The Traders Journal

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Wall Street's Free Lunch... But Investors Must Still Read the Menu

To paraphrase Bill Murray from the movie “Aloha,” the future is not something that just happens.  It’s a brutal force with a great sense of humor that will nickel and dime your investments until it’s totally steamrolled your portfolio if you aren’t watching.

I will concede that it’s a personal rant of sorts, as I have been on the receiving end of excessive charges and fees.  As a market observer, I constantly bear witness to many creative examples of the “steamrolling” force so eloquently cited by Murray.

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The "WHY" Investors Versus The "WHAT" Investors: And The Winner Is...

Highly educated people are, for the most part, trained to ask the question “Why?”  Engineers, accountants, doctors, lawyers and the like invariably want to know all they can about why certain things happen. The assumption is, of course, that knowing why will help you do the right thing in your career domain and therefore get nicely rewarded for it.  

While this strategy may work well in one’s particular profession, the stock market domain is completely different. In the financial arena, one is not necessarily going to be rewarded just because they understand the underlying reasons why something happened. To the contrary, pursing rational answers within a seemingly whacky market may generate an academically satisfying list of explanations but without financial rewards. An investor’s pursuit of “why” may waste precious time and energy when the focus instead should really be on identifying the “what” and then following up with the appropriate action. 

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The Most Profitable Correlation in the Stock Market

Whether it’s life or investing, if you ignore the reality of correlations – be they positive or negative – you are literally engaged in paradigm shifting.  This is the equivalent of trying to put the milk back into the cow. 

We all witness examples of positive correlations in our daily lives.  The more it rains, the more umbrella sales go up.  The more miles you run on the treadmill, the more calories you burn.  When one variable increases, the other variable increases as well.

Those are the easy examples.  You could have guessed them intuitively.  It’s the more complex correlations that are less intuitive – ones such as the positive correlation between the Russia Fund (RSX) and Light Crude Oil (#WTIC).

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The #1 Indicator Professionals Focus On

A week doesn’t go by without some investor asking me “which one single indicator do you recommend above all others?” When I answer this question, the indicator I speak of is never the one they expect.  The most important indicator – the one that will determine the majority of your successes or failures – is you, the Investor Self.  As my fellow trader Ed says, “Sine qua non” (without which there is nothing).
 
So how do we define this indicator?  How do we learn to understand the Investor Self – to know what its strengths and weaknesses truly are?  The answer lies within the one thing that is an investor’s best friend – his or her trading journal. Profitable behavior is based on good organizational routines, flexible thinking, consistent discipline and self-control.  A trading journal is like an expensive custom racing bicycle that allows you to get there faster than the next rider.

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Investing Is To Trading Just As Style Is To Design

In the automotive industry, a car designer begins his or her career as a automotive stylist.  Over time, as their knowledge and experience grows, the most talented of the bunch are offered the chance to become a car designer.  It can take many years to earn that title, and few actually do.  You see, style is all about how things look.  Design is all about how things work.  To produce a truly successful car, both are needed.

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Driverless Trading and the Five Investor Personalities

Pursuing a ‘driverless strategy’ – be it automobiles, hedge funds or individual investing – is counterfactual thinking, in my opinion.  The new BMW iVision car has knob-less gesture controls, 3D displays and an auto function that switches the car into driverless mode.  Perhaps this will work on highways of the future, but don’t bring that sort of thinking to the stock market. 

You’ll recall all those hedge funds that flamed out because they believed PhDs had uncovered new algorithms and derivatives that created virtual driverless portfolios.  For all my years in the markets, I have yet to meet an investor who has ever made money for a significant period of time by pursuing a similar driverless strategy using some third party’s black box.  Inevitably, investors doing that get sucker punched.  I refer to these efforts as the pursuit of dark money.  It’s always been with us, and it will continue to be with us.  But successful investing is 180 degrees from there.  

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Pulling the Trigger: Six Essential Rules

Make no mistake about it: these are internet days and news circles the globe at the speed of light.  Couple that with the fact that Wall Street is the world’s most sophisticated disinformation machine ever devised and you’ll appreciate why I believe technical analysis is an individual investor’s primary defense against the dark arts of disinformation.

Okay...I’ll lighten up. How about a few clichés?  The trend is your friend.  Snooze and you lose.  Both of these common sayings encourage you to be nimble and focus on reacting to changes promptly. It fosters the strategy of winning by not losing. Markets move fast, and you must be capable of pulling the trigger based on your technical signals despite a gaggle of possibly glowing fundamentals staring you in the face.

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Your Survival and Success As An Investor Depends On This

“The way to pick an investor’s pocket is through the ear.” – Jason Zweig

There is a direct correlation between an investor’s profitability and his or her communication skills.  I would be willing to wager you that I could ascertain the degree of your success as an investor within just a few minutes of speaking with you.  That sounds arrogant, but if you do not speak the language of the markets, they have a way of skewering you.  

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My Pal Warren on the 10 Stages of Investing

I’m a big fan of pithy quotes.  When I teach my college class “Tensile Trading”, I use quotes extensively to help illustrate each of the essential 10 stages of stock market mastery.  This week, I thought I’d have a guest blogger share his wisdom with respect to each of my ten elements for successful investing.  These are some of my favorite quotes from Warren Buffett.

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This Investor's Personal Mantra

Having traded the markets for over 25 years, I am still focused on ruthlessly driving mind-bending emotions from my investing efforts.  With novice investors, the first and most significant speed bump seems to be simply acknowledging the fact that investors themselves are the speed bump.

We need to accept two realities in particular.  The reality is that we, as human beings, are hard-wired to an ancient set of gray cells that have us perpetually tethered to poor financial decision making skills coupled with the reality that the world’s most sophisticated disinformation machine (i.e. Wall Street) is set up to take advantage of this fact.   Once you understand that profits are the product of behavioral control, you can appreciate why I continue to have to make the effort to remain even-keeled emotionally when trading the markets.  

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