Tasty Tidbits

 Tasty Tidbits

Edwin Lefevre chronicles the life of legendary stock trader Jesse Livermore in the masterpiece "Reminiscences of a Stock Operator." It is a timeless read for Wall Street aficionados, students of the stock market, and even those with just a cursory interest in finance. If you haven't read it yet, put this book on the top of your summer reading list. Below are some of my favorite tasty tidbits. The wisdom and knowledge gleaned from this book are priceless, but Amazon will sell you a copy for about ten bucks!

1) "It takes a man a long time to learn all the lessons of all his mistakes. They say there are two sides to everything. But there is only one side to the stock market, and it is not the bull side or the bear side, but the right side. It took me longer to get that general principle fixed firmly in my mind than it did most of the more technical phases of the game of stock speculation."

2) "After spending many years on Wall Street and after making and losing millions of dollars I want to tell you this: It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight! It is no trick at all to be right on the market. You always find lots of early bulls in bull markets and early bears in bear markets. I've known many men who where right at exactly the right time, and began buying or selling stocks when prices were at the very level which should show the greatest profit. And their experience invariably matched mine--that is, they made no real money out of it. Men who can both be right and sit tight are uncommon. I found it one of the hardest things to learn. But it is only after a stock operator has firmly grasped this that he can make big money. It is literally true that millions come easier to a trader after he knows how to trade than hundreds did in the days of his ignorance."

3) "Another lesson I learned early is that there is nothing new in Wall Street. There can't be because speculation is as old as the hills. Whatever happens in the stock market today has happened before and will happen again."

4) "There is nothing like losing all you have in the world for teaching you what not to do. And when you know what not to do in order not to lose money, you begin to learn what to do in order to win. Did you get that? You begin to learn!"

5) "Speculation in stocks will never disappear. It isn't desirable that it should. It cannot be checked by warnings as to its dangers. You cannot prevent people from guessing wrong no matter how able or how experienced they may be. Carefully laid plans will miscarry because the unexpected and even the unexpectable will happen. Disaster may come from a convulsion of nature or from the weather, from your own greed or from some man's vanity; from fear or from uncontrolled hope. But apart from what one might call his natural foes, a speculator in stocks has to contend with certain practices or abuses that are indefensible morally as well as commercially."

Many readers will notice distinct similarities in Livermore's trading philosophy utilizing momentum signals and the Absolute Alpha strategy launched on June 6th.  Absolute Alpha acted on the preponderance of Bearish market signals at launch and has steadily added more cowbell over the ensuing week, including today. Bearish signals remain constant and intact. Livermore would probably LOVE trading in our era.

Investors today have many advantages that Livermore didn't have in his day; nearly real-time quotes and execution with almost universal free trading, nearly limitless data sources, and even the ability to limit risk via index trading rather than speculation in individual stocks or commodities. So although the game may have changed, most (all?) of the behavioral characteristics remain the same; fear & hope drive the investing world. 

 

Suffering Fools

Suffering Fools

Dearest fellow Financial Farmers, why do we suffer fools? Investors for too long have been held hostage to economic imbeciles. Why are we gluttons for punishment? If every piece of economic data indicates that the market is POOP, why NOT short it? 

Frequent readers of this amazing blog know that this author is a big fan of "Reminiscences of a Stock Operator" by Edwin Lefevre detailing the life of Jesse Livermore. It reads like an acquired taste, in that fine champagne is an acquired taste. I consider it Gospel for trading. With that said, one of my favorite lines in the book details Livermore's thoughts on selling: "If a stock is good enough to sell, it is good enough to sell short."

Here at ILAF we have an open mind, but it closes like a steel trap when we lose money! The past 7 months have been a painful reminder of what happens when "leadership" runs amok and there is no strategy in place. Chaos ensues. Why as an investor should you be punished for this? Well because you believe in long-term growth and that the economy will "eventually recover," right? 

Recovery often takes longer than we realize, with the Bear Markets often lasting years. In times of listless trading, near-term assets are whipsawed back and forth until investors are green with nausea, not envy. So with that said, there are several options for investors who have little to no confidence in the current market.

First, there is always "do nothing." This involves keeping your current portfolio as is. You're indifferent to near-term volatility and think in decades. Second, there is Dollar Cost Average your existing portfolio during the sell-off with the hope of increasing your positions. Over long periods of time this has generally worked. Third, there is the safety run idea of going all cash until the market subsides and there is some light at the end of the tunnel. The average bear market lasts about 300 days. So cozy up to a umbrella cocktail for about 10 months. A fourth option to consider would be profiting from the downturn. There are several ways to accomplish this, some act more as buffers while others seek Absolute Alpha.

Consider your time horizon and goals, but also your risk tolerance. As Zero Hedge aptly says, "In the long run we're all dead." So for some doing nothing works, others prefer a cocktail on the beach, and a few investors will try to profit from chaos. Socrates put it best: "Know thyself."

Buying Dips

 Buying Dips

Buying dips is one of the great advantages long-term retail investors (aka Financial Farmers) have over their sporting counterparts who are focused on short-term (read high tax) trading gains. Here's how to do it.

When you buy a dip your goal should be to add acreage to your financial farm...at a price YOU are willing to pay rather than chasing a stock up. Even before the market sells off 700 points like it did yesterday for example, an investor looking to capitalize should be ready. The first step prior to even making a shopping list of potential targets, though, is making sure you have investible cash not only ready to go, but preferably deposited with your brokerage. Sometimes in the heat of the moment cash can be transferred but remains "unavailable" because it hasn't been cleared. Always have cleared cash ready.

Now with your cleared cash ready, the other thing that should be handy is your shopping list. This is a living document which has been assembled after careful thought, research, and diligence. It is often updated with new information or thoughts. Regardless, this shopping list has as its basis a group of stocks you want to own and the price you're willing to pay for them. Price discipline is essential. During a dip you are a price maker instead of a price taker. That is an important distinction. Bid low.

Buying dips is a confluence of action and inaction; the financial farmer has cleared cash prepositioned and a shopping list ready, now comes the order flow. Selloffs are tricky in that they often come on the heels of unpredictable data, by that very metric investors don't necessarily know the full impact of that data on the moment of release. Sometimes there are global macro events that trigger massive flights to liquidity that unravel over days, weeks, and months. Sometimes it happens in hours. The future is nebulous. But the investor should be prepared for the worst. This means that a selloff can markedly accelerate quickly. Very quickly.  That is why having a comfortable margin of error is vital on the purchase price. Use limit orders.

The other leg of the trade is the timing. Sometimes even if you get the stock you want at the price you want you still overpaid! Selloffs have a nasty habit of lasting longer and diving deeper than we think is possible, or even reasonable. That's why you should buy in tranches.

If your goal is to have a total 1000 shares of XYZ, consider buying the entire position in segments; make a an initial buy of perhaps 100 shares at the first price point (with a margin of err0r build in) that you think is reasonable. Then stagger those limit orders lower and lower and lower. The risk here of course is the opportunity cost of NOT getting your full desired position, but by using staggered limit orders you can ideally pick up some portion of your goal at pricing more favorable in to you. Stagger your order flow.

So to recap: Buying Dips is a great strategy for long-term investors who want to pick up stocks during a period of market weakness. The strategy involves having cleared cash ready to invest at your brokerage, having a shopping list on hand, and placing staggered limit orders. Although not foolproof, history has shown being prepared to buy quality stocks on a dip can result in meaningful gain over time. An old adage in the real estate world is, "You make your money when you buy, not when you sell."

 

Reminiscences of a Stock Operator

 Reminiscences of a Stock Operator

Recent stock market volatility with the GameStop (GME) short squeeze illustrates that there is nothing new under the sun, indeed some 100 years ago Edwin Lefevre chronicled the career of a character inspired by Jesse Livermore. If you've never had the pleasure of reading it, I highly recommend "Reminiscences of a Stock Operator." It is one of the seminal books on trading, risk, and human behavior ever set to typeface. 

Money Is Made In The Holding

What a bountiful harvest we are enjoying this year fellow farmers! I wanted to take a moment away from the fields and share with you a favorite quote of mine from my favorite book on investing.

Edwin Lefevre's masterwork "Reminiscences of a Stock Operator" has stood the test of time well and tells the story of Jesse Livermore, dubbed the "Boy Plunger," who turned his smarts, energy, and grubstake into an extremely successful career on Wall Street (up until his untimely death in the coat closet of the Sherry-Netherland.)

The primary take-away is this: "Money is made in the holding." And by that Livermore explains that the largest fortunes he made in his career were the result of buying and HOLDING the position.

Do some positions flop? Yes, many. Do some seeds fail? Yes, many. But the potential for an outsized return via an exponential winner dwarfed them all. The proverbial bumper crop that keeps a harvest going for years, generations in fact. There are many ne'er-do-wells reaping the success from seed planted generations before them. And why? They have held.

This ties in well with the Invest Like A Farmer philosophy of buying monopolistic dividend paying stocks with a steadily increasing left to right chart. Day-to-day a position may lose money. Over months it may as well, but over an increasing time period the confluence of inflation, consumption, and (hopefully) brand management those holding a position can harvest a bountiful crop.

So the is my mid-summer wisdom passed along from Jesse Livermore: "Money is made in the holding."

Do Nothing

Leo Tolstoy

A "do nothing" gets a bad rap in a busy bee world obsessed with constant updates, feedback, postings…a proverbial deluge of activity. The reality is, it a takes a lot of effort to do nothing.

Long-time, and long-term, financial farmers will appreciate and validate the soundness of this theory. One of the great modern philosophers of our time was Yogi Berra who had innumerable "yogisms" over the years. One of the best? "You can observe a lot by watching."

For those readers lucky enough to have read Tolstoy's masterpiece "War and Peace," the value of doing nothing is often featured as a prominent theme when faced with making a decision without enough data or confidence. "When in doubt, do nothing."

Finally, one of my favorite trading books of all time is Reminiscences of a Stock Operator which is a loosely veiled biography of the stock trader Jesse Livermore, who throughout his career had many massive ups and downs, is quoted as saying that he made most of his money by "sitting." That is to say, he made his move into an equity position and waited. And waited.

It takes a lot of effort to do nothing; there are multiple temptations, earnings releases, perceived opportunity costs, and yet to those who wish to Invest Like A Farmer, to "do nothing" is something indeed.

Waterfall Decline

Surviving a waterfall decline requires fortitude and patience, both of which are usually in short supply after a dramatic fall from a seemingly placid market. A 2,000 point drop on the Dow Jones Industrial Average over the past 2 weeks has been brutal, there's nothing quite like seeing hard-earned money getting vaporized for seemingly no fundamental reason. The question naturally arises, now what?

Frequent readers of this blog are well aware of the Invest Like A Farmer mentality; we're buying shares (small pieces) in a business, and we prefer highly profitable, monopolistic companies with a steadily increasing left to right chart. We value boring here. By definition, most monopolies are resistant to sudden economic swings. An entire farm planted with the seeds of multiple monopolies is an even better position to be in, as it is extremely unlikely, barring an astroid impact, that all business on Earth will cease.

The major change after a waterfall decline is that a company's dividend yield is now higher since the share price has fallen and financial farmers can now pick up more shares at a lower cost basis. All things being equal, consumers will most likely continue to drink coffee, smoke cigarettes, buy smartphones, wear sneakers, take medicine, drive cars, fix the shed, user their credit cards, and see a movie. Indeed, prevailing monopolies often have the ability due to their strong balance sheets of further consolidating their respective industries.

On August 9th (check out the posting to verify!) I suggested that the dollar was king and a good 401K would be $401,000…given the fall we've seen over the past two weeks, and the past week in particular, it makes sense to review your holdings and identify promising candidates for additional seed capital.

Goldman Sachs had a great article this morning in the Wall Street Journal comparing this correction to 1998 rather than 2008 and the Bespoke Investment Group also had a very interesting piece identifying just how rare true waterfall declines are (this is the sharpest in 75 years!)

My advice remains constant; have a healthy cash reserve at all times, build a portfolio of boring monopolies (i.e. highly profitable companies that pay consistently higher dividends with strong left to right charts), and continually focus on the long-term objective of creating sustainable, generational wealth. Opportunities like this don't come along too often and it is important to seize them when they do.