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Archive for August, 2008

Posted by Martin August 31, 2008

Discipline

Discipline and patience is alpha & omega of any trading or investing. Without it an investor would experience huge losses. I have my own experience with lack of discipline and patience. I lost about 60% of my initial principal when I started trading about three years ago. I still fight with my emotions. My biggest issue is waiting when the market does nothing. As many other beginning stock operators I want to be rich quickly. Unfortunately there is no “get-rich-quickly” method how to trade stocks. Any such effort will result a huge loss. Of course an investor may be lucky enough to make fortune in the stock market, but it doesn’t work that way too often. It was my hardest lesson I have learned – and paid my big tuition for it. There are some steps every investor should do prior he starts investing or trading stocks.

Create your investing plan

It is easy said, but how the beginning investor can create a plan when she has no clue how to do it? To be honest, I struggled a lot before I could create my own. A lot of books or other sources talk about investing plan, loss plan and money management plan, but none of them tell the reader how to do it step by step. In one of my next posts I will tell about my own investing plan and loss control plan.

Write it down

Once an investor starts working on her investing and control loss plans it would be the best idea to write it down. Everyone can do it either by writing her own blog, or a paper trading journal. I myself created my investing and loss control plan in Excel spread sheet, so it does some of my calculations for me. I have it saved on my flash disk and carry it with me wherever I go. So I always have access to my investing plan. I never invest in the stock or fund prior looking at the plan to see where I am and whether such investment will fit the plan.

Stick to it no matter what

This is the most difficult part in investing. I always struggled to follow my plans by double guessing. I always asked myself whether the plan would really work or should I modify it? I think, investing into stocks is very easy process with no science behind it once an investor has a plan. I wanted to find a system which would allow me an automatic investing into stocks without too many science-work. Some books I have read recently (i.e. The complete Turtle Trader) comply with it. Once an investor set up his rules he can invest no matter what and there is no need to ask further questions. For example CAN SLIM system encourages investors to perform stock timing. I agree with this, however I feel this very difficult to apply it as a beginner. There were very successful traders such as Dan Zanger who turned his $10,000 account into $42 millions because he successfully applied timing and pyramiding. I set my rules how to enter the positions and when to leave the way it allows me to avoid excessive stock chart studying and determine when is the best time to enter. My screener and rule tells it to me right on time. The most important is to stick to it, don’t ask any questions.

When I say stick to the investing plan no matter what, how can investors recognize that their plan is the right one and it works? An investor can always test it on paper trading as I am recommending in my previous post by opening a Stock simulator. During the savings process an investor will have enough time to test her investing rules and plans. After she saves enough to start a real life investing she should know whether her plan works or not. I am not such a person and I wanted to test my rules in real life. So I started investing immediately and tested my rules during the investing process. However you do not have to do it this way.

Learn opening new positions only after referring to the plan first

One of my mistakes was I had my portfolio ticker opened in my office on the second monitor. It was nice watching how the stocks were doing, mainly when they were growing. Most of the time I ended up caught in the trap by jumping into the position and out. The best way how to spend all your money on commissions. At least my broker was very happy with my trading. This is why I was awarded with a special treatment from him so some of the trading tools I have for free now. However the tools won’t make me money. Today I do not do it anymore. I check the prices, but do not open any position until it appears on my screener and I check my Excel spreadsheet rules.

I am learning to stick to those rules as any new investor must do the same. It is not easy process to survive all the temptation, but the discipline will improve results of anyones investing.

Posted by Martin August 31, 2008

Market 08/25 – 08/29

Market 08/25 - 08/29

This weeks’ market behavior was little shaky and volatile, in weekly terms it went sideways. However I could see one positive point in the last August week trading. Even though on Friday the market dropped very significantly (Dow -171.63; -1.47%; 11,543.55; Nasdaq -44.12; -1.83%; 2,367.52; S&P -17.85; -1.37%; 1,282.83) the end of the week shows the resilience to go further down. See the chart:

As you can see at the end of the week the stocks went significantly up at growing volume. So, even though Friday went deep back down it still shows some strength for future growth. If the next week stocks will continue growing we can consider this rally as confirmed. However I wouldn’t recommend opening new positions until the market’s 50 day MA grows above its 200 MA.

Posted by Martin August 31, 2008

Transfer your savings into investing

I am still talking in terms of a small account, small money. In my previous post I told that every small beginning investor can start from nothing. If an investor sticks to the saving plan by transferring a little share of her salary into a savings account, soon she will end up with some good starting amount of money. Also her behavior will change significantly, because she will learn saving money instead of living in debt. I am surprised that many Americans live in huge debt and mostly those people who cannot afford it use credit cards or any other type of loan to buy things they do not need and make themselves end up in even deeper debt. Saving small amount of money can teach everybody how to manage personal money to get out of the debt and create some reserves.

However I assume that an investor is free of debt or he saves some portion of his salary while paying the debt off.

When investor’s savings account shows some money, transfer them into a broker’s account. If the new investor is not familiar with stocks, she may start investing into ETFs or Mutual Funds. However at the very beginning I wouldn’t recommend investing into ETFs with small money. It is very expensive. If an investor can invest only $150 a month it would be very painful investing into a single ETF every month. Because ETF is traded like a stock he will pay commission every time he sells or buys ETF. With this little amount the commission will be 6% (it depends on a broker, but with TD Ameritrade i.e. the commission is $9.99 per trade, so $9.99/$150 = 6%).

I would recommend investing into NTF Mutual Funds instead. The advantage is that there will be no transaction fees involved when buying or selling NTF Funds. The disadvantage is that the funds still require minimum initial investment. The investor shall save the initial investment on her savings account first and then transfer the money to her broker and purchase her first fund.

You can pick some funds as I did for investing to diversify. Since I have two accounts – one for stock trading only, second is my Roth IRA where I invest conservatively. I selected those funds in my IRA account:

Symbol Group / sector allocation initial investment additional investment
SWLNX US Large Caps-Growth 40% $0 $0
NNLEX US Small Caps-Growth 30% $0 $0
RYMBX Specialty-Natural resources 5% $1000 $0
USEMX Emerging Markets 10% $250 $50
OBCHX China stocks-International 15% $500 $100

I recommend that you should do your own research on NTFs prior investing. I wanted to have more aggressive portfolio and I believe this allocation reflects it.

With this starting portfolio I will invest $150 every month into one fund and rotate my investments. Those funds, which require larger initial investment I will save the amount on savings account first, then transfer the amount into IRA and invest it later.

There is a very good article on investing small money on MSN Money by Richard Jenkins, however unlike him I wouldn’t recommend investing into ETFs at the beginning. Originally I started my IRA account the way he recommends in his paragraph but later I realized how expensive it was (unless you trade with no commission broker). If an investor still insists investing into ETFs, the only recommended way to do it is via saving small amount on a savings account first and invest at least $500 (better $1000) into ETF later.

Next step is re-balancing the portfolio. R. Jenkins describes it very well and I stick with this method. I invest into each fund accordingly to keep the allocation at the target. For example when I invest the initial $1000 into RYMBX the allocation will be more than 5%. The next investment will be located into other funds to bring them up to targeted allocation and I start investing into RYMBX again after other funds will meet allocation target.

This investing strategy is for a very long haul. I do not trade these funds, I invest into them. I apply a dollar averaging strategy unlike trading stocks I believe investors can do it with mutual funds or ETFs, because the risk of bankruptcy of a fund or ETF is a lot smaller than individual company. Applying dollar averaging into Enron would ruin a part of investors’ portfolio. There fore I trade stocks, but invest into funds.

Posted by Martin August 29, 2008

Strategy – money management

I will trade only a small money account. The truth is I do not have more money to trade with. My account was originally larger than it is now, but this is a different story which I will explain later. My problem was that I was not disciplined enough to follow any rules given.

I am working on it and I set up rules which I am learning to stick with them as much as I can. Believe me, it is very hard. There is so huge temptation out there, impatience, quick-rich wishes, double guessing and more and more. The best way how to keep oneself on track is write your plans and rules down. This blog is not only the record how I am doing, how I did from the account inception, but it serves to me as my journal. If any trader decides to follow this way of managing her trades I would recommend either creating a journal log or this Internet blog. Not only others can see what the trader is doing, but even she can have this blog always handy without carrying any paper logs. The blog is always accessible wherever the trader is even from someone else’s computer.

However – never, ever write down any personal data on internet, no account numbers, passwords, nothing. Only the ideas and numbers displaying the account development can be used.

Today I deposited the last $150 dollars to my account so the total value of the account is slightly above $2,000 dollars. The broker allows me to use margin, so my buying power is now about $4,700 dollars.

To trade efficiently I created a money management plan which includes the total amount of the account can be invested, how many trades can be opened in one time etc.

The first rule is that I never use the entire account amount at one time. The rough rule is if the account doesn’t use margin, I invest only about 50% of the portfolio principal. If the account uses margin, I use as a principal 65% of the buying power and than I trade 75% of the new buying power. This will always protect my account against over-trading. I remember once I invested all my money even all my margin. When stocks dropped, margin was killing me and I had to start selling losing positions prior stop loss orders could be activated to cover margin calls. So I was killing my trades even when they showed one or two percent of loss which still wasn’t the reason for selling.

Next rule in the money management is that every open position can lose only 5% of the entire account value. Since I do not use the entire value for trading, this rule allows me to set the stop loss order deep down to 50% of any single position. It means that if one open position loses 50% of the value, it still will equal to only 5% of the entire portfolio value. Such a drop in a stock price won’t occur so often so with this stop loss I am protected against the market volatility. It seems pretty drastic to use 50% as a stop loss, mainly when almost every rules based on CAN SLIM or similar trading system say “cut your loses quickly at 7% – 10%”. If a trader sets up the stop loss 7% below his initial entry price, he would be stopped pretty quickly in a volatile market. It happened to me in couple last years when I became collecting 7% loses one after second. I know there are opponents who may say that when a trader enters the position in a proper time, when a stock breaks up from a sound base, he wouldn’t experience such bad results. Well, how many of new investors and traders are experienced enough to recognize such bases and proper buying points? I am definitely not one of them. I am also busy during a single day so I was looking for a strategy which can provide me with a peace of mind and I would not be required studying stocks so often and still making money. The Reverse Scale System (RSS) is the right solution. So even if I lose 50% on a single trade, it still will be only 5% of the entire account.

The next important rule is the number of open positions at one time. I plan to have approx. 10 open positions, but with such a small account it is not efficient. This account will always be riskier than larger one, but there is no other way how to do it. Everyone can always add more money and use different ratio between maximum draw down tolerance, opened trades and the entire account value. Since I have a very small account now, I set up my draw down tolerance to 25% of the entire portfolio. Since every single trade can lose only 5% I can open max 5 trades at one time. When the account value starts growing, I will change the control loss plan accordingly to afford 10 open positions and still be losing no more than 5% (actually on this, the goal is 3% only). However this will be adjusted later as the portfolio will grow.

 

Conclusion:

1) I will trade only 50% – 75% of the buying power of the account.

2) I will set up the stop loss order on each open position immediately after buying an initial position.

3) The stop loss order will be set up to a such value so when activated I will lose only 5% of the entire porfolio.

4) I will have only 5 open positions at one time (later this rule will be rebalanced).

5) I will keep track of any new buy with explanation why I have entered the trade (you will be able to see it on this blog as well).

6) Prior taking any new position I will calculate the loss control plan to see where the stop loss is and whether I am in the allowed limit on such a trade. By doing the calculation, I can determine not only how many positions I can take, but also how large the position can be to stay within the limits for possible loss. For example every initial amount which can be invested in a single trade was around $290 (before margin). After the margin was allowed I would use $466 dollars for a single position. These values when multiplied with max allowed open positions shall be within 50% – 75% of the entire portfolio, if not I will be over-invested.

Posted by Martin August 29, 2008

Picks 08/25 – 08/29

This week I have deposited $150 to my account so I can use a margin for the next trading. Unless the account drops below $2,000 value.

No new picks.

Existing holdings:

Symbol Qty Last Gain($) Gain(%)
AFAM 7 45.21 45.08 16.61
BABY 12 24.60 5.40 1.86
PEGA 19 14.66 -7.03 -2.47
WCG 6 41.76 -6.84 -2.66

Contribution this week: $150

Starting account value with deposit = 2,095.55

Account value = 2,115.58 (without margin)

Buying power = 3,076.31 (65% of the account buying power, see explanation in Strategy)

Portfolio Gain/loss this week = 0.96%

Portfolio Gain/Loss for AUGUST 2008 = -1.13%

Portfolio Gain/loss since inception = -1.13%

Annual Return (CAGR): -1.13%

Posted by Martin August 23, 2008

Picks 08/18 – 08/22

No new picks.

Symbol Qty Last Gain($) Gain(%)
AFAM 7 42.71 27.58 10.16
BABY 12 24.02 -1.56 -0.54
PEGA 19 14.72 -5.89 -2.06
WCG 6 42.31 -3.54 -1.38

Account value = 1,945.55

Portfolio Gain/loss this week = 1.54%

Portfolio Gain/loss since inception = -2.21%

Annual Return (CAGR): -2.22%

Posted by Martin August 22, 2008

Market 08/18 – 08/22

Market 08/18 - 08/22

The rest of the week the market went sideways while volume was dropping. Friday ran up, but on low volume. No big deal.

chart 3

Wednesday:

The market continued in a downtrend, even though it ended with a gain it is on the edge of a downtrend. The volume eased however, which would be a good sign. I cannot say whether the market would continue down or turns back up.

Tuesday:

On Tuesday the market probably lost the steam to continue on its rally. The volume rose when compared to previous day and the index dropped below its support, see the chart. If the market won’t turn the next coming days, which I do not believe it will, the rally will be over. It definitely means no new positions.

Funny thing is that Fannie Mae successfully issued the new emission of bonds, but the market is freaking out over those firms (Fannie Mae & Freddie Mac). Who bought those bonds though? The same investors who are selling their stocks?

The stocks in my portfolio hold well, so I am going to hold them.

Monday:

So Monday’s trading was as I expected. Actually it went the same way as past couple months. The Street was concerned over the future of Freddie Mac and Fannie Mae. I am concerned and surprised how the Street can be concerned over those banks. We all know they (financial institutions, not only these two banks) screwed the financial sector because they didn’t respect warnings and concerns of their own people and rules. I don’t know what people responsible for banks’ businesses thought they were doing, but I consider this as their fault and they should be called for full responsibility. And FED shouldn’t bail them. I have read that Freddie Mac’s CEO Richard F. Syron ignored internal warnings of his risk management chief and explained it as “he had to balance the demands of shareholders and Congress.” (The New York Times, August 5, 2008). I don’t care who bribed him so he had to balance someone else’s demands. He knew that his “balancing” was driving the company into the financial hell. He should act to protect the firm, not others demands. If I do the same in my own business, I would be fully responsible for my own acting and if my own business bankrupts, it will be fully my own problem. How come that these guys are now calling for bailout? Who would bailout a common entrepreneur for his own errors? Those banks deserve bankruptcy, not bailout.

I have heard the opinion that letting banks going bankrupt would have a negative impact to the entire banking system of the country. Maybe. However take a look at emerging markets and post-communist countries. They went through many bankruptcies in 90’s and survived. I think, this economy would survive couple irresponsible bankrupted bankers too.

Well, however the market reacts on these news and concerns about financial companies like a hooker who just found out she is pregnant, we have to deal with this volatility.

Posted by Martin August 17, 2008

Market 08/11 – 08/15

Market 08/11 - 08/15

The market remains in rally, however its 50 day MA remains still below 200 MA. Do not open new trades. It is one of the rules which I have broken again two weeks ago. The rally still may fail. These two coming weeks will show if the market would have enough power to break higher. At this time it moved at 50 MA and slightly above. If it stays there and continues higher, I can consider the market bullish. The economy is still weak so the growth may be temporary. Let’s see what the next two weeks bring up.

As you can see on the chart below, the market is slowing down in its uptrend while the volume is easing. This may cause there will be no more buyers and this rally will become a short one.

Market chart

Posted by Martin August 17, 2008

Picks 08/11 – 08/15

No new picks.

Symbol Qty Last Gain($) Gain(%)
AFAM 7 40.21 10.08 3.72
BABY 12 23.95 -2.40 -0.83
PEGA 19 14.47 -10.64 -3.73
WCG 6 39.81 -18.54 -7.20

Account value = 1,907.46

Portfolio Gain/loss this week = -2.01%

Portfolio Gain/loss since inception = -4.13%

Posted by Martin August 17, 2008

Picks 08/04 – 08/08

As I said in “About me” I decided to change my trading to become a successful trader. Here is my record for this week:

Initial account value = $1,989.66 (see why this amount)
————————————————————————————————
BABY = initial bought 12 @ 24.15; total shares owned 12;

High fundamental result:

– EPS (+1,155 %);
– Growth ratio (+187 %); *
– Sales Growth (+32 %);
– Annual EPS Growth (N/A);

Medical Appliances & Equipment.

1) I have bought my initial position on 08/04/08

*Note this is my own calculated value.
————————————————————————————————
AFAM = initial bought 7 @ 36.76; total shares owned 7;

High fundamental result:

– EPS (+81 %);
– Growth ratio (+1146 %); *
– Sales Growth (+46 %);
– Annual EPS Growth (+43 %);

Health care industry. AFAM showed on my screener result list only for one day, then it shot up and become overextended. The company shows very strong fundamental data.

1) I have bought my initial position on 08/04/08

*Note this is my own calculated value.
————————————————————————————————
PEGA = initial bought 19 @ 15.03; total shares owned 19;

High fundamental result:

– EPS (+258 %);
– Growth ratio (+142 %); *
– Sales Growth (+28.5 %);
– Annual EPS Growth (-15.49);

Business Software & Services industry. The company showed great result and rising EPS. The negative Annual EPS shows that these good results came only this year (2008). If it was only one time growth I will drop this company. I also changed the screener to eliminate negative growth ratio, even though the CAN SLIM strategy allows the company to have negative ratio in one year.

1) I have bought my initial position on 08/04/08

*Note this is my own calculated value.
————————————————————————————————
WCG = initial bought 6 @ 42.9; total shares owned 6;

High fundamental result:

– EPS (+168 %);
– Growth ratio (+11,511 %); *
– Sales Growth (+115 %);
– Annual EPS Growth (45.4 %);

Health care industry. This stock can be called “my pet”. I made money trading this stock. Even though last year this stock slumped down because of its investigation, this company is making money. During the bad market it showed some resilience to drop down significantly. When the market becomes stronger, it will grow up.

1) I have bought my initial position on 08/04/08

*Note this is my own calculated value.
————————————————————————————————