RP has been a great trader. We first entered shares at the end of October and hit 1x shortly thereafter. After a correction we were able to increase the position again in February and the trade has hit 1x today. See history of the trade HERE. I have gone ahead and sold half the position and will raise the stop to the revised entry of $31.83.
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RP has been a big winner already since the October initial trade HERE. Today the stock is breaking above the recent pivot high and I’m taking the opportunity to add to my position and raise my stop on all shares to $27.50. If this were a new trade my trade size for a $600 risk would be around 150 shares so I have added 86 shares to my position of 64.
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So far the trades have been quiet as many names inch towards 1x profit targets. The only one that has hit was RP on a quick surge. Thankfully I have live limits in so a partial sale took place while I was in a meeting. I will wait until closer to day end to allocate proceeds as I think some others will hit and more cash will be raised. Here’s the initial buy post on RP.
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Bill Ackman was a billionaire activist investor and head of legendary fund Pershing Square. I say was because I’m not sure if the value still holds after his recent losing position in Valient Pharmaceuticals where he rode down the position by more than 90%, selling out for a total loss to him and investors of more than $4 billion dollars.
While for most it may seem hard to believe how someone could stay with a position for such a long time, watching the losses mount, it is something I have seen countless times aduring my career and is one reason I always subscribe to a disciplined approach by which stops must be used in order to sell out a position when it starts to erode past the point of no return.
When a stock starts to decline it matters not how many shares you have, the total amount in your bank account or whether you’re a retail investor just having fun in your eTrade account or a major wall street player. The common bond we all share is we’re human and inevitably go through the same set of emotions when a loser creeps into the portfolio.
1.) Denial – When the decline first begins human nature will have us denying that the loss is actually taking place. Such phrases have been coined such as “You only lose when you sell.’ and ‘I’m in it for the long term.’ These help to ease the pain and make it feel as if the losses aren’t all that real. The search begins for the answers as to why the stock is falling and many times, investors who haven’t researched the firm ever before, now find themselves digging through reports and updates to justify why the stock is falling.
2.) Apathy – At some point the loss becomes so great that a total loss of interest sets in. Even though the person still owns the position it’s as if the losses have already been had and so rather than sell the name it is held and generally accepted that the worst is over. This may be a loss of half its value or even less. Statements aren’t even looked at any longer and the general idea is that “I’ll just hold this and see what happens.” Rather than sell and take the loss the individual just sits idle and does nothing.
3.) Disgust – Finally at some point, should the stock still trade and not go 100% bankrupt, the individual finds themselves at a place of total disgust and finally throws in the towel. Long gone are the thoughts of recouping the investment or even seeing a bounce. A general understanding that the ‘game is rigged’ sets in and the person becomes convinced that it’s impossible to pick winning stocks. It may be at this point that stocks are even sworn off forever, depending on how big the loss is.
Now, I know this sounds crazy and maybe some of you are sitting there asking yourself. How could someone watch an investment falter like that and do nothing? The irony is far more of you are probably recalling the time you did just that. Why? Because we’re human and as humans we make mistakes. The only difference between what makes successful investors and those who are not is a discipline plan created before the position is ever entered.
Here’s what it looks like.
1.)What is the rationale behind buying the stock, fund or investment?
This could be fundamental such as the stock is trading far below its intrinsic value, it’s long term multiple or maybe the discount of all its future cash flows. Maybe you’re a trend trader and the stock has just entered a new technical trend. Whatever the reason it must be concrete and something you alone can articulate. “Because I think they’re going higher” is NOT good enough. “I got a tip.” has lost more money than all stock market crashes combined.
2.) What is the trading plan? AKA where are you wrong?
This has to be the one area I see most investors falter. They fail to decide ahead of time where they would be wrong. Maybe they are investing in an earnings turnaround story and if the company doesn’t see this improve over the next few quarters the stock should be sold. Maybe the stock that was bought around $30 hasn’t traded below $25 in the last few years as a long term company share repurchase plan kicks in at these levels. Should the stock fall below this level you’d sell regardless. Whatever the reason or level it is important to determine ahead of time where you would exit if you were wrong. Here’s a newsflash, even the best investors are wrong. This is where Ackman failed. He has been wrong before but for some reason rather than accept this mistake and move on early, his arrogance convinced him otherwise and he rode the stock into oblivion. When you’re wrong, get out quickly.
3.) How much will you risk?
Over the years, for whatever reason, people have become accustomed to ‘buying a few hundred shares.’ It’s like something that rolls off the tongue easily. “Pick me up a few hundred shares of XYZ” Well, what if XYZ trades for $25? 200 shares of XYZ is $5,000 but what if XYZ is actually AAPL and trades and $140. This 200 shares is now $28,000. It is critical to know the dollar amount you are willing to risk on each trade you make. Is it $500, $1,000 or more? Whenever you place a trade you should know exactly how much you’re willing to lose such that if #2 happens and you’re forced to get out, you’ve accepted your risk and can do so unemotionally.
4.) Where do you take gains?
This is a biggy and something I also see folks fail at time and time again. It’s one thing to make money, it’s another to keep it. My suggestion is to adopt some sort of scientific sell strategy that allows you to take emotion out of the equation. For example, let’s say that the difference between your entry of $25 and your stop loss level of $20 is $5.00. How about you take half your position off should you see a profit of $5.00 on the upside? Don’t think that’s good enough? Well, how about taking off ⅓ or maybe 25%? The key is to be taking some gains along the way but here’s the kicker. When you do take gains, RAISE THAT STOP. This way you are sure to secure your profits and if the stock then reverses course you don’t see a winner turn into a loser.
I’m bummed to see Bill go through such a hard time with Valient but he made some classic, avoidable mistakes and I am sure he is kicking himself over these now. I’m guessing he has resolved to never make these mistakes again and I’m sure he will be back, better and stronger than ever. He didn’t get to where he is today being a perpetual loser. He deviated from his rules and it bit him hard. Let’s learn from this and resolve to not make the same mistakes ourselves.
Investing is the greatest business in the world, especially when the markets are in bull-mode but a disciplined strategy is critical regardless of what your name is or how many zeros you have in your bank account.Read More
Sometimes the market chops around with no real direction trying to wear traders out, rather than stop them out. After a hot start to the year where my personal trading portfolio was up a quick 5.47% through January 27th, I’ve done nothing but mark time since, with a slow drip to the downside. I now stand at a paltry 1.33% for the year as many of the names in ‘Trump-Trade’ have seen sharp pullbacks. The momentum knife always cuts both ways and traders can’t be overly upset with beta on the downside when they’re gaining beta on the upside. It’s all part of the game and is one reason I always try hard to keep emotions in check regardless of the market movement.
From my vantage point the majority of pullbacks I see look healthy and necessary. What I do see as a potentially abnormal is the drop in crude oil. This decline has spread throughout other areas and if it continues it will only be a matter of time until it starts impacting the general market as a whole.
Many of the O&G names need to see Oil in and around the $55 per barrel range in order to kick off enough cash to pay debt. In a rising interest rate environment this debt interest becomes even more expensive which means declining revenues is a double whammy. Again, it’s too early to see if this is going to keep going and we definitely find ourselves in a critical area at this moment but if it does continue, my guess is we see a much greater market sell off in a variety of areas sooner rather than later.
For now I’m not trying to get ahead of this or micro-manage positions. Out of the 37 names I own, 24 have hit 1x and have stops raised accordingly. 13 have not hit their first profit target however MDC and RP are super close with FANG and MTDR edging closer their respective stops.
In summary, I have risk quantified and at present I am just fine with this should we see a greater sell off and cash naturally begins to be raised through these stops.
It’s easy during this downtime to start extrapolating on what could happen and then start to adjust your portfolio accordingly. Sometimes hand-sitting is the best course of action. As traders we naturally want to ‘trade’ when in reality the n0-trade is what is needed right now.