Groucho Marx first said it and Woody Allen repeated the famous line “I’d never join a club that would allow a person like me to become a member.” As an independent trader, I’m part of an informal loose-knit group of investors who do what I do, tend to think like I think and possess many of the same traders’ “ticks” as I possess. We are a circle of friends who don’t commingle funds but who touch base regularly, encourage one another emotionally and share investment ideas. Being a trader can be a solitary discipline and one must consciously make an effort not to become reclusive. For me, my trading buddies and my educational outreach provide me the antidote.
The Seasonality Action Practice blog from December 16, 2016 is about the two most impactful decisions you can make as an investor. Academics have produced stacks of papers confirming that your asset allocation decisions have immense consequences that flow directly to your bottom line. I maintain it’s the second most important investment decision you can make.
The most important decision is making a commitment to actively and regularly rebalancing your asset classes. That’s where seasonality comes in by putting the probability winds at your back as you buy and sell to realign your positions with your target allocations. The discipline decision is the most important because while seasonality has a degree of predicable probability, human behavior is predictably irrational.
Babylonians did it. Ancient Romans did it. Medieval knights pledged the “peacock vow” each New Year as their promise of chivalry. Reflecting upon the previous year’s efforts and seeking ways for self-improvement in the coming year has been a common ritual for millenniums because our human nature drives us to be better next year than we were this year.
At this time of year, it’s one distraction wave after another. Admit it. Your investing efforts take a back seat to shopping, socializing, decorating, drinking and feasting. Just pick your poison. In addition, many of you head off to warmer climates, as you should. As an investor or trader, how do you approach these seasonal holidays and travel challenges? The markets don’t close when you go to the Caribbean. They do not tolerate inattention or loss of focus, not even accidental lapses.
You can’t download stock market wisdom. You have to experience it firsthand and practice it. In a nutshell, that is precisely what these Action Practice blogs every two weeks are all about.
The previous Action Practice (#7) presents a tool for uncovering individual investors’ tolerances for risks and rewards. The exercise was intended to identify the personal balance between fear and greed with which investors participate in the market. The response was so positive and encouraging that I actually wrote an entire blog last week to dive into the material in greater depth. Please review that description.
Far too many investors get it wrong, and perhaps no other group more so than the Millennials. In a recent cover page article on the investing habits of the Millennial generation, IBD reported that Index ETFs are the investment vehicles of choice for these 19 -35 year olds. I maintain that this is foolish and simply the result of the young investors not being aware of the powerful decision tools that are available to them.
I have personally discovered that the sweet spot with investing is to have a truly accurate understanding of your own tolerance for the markets’ inevitable pullbacks and drawdowns. Most fundamentalists approach this problem with a static model that considers standard deviations, beta,percentage drawdowns or some numerical gauge. The reality of investing, however, is that we each have completely unique tolerances for risk and reward. This is precisely how it should be.
I’ve analyzed over one million charts. That’s not bravado, just math. A hundred to two hundred charts a day (most days) for over 25 years, and that’s the number you reach. I share this because chart reading practice has indeed allowed me to train my eye in such a away that it allows me to wring an astonishing amount of information from a one-page chart. Cultivating these skills is what this bi-weekly “Action Practice” blog is all about.
For those of you who might have stumbled upon this as your first exposure to these “action practice” blogs, think of this as paper trading, visual investing or virtual trading exercises. Might I suggest you revisit the September 2, 2016 blog where I explain my objectives in more detail.
As we celebrate this season of Thanksgiving, I want to acknowledge a few favorite quotes that are embedded with special wisdom for investors.
As an individual investor, what you bring to the table in the way of intellectual, emotional and behavioral skills will determine whether you succeed or fail. This is hardly a breakthrough revelation, but it needs to be said nonetheless. It’s been my experience that great investors are not born. For the most part, they are average people who simply make a personal commitment to teach themselves the most appropriate skill set.
Investors Business Daily (IBD) acknowledges this by its regular features about individuals who have excelled in one sphere or another. For it is role models who can indeed jump start the acquisition of these essential faculties. IBD features a large number of entrepreneurs in these bio picks. This is clearly from experience and by design. This is a reasonable alternative in lieu of face-to-face mentoring.
Yes, I’ve profited handsomely for years by trading on the coattails of top mutual funds when they report their new holdings each quarter. Yes, this is precisely why so many of you download the Tensile Trading ChartPack each quarter because we make it super easy for you to coattail along as well.
No, you don’t make these profits without some independent thinking, research and comparisons on your part.
Okay, so we know that due to legislative changes as explained in the Action Practice #5 blog, Fidelity is selling their positions in certain financial equities and replacing them with different financial equities, such as ICE, CME, SPGI and STT.