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I’m sure you’ve heard the expression, “the more things change, the more they stay the same.”  Gerald Loeb used this phrase frequently.  I’ve always had great respect for Mr. Loeb.  True, he was an extraordinary investor and a best-selling author.  But what I most respected him for was his business acumen.  As one of the founding partners of E.F. Hutton, he was often quoted preaching to investors about the need to approach investing as a business and with a business mind.

Early on, I took his advice to heart.  From the very beginning, I always made certain that I organized my investing activities in a manner that yielded timely investment reports and minimized taxes.  I also sought out the best professional accounting, legal, tax and estate planning advice because this is what Gerald Loeb advocated. 

Over decades of training and teaching, it’s been my experience that the majority of both investors and traders are data driven, first and foremost.  Their mantra seems to be “better living through numbers” or a hundred variations on this theme.  But I’ve always wondered: with so much data out there, are the numbers the only thing that matters?  Or is there some other secret sauce to investing success?

I recently delved into my trading journals trying to ascertain the reality of my own emotional status versus trading results and the connections within.  What I discovered was quite an enigma.  It was baffling at first, but it became much less perplexing the more history I reviewed.  The periods of my greatest investing success were invariably tied to positive times when my life was on an even keel.   As a passionate car devotee, I might call this a “turbo boost” in investing because financial rewards seemed to be the highest when I didn’t just follow my methodology but was able to align it with positive equilibrium in my personal life.  The flip side: there were clearly instances where I nailed the methodology portion, but my personal life was somewhat discombobulated.  In those periods of disharmony, I inadvertently created my own ISHTAR – my synonym for the 1987 movie that turned into an expensive blunder!

Peter Lynch started managing the Fidelity Magellan Fund in 1978 with $20 Million in assets.  When he retired in 1990, the fund had ballooned to $14 Billion largely as a result of his 29.2% average annualized return.  Peter Lynch’s mantra was to  “invest in what you know” and his primary investing approach was based on simple research, patience and resilience.  He captured my attention while I was still in graduate school, and his reign continued for a decade after that.  In those years, I found encouragement and inspiration in Lynch’s famous saying “Everyone has the brainpower to follow the stock market.  If you made it through 5^th grade math, you can do it.”

My trading journal is jammed with many of his pithy observations.  Here are a few of my favorite Lynch truisms, each followed by my own insights.

It’s spring and the baseball season is upon the Kingdom.  The Mariners are playing at Safeco Field again, and I happen to be watching the first season of HBO’s medieval fantasy series, GAME OF THRONES.  Is it just me or are both of these pastimes bursting at the seams with investor insights?

I was living in Seattle in 2004 when Ichiro Suzuki won the American League crown with a batting average of .372.  He was not known as a home run slugger, but gosh was he consistent in getting on base.  He only hit 8 home runs that year.  I’ve always considered Ichiro my kind of trader.  In GAME OF THRONES, the House of Lannister has two brothers.  Ser Jaime Lannister, the “Kingslayer” and older brother, is the bold swordsman.  His younger brother, Tyrion, is a clever dwarf with a keen mind.  In my reckoning, Tyrion is the Ichiro Suzuki of the miniseries storyline.

The parallel here to trading is that I’ve known investors whose personalities align closely to Jaime Lannister.  They are big bold extroverts full of confidence who happen to stumble into the market just at the bottom of a major trough.  They execute a couple of ten-banger trades and then, lo and behold, are convinced that they have been touched by the hand of God and are indeed blessed with unique and powerful super hero trading skills. 

You watch your equity position tear away on a 200% parabolic run and then you allow your greed and fantasies to kick in, hoping that it will go up 300% just as it turns down and erases half of your gain.  That’s how you make 100% return on what was once a 200% gain.  So how do you profitably trade an equity that is in an extreme uptrend and going vertical?  The answer is that you trade it “very differently” than your run-of-the-mill trades.

I have a couple of positions presently that remind me of similar equities in 1999-2000 where panic buying had set in and there seemed to be a complete absence of sellers – a situation which created a sort of buying vacuum.  Traders were rushing in regardless of price, fearing that they’d be left behind.  Most of my readers are sophisticated enough to know not to be buyers with this kind of price action, but the dilemma presents itself when you already own the stock and your equity becomes the object of everyone else’s lust.  The challenge is how to maximize your profits without overstaying your welcome.  Here’s how I trade these money machines:

Albert Einstein famously said, “If I had one hour to save the world, I would spend 55 minutes defining the problem and five minutes implementing the solution.”   If you were in a life threatening situation and had only one hour before it proved fatal, what would you do?   Einstein said he’d spend his time wisely asking probing questions to understand the problem in depth.  Having done that, he’d only need 5 minutes to address the issue. 

Many new investors I meet in my classes totally flip around Dr. Einstein’s approach.  They have an unstoppable inclination to jump right into the market, metaphorically speaking.  They’ll trade impulsively for the first 55 minutes and then allocate the last 5 minutes trying to figure out what just happened.

Humor me, please.  Just go with this.  Place your hands on the table, turn down the lights and let’s invite Albert Einstein to our séance to give us his advice.  If it was indeed possible to “channel” him, I suspect he would suggest approaching the market’s first 55 minutes more like this:

I have found that if you offer the market your sincere attention – presented on a platter of organized checklists – it will reciprocate by talking to you about its true intentions.  Warren Buffett would claim that this offers you a cleaner windshield, albeit one never as clean as the rearview mirror.

At the risk of generating many more questions than I can fully answer in this blog format, I’ll share with you the routine checklist I go thru just prior to hitting the buy/enter button on my keyboard.  I present it to you merely as a starting point in hopes that you will assemble your own checklist.  There is nothing supernatural about the list.  The magic is simply in having a customized list and the discipline to run through it just prior to buying an equity.

This checklist assumes that you have already stepped through all six preceding stages of Tensile Trading’s 10 Stages.  That is, it assumes the equity of your desire has been thoroughly vetted, the “buying fire” is in your belly, the market is moving and you’re anxious to jump in.  But hold on a minute, cowboy!  As your mother told you, show some restraint.  Take a deep breath, invest a few minutes and run through your buying scenario one last time.  Here’s my checklist:

Wrong is now right.  What I once considered unreasonable is now considered reasonable (and I don’t mean just stock markets).  On YouTube, you can watch American Eskimo dogs playing with their natural predators, the polar bear (check it out).  Nature and civilization as I’ve known them have changed!  As a trader, I have to change too.

Investing demands that you be aware of what is on the stock market’s fashion plate.  What is in vogue, so to speak, and what is not.  You don’t need to transform yourself into some sort of “fashionista” but, at a minimum, you must pick a side and know which side you’ve picked. 

In the most simplistic terms, the investor’s universe is split into two camps: fundamentalists and technicians; right brain and left brain; stuff we like to trade versus stuff we don’t like to trade; and so on in endless progressions.  The philosopher Buddha said, “We are shaped by our thoughts.  We become what we think.”   With deep respect for this religion, I would add my own embellishment that we trade our own beliefs. 

Warren Buffett’s partner, Charles Munger, once said “All I want to know is where I’m going to die so I’ll never go there.”  There’s a parallel here with stocks.  The year in which certain equities top the performance charts more often than not precedes the year in which they die.

On an annual basis, the press touts the year’s top performing asset category.  It’s nearly always a given that it will be different category than the year before.  The fact is that parabolic runs do not last.  Just refer back to the Internet or housing bubbles for many examples of this.  This is somewhat equivalent to retailers’ “bait and switch” strategies.   Retailers advertise a door buster price bargain but it turns out to be limited to only a few products for the early bird.  Those customers coming afterwards find only a more expensive alternative available – hence, the switch.  Last year’s winning equities seldom translate into winning trades this year.

I attend investment seminars as half-monk, half-hit man.  My time is a precious commodity, so if you are a speaker and see me in the audience, be prepared.  My hot button is when speakers show a few elaborate slides, “share” their four favorite tenets to successful investing and then launch directly into their marketing pitch.  They act as if they’ve given you the keys to the kingdom, proving their brilliance and justifying your attention. And those four tenets are invariably the same:

1. The trend is your friend.
2. Cut your losses short.
3. Let your profits run.
4. Use good money management.

God knows, the investment realm is flooded with these sorts of clichés and they have some value, but only if you embrace these tenets and make them your own.