Thursday, October 30, 2008

The Two Edged Sword of Discipline

Golden Age
Giclee Print
by Pihua Hsu
item #: 11728536A

While I'm happy to report that my accounts are in good shape and at their highest balance, the BUT is this: They should be much higher.

There's a huge difference between seeing and taking advantage of an opportunity (buying a position be it stock or option) and MANAGING that position (limiting losses/maximizing profits). That's a general statement, certainly. In truth, it is hard to look back with the benefit of the future having unfolded and judge a decision when the future is murky. Harder still when you have a psychotic market and you've got money on the line. In this context, it is hard to levy an objective judgment on what one could or should have done in the miasma of uncertainty from the perspective of certainty.

But every investor is faced with uncertainty and must find successful ways to manage that uncertainty in order to maximize profits and minimize losses. Essentially, that translates into have a good process (discipline) and sticking with it. A consistent process founded on sound principles will yield better results than being willy-nilly. For example, you will displease the gods of Probability should you play black jack, and sometimes take a hit on 16 and at sometimes pass. You either always do it OR never do it. It's called being consistent, and consistency is always founded on discipline.

As this blog is for heuristic purposes I want to tell you how I committed a double blunder on my HERO. I bought 2000 shares of HERO two days ago. As I indicated, I felt that I had a decent risk/reward. One of my disciplines is that I never buy a stock ahead of earnings. (Well almost never!). I generally look at when a company reports prior to buying. I did not this time. That was Blunder 1.

HERO happened to report yesterday a.m. They beat, but frankly, the outlook for some of these drillers is not all that good. I watched the stock, and I did not feel that the price action was indicative of a really strongly desired stock. I had a very nice gain, and I took it. My 'nice' gain could have been a really extraordinary gain as there was at least $2.05 more in that trade. When you buy a stock at $4.9, two bucks is a rather sizable percentage gain.

I spent a good bit of the day kicking myself. I should have tranched my sales in thirds--something I generally do. Blunder 2!. I'm not excusing that. I strayed off my discipline. But I assuaged my disgust (yes, I really was disgusted), with the knowledge that had I really been following my discipline, that I wouldn't have bought it to begin with! (Oh the things we rationalize to keep us from looking like a dumb ass!).

I will be out all day tomorrow. We begin our two-day odyssey to secure Lacey. As it turns out, a Border Collie from this shelter needs a ride to Richmond, which is just 20 minutes from where I live. Now how strange is that?

The weather promises to be beautiful: high sixties and clear. I'll take my camera and bring a few shots back of the Great Smokey Mountains. The futures look promising, but I don't think that any are fooled by our prospects economically either here or in other parts of the world. So many are calling for a bottom process. A bear market rally is not part of a bottoming process insofar as I understand bear markets. Seems more of a relief rally.

But, these present opportunities in which we can either participate with prudent positions and vigilant risk management or stand aside and watch. I've just enough exposure to feel like I'm participating with UYG, UPW, and SSO. I still have some DUG having sold DIG yesterday.

HERO will likely be $10! But, if my discipline is to not buy before earnings, and to look at both charts and fundamentals, I'll either find an entry or find another opportunity. In fact, holding the thought that there are ALWAYS opportunities in the market to find at better risk/reward than chasing an extended stock is also a good discipline to both hold and more importantly to practice.

I hope that you have a good day.


nice said...

Personally I like to scale out positions in 3rds...

As the position initially moves in my favor I take 1/3 out - so no matter what happens after this, the trade is now profitable..

After that, I like to set a target or wait for a move - and sell another 3rd

For the final third - unless the move has been extreme - I like to just let it ride in case we go into a longer term trend.

Using this method one can avoid trying to call bottoms and tops and avoid trying to guess whether we are in a trending or sideways move.

The diasadvantage is that it leaves a lot of money on the table - but the advantage is that it allows you to 'keep' the gains made.

After all...

IT is not what you MAKE, it is what you KEEP


Regarding renko charts - I like to use them for commodity markets because these charts filter out the noise.. but I like to program them to change the box size to adjust for the volatility


I've been thinking about all this dollar swap stuff.

Flooding the world with dollars - ultimately creates a temporary demand for them - I wonder at what point this flooding of dollars will actually cause a reflation rather than any continued unwinding of commodity positions (as soon as the dollar hinted at a shortterm reversal/consolidation this a.m. - gold and oil went down - and copper just dropped 10%)


I've also noticed the past 2 weeks that afterhours and pre market there is some kind of game going on with the futures - mostly BS action..

I mean DOW futures up 300 points on a declining GDP??

And there was that limit down fake out last week.

Unfortunantely it is looking more and more like meddling in the market IMO..

I may be wrong - but given the dire situation and the latest market action - I think the governments are going to do what ever they can - ie: prop stocks - and try to keep commods level.


Leisa said...

I've seen various folks 'call' for the government to step to the equity markets. This stuff is so crazy.

Thanks for explaining your tranching. I like the 3 in 3 out, and I've done that successfully. While I've become much better of 'understanding' that neither tops nor bottoms can be accurately determined, there is always that niggling sense--that is always invoked with looking at a chart--that wants to needle us otherwise!

I'm glad that I hung onto DUG.

nice said...

The odd thing about people 'calling for the government to step in to the equity markets'

is that during the 1990's Japan did just that - and as soon as foreigners found out about it - they dumped Japanese stocks as soon as they could creating an even worse bear market.

I recall reading how during the past 20 years - Japanese investors wanting to trade locally - just shorted the market month after month - that's how they made their money - keeping the rest in their yen in Post Office savings accounts
(until earlier this decade when they cuaght onto the carry trade thing)

Now it seems all governments are for all intents and purposes 'supporting' their markets - so it prevents money from trashing one particular country to much in particular.

Still I have to wonder if we are not creating one big 'welfare' state - where people depend on the government for every little thing - and cheer everytime the government props up their 401k's


On a positive note I guess there was some 'dethawing' of the commercial paper market - since the goverment is now the 'buyer of last resort' in that market also.

Funny that some of GE's 'highly rated' paper was trading like a junk bond recently.

I guess the real problem is that with so many markets frozen - people cannot really price anything at all..

I agree it is scary..

But I'm hoping for the best.


nice said...

So we bounced around all day today for an EOM shuffle within yesterdays last 15 min closing range...

Volatility was muted today - which was a good sign - and probably explained all the rapid back and forth action as day traders didn't adjust their game plan for a more relatively less volatile day...

However I sensed everything was on the verge of selling off until about 15 minutes into the close then Fed's Yellen said 'we could go a little below Fed Funds 1%'

To be honest I don't see going below 1% as positive at all - and I don't see it..

I was surprised to see many expert bloggers say they were going to ct 75bps yesterday....

However anyone take a look at Hartford Financial $100--$10??

he next casualty?

Scary stuff indeed to see insurance companies going down the tubes..

Of governments will sadly help out lifecos and pensions by lightening up their reserve requirements...

Q's close green again...


Leisa said...

Nice, I'm very proud to say that I'm the first person that wrote (to my knowledge) about insurance companies and their entanglement in hedge funds and bonds and ....systemic risk. I was way too early to the trade though.