Saturday, 13 October 2012

Relaxed Investor.

Evolution is a process which guarantees the survival of those who adapt to the changing environment. This is true of nature. This is equally applicable to the world of investing.

The readers of this blog come from many walks of life and from different countries. There are day traders, traders who specialize only in emini or options and a vast majority who are not traders at all but simply want to preserve and grow their capital and want to take control of their financial independence in their own hand. These vast majorities of readers are folks who work full time, have 401K accounts, and feel that they are not being served by their financial advisor.  Obviously the needs of each group are different and how each would approach their trading / investment approach is also different. For e.g.  a day trader who is very active in the market (has to be) can move between positions multiple times in a day. But that option may not be available to someone who is working in the law enforcement and is busy chasing the crooks.

I want to share some of the emails from readers (I have obtained their permission):

Don asked:
I have a question.
I have started Swing Trading, but not very successfully so far.
What is a reasonable expectation of returns after a ramp up period of say a year, if someone works at it diligently?
I recently sold my business and have invested the proceeds.
I find it interesting to observe and explore the patterns I seen in the markets and would I believe be happy spending my time being active in the financial markets by taking advantage of these patterns.  This form of  "trading" would only make sense if I can significantly outperform the returns I could achieve with index investing.  As well I am in my 50's so I am concerned with capital preservation.  I should say as well that my spouse is concerned that this form of "speculation" is too risky for us at this stage in our life. And, I of course want to be respectful of her concerns.

Robert said:
grateful if you could add my email to your list.
I  have tried to day trade, mainly ES futures but never made money so I need more of your 'relaxed' investor methods
whilst still putting in time on technical, risk/ ETF picks etc.

find your blog and twitter always worthwhile

And they are not alone. Possibly over 90% of the readers will find themselves in that position, of not making enough money, consistently, over long period of time. In the process, the capital pool is depleted and the dream of achieving financial independence and securing the retirement remains just that, a dream.

I have renamed a page in blog as “Relaxed Investor”. There, I have outlined 16 investment strategies of Sir John Templeton: (H/T

1.Invest for maximum total real return
2. Invest — Don’t trade or speculate
3. Remain flexible and open minded about types of investment
4. Buy Low
5. When buying stocks, search for bargains among quality stocks.
6. Buy value, not market trends or the economic outlook
7. Diversify. In stocks and bonds, as in much else, there is safety in numbers
8. Do your homework or hire wise experts to help you
9. Aggressively monitor your investments
10. Don’t Panic
11. Learn from your mistakes
12. Begin with a Prayer
13. Outperforming the market is a difficult task
14. An investor who has all the answers doesn’t even understand all the questions
15. There’s no free lunch
16. Do not be fearful or negative too often

All his advices are worth listening to, but what I like most is point # 2. Invest – don’t trade or speculate. However, Sir Templeton possibly wrote these rules during bull market and we may have to adapt them a bit in this secular bear market. (yes, I think we are in a secular bear market rally, which will end soon)

To elaborate more on point # 2:

The stock market is not a casino, but if you move in and out of stocks every time they move a point or two, or if you continually sell short… or deal only in options…or trade in futures…the market will be your casino. And, like most gamblers, you may lose eventually—or frequently.
You may find your profits consumed by commissions. You may find a market you expected to turn down turning up—and up, and up—in defiance of all your careful calculations and short sales. Every time a Wall Street news announcer says, “This just in,” your heart will stop.
Keep in mind the wise words of Lucien Hooper, a Wall Street legend: “What always impresses me,” he wrote, “is how much better the relaxed, long-term owners of stock do with their portfolios than the traders do with their switching of inventory. The relaxed investor is usually better informed and more understanding of essential values; he is more patient and less emotional; he pays smaller capital gains taxes; he does not incur unnecessary brokerage commissions; and he avoids behaving like Cassius by ‘thinking too much.’”

And a little bit on point # 3:

There are times to buy blue chip stocks, cyclical stocks, corporate bonds, U.S. Treasury instruments, and so on. And there are times to sit on cash, because sometimes cash enables you to take advantage of investment opportunities.
The fact is there is no one kind of investment that is always best. If a particular industry or type of security becomes popular with investors, that popularity will always prove temporary and—when lost—may not return for many years.

It is difficult to make money day trading when your only resource is your home computer, some technical analysis tools and an internet connection. You are competing against those bots that are able to front run every order. You are competing against those four massive US TBTF banks that control 70% of the derivative market and can employ the best and brightest to write program for trading. Against those hedge fund genius that trade on insider information and have a wide army of expert network.  Above all, your worst enemy is you yourself, your emotions, fear and greed. Very few day traders make money on a regular basis, (over 90% lose money) year after year and those who do, deserve a special salute.

I have been writing about being patient, cash is king etc. Because I have done that mistake of jumping from trade to trade. I have now given up on that and I only trade only when I think it is a long term trend. I would rather not make money, than risk losing it. Capital saved is capital earned. That is why I am not interested in shorting the market for 30 or 50 points any-more nor do I want to go long for that many points. I am waiting for the clear sell or buy signal which will run for 100+ points or more. These opportunities come once in a while but when they come, we are too exhausted or emotionally drained from our failed trades to take advantage of them. The markets are tradable only two or three times in a year, rest of the time; it is not worth the risk. At least from the ordinary investors’ point of view.

There are some sectors, some industries which will go up even when the rest of the markets are down and we have to identify those. I quote this from Josh Brown of reformed broker: The consumer staples sector of the S&P is up 47% since the peak of the S&P 500 in 2007 while the broader market is still down 7% five years later. Did you learn anything? Here's what you should have learned: Even in the very worst of times, people still have to get out of bed, make their kids breakfast and put them on the bus to school. They will die before they stop doing that, no matter what kind of recession/depression/crash you think is afoot. Before I let my kids go hungry, I will work three jobs and then kill a hobo to sell his organs. And you will too. Invest accordingly, end of lesson.

The post is getting too long so I better finish it now. In conclusion, let’s just have a longer time horizon and at the same time be nimble. We are not going achieve our financial nirvana tomorrow and it is going to be a long journey. (We also need bit of luck with us.) Hope I will be able to share the journey with you.

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  1. Interesting view on long-term investing.

    I personally think quite opposite. To achieve any meaningful results in any type of business (I think trading or investing should be considered as a usual business) - you have to be really, really dedicated and involved all the time. Can investor make money by making 3 genuine bets per year? I'm pretty sure no chances. I can't think of any business would grow out that way.

    Plus there is a problem with all this long-term supposedly 'relaxed' type of investment: it requires huge capital, and you supposed to have a very high risk-tolerance (which most of the public doesn't have at all). Also that looks to me more "gamblish" and risky than any trading or speculation. All money in for couple of shots with hope to make huge payout?

    I think it's not possible to make any money or beat the indexes till you really get involved into this business. There are so many tools, strategies, trading vehicles available plus technology got so accessible that it should be used actively. However let's admit, most would prefer what? Learning mini-ES in relation to UST or watching baseball, hanging on facebook, going out to the bar or in the best case reading bbfinance blog? :)

    And by the way, the blog is awesome and entertaining, but would I ever make a trade because I read about it somewhere on Internet? Well, I used to, but never again. Because I know that authors spends hours and hours on analysis and preparation to make a good trade, so should I to make my own.

    And btw, this Sir John Templeton is a freaking master of obvious (Josh Brown too)! Buy value, buy low, diversify - is that it, so simple?!

    1. To each his own. But the fact remains that day traders don't make money and I have tried everything and my personal experience tells me that longer term horizon do work.I invested in gold when it was $200+ in 2002. I can't say I am unhappy. I can give you many examples.
      The folks who have a regular 40 hours + per week job, cannot sit in front of computers watching the stock prices move every which way. 401K allows them to execute only so many trades in a month.A retied person with limited capital looking to preserve and grow capital would be taking unnecessary risk doing monkey hoops chasing beta.
      It goes without saying that one has to be vigilant with his/her investment but going long or going short every 7 days is not for them.
      I am not sure how much you make speculating in stock market, but a clear distinction must be made in the mind of every person, whether s/he is trading or investing or speculating. Those tools and strategies that you talk of are not much use for the retail investors. Believe me, I do this for a living and I have seen both sides of the table for many years.I feel bad for the small investors risking $100k of his/her saving thing they will double it soon, only to lose half of it by the end of the year.
      Again, this does not apply to the 10% of the readers who do it as a business/profession but I am mainly talking about those 90% who do trading / investment on the side.
      I really value your comments and suggestions and you have been a friend of this blog since beginning. Now that I am spending too much time here, please suggest how best to increase the readership and monetize it. I think the calls have been pretty decent.What do you think?

  2. 40 hr shouldn't be an excuse, we talking about making some money here. Plus there is no need to spend all time in front of the screen, but I think it's necessary to be in the market one way or another most of the time. To really feel what market is doing you have to trade it. Again, from my point of view investing is pretty hard and riskly unless you have substantial capital, I would say at least a million and high risk tolerance.

    I consider 401 as a free cash machine for all these "fidelities", unless you actively manage it. I don't touch mine very often, because I've started it recently and don't have much cash there. Also, the technology in all these firms is disgusting and I really think the whole concept of 401 is a joke. However, I try to make at least few trades per year in that account with a target 7-15%/year. I'd call it very infrequent trading. Also the interface is so disgusting that I can barely make myself doing anything there, seriously.

    If you'd like to increase readership, you need to give them numbers (where to trade/invest). People love numbers and hate learning curve of how to come up with ones. Looks like your have some good sense what market does, so you can make emphasis on it. I'd stop relating all political crap to investing or trading decisions, because market cares less about it. Plus can't really compete with ZH :)

    And regarding monetization... I think the only way is to run it as a real business, I mean as a financial adviser or something like that and continue increasing customer base through the blog.

    I don't think pay subscription model would work in the long run - information and technology right now is almost free everywhere. But there is the other side to it: people are really conservative and lazy to make any use of it - so the industry will continue to use their funds for free. That's where chances to succeed are, if you will be able to show readers that it's not scary and can be in fact a lot of fun to manage own capital.

    1. I think we agree on one point. That is, to call it infrequent trading. You don't need $1 mil to investment and very few people have that kind of money. You can easily achieve that target goal of 7%-15% with risk free infrequent trading, without hoping in and out of the market. That was my point.I did an experiment with few clients. They made two pools. Pool A few long term trades, and pool B frequent trades, options and other fancy things. They were to manage pool B by themselves.I signed them up with Thinkorswim and TDwaterhouse. And after a year, they have given up on pool B. Pool A wins hands down.
      I like your idea of giving numbers, which I have started providing. I would not like to make it a subscription model because it is not going to be my main focus. I am a CA,CPA, PMP,SAP FI-CO and have now joined executive MBA. This blog will never be a substitute for work but I am so exhausted that I wanted to take a break and do something different. Enjoying writing but the time spent has to be worth it. If I cannot generate enough Ad revenue from this blog, I will definitely lose interest in it.So trying to sign up with Ad agencies, asking readers to help and disable Adblock, affiliate program with Amazon and now thinking of starting a job board!
      So that when in Jan. I go back to job, I still have a vested interest in keeping the blog growing. And in the process, if I can help few people and make few friends, why not.
      Fridays and Saturdays are bad for the blog. Ad revenue is down.Need more readers and love.
      Anyway, some nice and exciting time is coming up and if we can play it well, we will be able to make more than 15%.Readers will have to take control of their own capital and manage it properly. My main point " Do not take undue risk", reward will follow.

  3. All right, glad you call it trading :) My point is that there are always opportunities... And even if you hold a stock for years, you have to sell calls each month against it - I mean that type of things.
    But they were probably buying options in that pool B? :) No surprise about results then.

    I'm not sure if it worth dealing with all these Ads, I mean when you work in financial industry and have so many title abbreviations, I even don't know what half means :) If I were you I'd try to make blog as a lobby of main business to generate some client's inflow, of course if you need new clients.
    Anyway, it's an interesting place and can grow into something else sometime later, you never know...