Wednesday, January 14, 2015

From Ari Kiev's "Mental Strategies of Top Traders."

This simple (but hard to do) 11-step outline is a fantastic way to organize your thoughts as a trader.

For 2015, I have resolved to use it, formally, for all of my new positions.  This way I can get more size, and will have the conviction to ride out this volatility.

I think the mistake most of us do as traders is to sort of "Get a hunch and bet a bunch."  In other words, we don't actually do the real boring, hard work of knowing our position.  And what happens when we don't do enough work?  We don't have the conviction to hold our stocks when they get hit with volatility, especially around events or earnings calls.

I find that for myself, when I've done the work, I have the conviction to ignore the chorus of bench-warmers who are telling me how stupid I am to have a variant view.  Sure, it's lonely, but it's always lonely at the top.  By definition, the winner of the race is there alone, before anyone else arrives.

The other thing I notice is how much BAD information/opinions there is out there.  Even highly respected major analysts at big firms get things wrong OFTEN.  "Often wrong, never in doubt" is their mantra.  How do we, with a variant view, ignore their bleating?  By doing the work.

And a variant view- that is the key to this whole game!  Most of the money I've made in stocks is in the painful positions, the ones that no one likes.  One way to ameliorate that pain is bourbon.  But an even better way is to follow this checklist.  To a tee.

So I'm sharing it with you here:

An outline for establishing a variant view:

  1. Understand your sector.  Find something changing, a transformative event.
  2. Do the work that will increase your conviction that your expectations will be realized.
  3. Don’t worry about day-to-day price fluctuations if your thesis is correct.
  4. Define the variant view and set up some benchmarks to see whether your thesis is playing out. 
  5. Technical analysis can support your thesis.
  6. Get sized with good ideas even if you have got only one or two data points.  You have to think bigger than your own limited set of data points.
  7. You can expect 4 to 5 good ideas per year.  Go down multiple paths since you don’t know which ones will come to fruition.
  8. Don’t worry too much about the downside.  Take a variant view and keep doing the work.
  9. Sell into strength as the rest of the Street starts to recognize the story and your variant view is becoming consensus. However, there is value in holding on as a story unfolds even past the point where the idea becomes consensus.
  10. Dig deeper; talk with people in the industry, read financials, listen to conference calls, build your own models.
  11. It is often uncomfortable when your views diverge from the consensus, but this is where there is the most opportunity.

Wednesday, October 15, 2014


"I just want to evolve." -Ray Dalio

Ray Dalio is the epitome of quirky, eccentric hedge fund investor.

His complete obsession with questioning every fact, every belief system, even himself enthralls me.

I could never work for him (FD: I did interview with Bridgewater, but I am an equity long/short person at heart and that is not what they do, so I did not go further).

His way of looking at Macro really impresses me though, because it's kind of like "Beginner's Mind" in that he questions every belief constantly.

Relates to "the market is right" idea from yesterday.

Here is a short 5 minute clip of him with Charlie Rose which gives insight into the VERY unconventional way that this man thinks:

Monday, October 13, 2014

The Market Isn't Wrong

We like to think we have a variant perception and we time arbitrage our investments and in time The Street will come around to our point of view and our investments will pay off.

But sometimes they don't.

For today's ten minutes of trying to learn how to be a better trader, I read an article tweeted by @JFDI.

Here it is:

I particularly love this line: "You are wrong if you are losing money for any reason at all."

I think great traders are not the ones that aren't wrong often.  They are the ones that correct their mistakes the fastest.

To me, that means using stop-losses.  (Don't give them to your broker, though, for %#@" sake!).

When the market is collapsing like it has been for tech stocks lately, I avoid the temptation to catch falling knives.  At least in the short term, the market is right and I am wrong.

Wednesday, October 8, 2014

The Mother of all "180 Rule" Trades

So The New Yorker magazine published a great article on the SAC insider trading case.  It is more than a ten-minute read, but it is well worth the time.  There a lot of good things to learn here as a trader.

Most of the article is old news; those of us wading through the sewage of the Street every day have long since seen all of these seedy details.  But what I find most interesting as a trader was how aggressively Stevie Cohen used the 180 Rule.

(If you haven't read my little blog about what I call the "180 Rule," you can jump to the link below and read it: )

What Stevie Cohen did which was so brilliant and gutsy (although armed with inside information) is that when the thesis changed on his alzheimer drug trade he not only sold all $750 million of the stock, but he reversed the position!  In a week, he swung the trade in what I think is the biggest 180 rule trade in history. 

Cohen has been called the best stock trader of the last 20 years.  Perhaps a lot of his success was fueled by inside information- who knows?  But one thing is for sure, his trading techniques are unparalleled.  When the thesis changed, he did the mother of all 180s.

I'll grant you, this is easier to do with inside information, but for the rest of us peons, plying the market for a living, perhaps we can learn from him.

I strongly believe that being able to execute 180s when trading stocks makes a trader hor concours.

Tuesday, October 7, 2014

In The Zone

More ideas from Ari Kiev's "Trading in the Zone":

  1. Defining the zone.  The zone is an ideal psychological state where you are doing everything correctly. Centered state of mind, activating positive memories by remembering the sights, sounds and smells of past positive experiences. Allows you to trade in a disciplined way and yet be more open to opportunities. You do more work with less effort. “You start to see things.”
    1. How to enter the zone.  Players who are willing to get in the zone are willing to do the uncomfortable thing. “When I find an easy trade, it is usually wrong.” It requires conviction.  Conviction comes from a willingness to trade your ideas and to develop confidence in your ability to assess what moves to make. Confidence to stick with your convictions.  “When I think I am right, I will stay there.  I don’t care how the stock trades.”
    2. How to be in the zone. Totally focused. Time stands still. Less resistance. Follow your strategy, trust your plan. “I did the work. If I thought I was right, I didn’t care how they traded. I stayed with them.”  Trading with a lack of concern for results. Greater tolerance for pain. Don’t let this tolerance push you out of control. Your risk appetite should be clearly defined. “The zone is not comfortable.  It is being a little bit on edge.  Trading is a game of uncertainty.”
    3. How to stay in the zone. “Take a step back and think about what is going on. When I am worrying about my profit and loss, it takes me out of the zone.” Make small successes and build on them. 
I find myself in the zone when I am against the Street on a stock and I still know that I am right.  I'm calm, knowing I've done my work and my thesis will eventually play out.  Especially in my biggest, best short positions, I find myself occasionally in this state.

I've found myself in this same zone on big long trades like TSLA the last couple of years.  As the voices of opposition got more shrill, more emotional and less-informed, I knew I was right to be long. 

I also recognize when I am not in the zone.  When things are out of kilter.  When nothing works.  2014 is one of those years for me- I'm making good trades and doing good work, but nothing is really gaining traction.  What to do?  Just work through it.

(Abstaining from online pornography and masturbation actually helps you stay in the zone physiologically, but that is an entirely different topic.  See work by David Deida for more information.)

Monday, October 6, 2014

Good Traders Stay With Winning Trades

Today, I continue to review "Trading in the Zone" by Ari Kiev.

This is a fantastic book.  I will review it for the next week or so.

In the beginning of the book, Kiev lays out what I think is the key to successful stock trading:

The best traders do not get attached to their stocks.  They recognize that there are forces they cannot understand.  Like Zen masters, they are able to be in the now and evaluate where they ought to be based on where the stock is and where it is going. They take a loss, clear their heads, center, and focus, and don’t try to make it back in that same stock.

Face the truth and be honest with yourself. 

Play your winning names.  

Avoid stocks that don’t move. 

Most successful professional traders make most of their profit from 3-10% of their trades.  Most of their trades are not making profit.  

Success is not about picking the right stocks.  It is really about how well you do once you are in the trade.  

Good traders stay with winning trades.  

They keep adding to those positions.  If one goes bad, they get out fast.

The master trader has a longer-term focus, a goal, and a strategy to reach that goal. Because of this, he is able to tolerate the pain of losing.  This requires learning the meaning of trading with no ego- letting the trade happen and getting out of the way.

I especially like the idea of staying with winning trades.  I heard a value investor once say they sold early all the time because they sold when a stock hit a certain valuation metric.  I try not to make this obvious mistake.  Winning stocks often get to high multiples and keep going up for years before a major correction. Why should I miss so much upside just because of a metric that I've made up myself that may or may not be correct in the first place?  Examples: TSLA, AAPL, etc.

Friday, October 3, 2014

Picking Tops or Bottoms

For the next few days, I am going to review and summarize parts of Ari Kiev's amazing book "Trading in the Zone."  This is perhaps the best book ever written for traders working for long-short hedge funds. 

On picking tops or bottoms. 

The Master Trader controls the impulse to do the impossible, which is picking tops or bottoms.  Instead, he bases his trades on information and strategy instead of emotional guesses. He will wait until a falling stock begins moving up before buying or a rising stock turns down before shorting. Even if he misses the first move, at least he trades on the actual movement of the stock. 

Patience, not emotions. 

Trading correctly requires a willingness to be uncomfortable. 

The master trader buys more if his positions are working and gets out when his positions aren't working. 

Success requires discipline and the ability to tolerate anxiety and uncertainty.