surface).

Clever thinking is what cost me then, as I let go protective hedges ahead of the broad market improving and subsequently took lumps for it. This behavior endangered my better mood and importantly, the gumption necessary to continue out-performing. Hence, it's a little reckless.

The market is the mob - show some respect or else get whacked. Pretty simple really.

In 2002, before a new bull market had begun (check out April, 2003), volatility was low and trading was becoming very difficult. If you jumped onto a trend, that was when it would revert (up or down, it was only consistent in that it was going nowhere). This was the death of me and I knew my human trading days were numbered (fortunately for me, poker was very popular in 2002...suckers!).

Well, my days are numbered still and I'm no longer feeling 60 again. Volatility remains quite high, which I appreciate, as a mere human can still find opportunity. But I can't be so frisky (even if I see a better market than long-only heads appearing on CNBC, who, by nature, are supposed to see a brighter future for stocks than me. It's always exciting, when our roles are reversed).

Thus, I'm pretty sure October is going to be a smash-mouth gaining month for stocks, but I don't care. I'm 100 years old now and having a good year. I got away with a good quarter (just ended), but it took a lot of depleting energy and equity accounts were only so-so sick by Friday's close (still amply sick, compared to most and certainly the broader market, but nothing especially bloodthirsty). Futures accounts, however, those were pure evil, as I picked-off 13 out of 14 trades profitably during one run and avoided most of the bigger sets).

Smash-mouth or not then, I'm going to peel back some and wait for the market to take the lead. I'm going back to the 1-step behind approach that has printed performance for the last 9 years (pre-2000, FYI, I was always front-running the market, and could be counted on for +200% years - when I wasn't busy blowing-up instead).

This means I'll be lightening-up, everywhere necessary and largely laying LO -  before driving leadership stocks higher into the Thanksgiving holiday!

The longs left in my position (below), while in need of a hedge perhaps, were not yet necessary to sell.

Cliff notes:
Don't Do What I Do
or else, I'll bite your legs off!
Develop and manage your own discipline, based on your style. Then stick to that personal discipline.

Bah!

Follow @Centrifugal to fade trades in real time

Current Position: Equity accounts long-only, 46% invested

Currently Long (according to size): LO (20.1%); ROST (7.1%), [Edit: left out 7% APKT position; 1-3 day trade only], CELG (6.9%), LQDT (4.9%)

Currently Short: no current position

Futures: no current position

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