It’s that time of year: Back to school. Back to work. And time time to tend to the crop.
There’s something about the pending end of summer that always gets me. It probably has something to do with 20 years in the educational-industrial complex.
Nonetheless, after months of fun, frolicking in the sun, my attention starts to turn. I’m focused on productivity, output and grinding my way through the incoming winter months. It’s time to get busy. Seriously.
So here’s to a good September. To pushing yourself. To committing to a course of action and seeing it through – even when things get tough. You can change your direction to your goals, but not your decision to achieve them.
Now let’s make this fall count: With your work, your investments, and your family. Define your priorities, and focus on them ruthlessly. Cut the noise. Build your peloton. And live your life.
I hope you had fun while the sun was shining. But now, the days are getting shorter. Are you ready for it?
Do you feel a change of atmosphere when September rolls around? What are you going to be harvesting in this upcoming semester?
This book came up on my radar because the author, Jason Voss, writes regularly for the CFA Enterprising Investor blog. Eventually, I started reading his website and purchased his book. In this book review, I’ll tell you if that was the right decision.
But before we get into the book, I’d also like to further introduce you to the author. His credentials and success were another important reason why I bought this book.
First of all, Voss retired before the age of 35. Anybody who has cracked that code is definitely worth listening to, if you ask me. Plus, he was a portfolio Manager for a well-regarded mutual fund. And he beat his benchmark by a long shot, during his money management career. So with that in mind, it’s pretty amazing you can buy his insights for much less than a nice dinner out.
The Intuitive Investor Book Summar:
The Intuitive Investor is a radical guide for manifesting wealth. But the book approaches this in a much different format from most other investment books. And by the way, I’ve read a ton of trading and investing books. Most of these books are analytical or anecdotal accounts of how to beat the market. They focus on methodologies, strategies and tools to help you try and outperform the pros.
That’s because The Intuitive Investor is focused on helping you tap into the powers of your creative right-brain and harnessing insights to drive investment success. And it’s fascinating stuff.
The book starts with a discussion of emotions, feelings and their implications for investors. This is ground that isn’t often covered, but it’s absolutely essential. Because at the end of the day, humans are emotional creatures and if we’re not careful our emotions can have a big impact on our actions. For better, and for much, much worse.
From there, the book introduces a number of frameworks for how to access your right brain, to receive insight and intuition that can help your investments outperform. As far as investing books go, this is pretty esoteric stuff. And I wouldn’t blame you for feeling skeptical.
But keep in mind the author’s credentials, and throughout the book he absolutely emphasizes the importance of sound and diligent left-brain driven analysis. Actually, those are the table stakes. This book goes further into how to access your entire thinking apparatus to achieve the financial future you want. Now let met tell you what I liked most about The Intuitive Investor.
The Best Part of The Intuitive Investor:
If you ask me, the best part of The Intuitive Investor was how actionable the book was. This trait primarily displayed itself in three ways.
First, the entire book is very well-structured. The key concepts are broken down into digestible parts, from the 4 Principles to the 7 Behaviours and Beliefs, this book lays out incredibly insightful ideas in easy to understand pieces. In fact, Voss asserts the most important investment skill is “understanding information.” So he does his readers a big service by sharing his wisdom in straightforward and simple terms.
Next, the book is also very actionable. Each chapter ends with self-assessment questions, and exercises. To be honest, I need to put a little more work into these parts of the book myself. Since I read it while commuting it was a little bit tough to do all of the exercises. Nonetheless, the author put in a lot of thought and effort into helping you get the most bang for your book. Especially since there’s talk of meditation included it’s helpful the author gives specific action steps.
Finally, Voss shares interesting and educational investment anecdotes from his professional career. Not only is it insightful to better understand how a professional portfolio manager finds and considers investment ideas, but these anecdotes
What The Intuitive Investor Is Not:
If you’re looking for a trading system, analytical technique or some crazy scheme to get rich, this book isn’t it. On the other hand, if you seriously contemplate the material in The Intuitive Investor it can help you live a much richer life. Further…
I know there are readers out there who will scoff at this book. They’ll call it soft, fluffy and irrelevant. But I’d be willing to bet a pretty penny that’s just their ego trying to defend itself. Therefore, if you’re willing to think a little bit differently and consider some new ideas you might want to pick up The Intuitive Investor for yourself.
With that, let’s wrap it up…
The Intuitive Investor – The Final Word:
As you’ve probably surmised by now, The Intuitive Investor is an intriguing investing book that will make you think about your portfolio, and yourself, in entirely new ways. For this unique perspective alone, I recommend you pick up a copy of The Intuitive Investor on Amazon.
Now, if you still aren’t sure if this book is for you, I encourage you to watch the video book review below to finally decide once and for all if The Intuitive Investor is the book for you.
Because when it comes down to it, the critical concept of positive expectancy I previously espoused on, is based on trading and investing rule #1. So what is this rule?
Trading and investing rule #1 is: don’t lose money.
Of course, in risky and speculative activities like trading and investing, this is impossible. There’s no reward without risk. But as long as you don’t lose A LOT of money, then you’re doing well. It’s about avoiding the crippling losses that can take a big bite out of your account.
Now, this advice to not lose money is pretty basic. And some of you might even scoff at it. But keeping losses small (and risk in check) is key to lasting success in the stock market. Plain and simple.
So here are some of the common ways people lose a lot of money on their stock trades and investment strategies:
— not having an exit plan
— not sticking to their exit plan, often due to emotional shortcomings or a lack of discipline
— not using stop losses
— changing a stop loss after the order has been placed
— falling in love with a stock or security
— holding a stock in a downtrend
— averaging down into a losing stock
— ignoring data that refutes your hypothesis
— not wanting to admit you were wrong
As you might have guessed, it usually comes down to that last reason. Your ego wants to be right; often, more than it wants to make money. Seriously.
So the question becomes: are you controlling your ego, or is it controlling you?
If you’re not sure, just look at your portfolio. If you’re holding any big unrealized losses then the answer is likely to be yes. Even if you tell yourself it’s a (mis)adventure in fundamental investing, well, are you sure your initial thesis hasn’t changed?
Think about risk management. Like they say in the book What I Learned Losing a Million Dollars: there are only a couple reasons people lose money. There are infinite ways to make bank. But only a couple ways to lose it.
So don’t lose money. Keep losses small. And survive to fight again another day.
You need money management skills the REST OF YOUR LIFE. Take it seriously. And don’t lose a lot of money.
No stock trading methodology is perfect 100% of the time. So you need to know how to lose before you can consistently win. Do you?
And finally, sitting on the sidelines isn’t an option either. Sure, inflation is low right now. But that can change and over the long term, stuffing your cash in a mattress isn’t a viable strategy. The risk of inaction is the greatest risk of all.
Maybe that robo-advisor isn’t such a bad idea after all. At least they’re not likely to lose your money. Can you say the same thing about your trading?
Have you heard of Olivier Tischendorf? His website, www.tischendorf.com is a trove of stock trading information. Plus, for those Canadians out there, he focuses on a lot of TSX and venture listed stocks, which makes the information even more actionable.
But today, I want to focus on some of the third-party resources he’s managed to compile, and shares so freely on his website. Specifically, there are some great trading rules that are worth regularly reflecting on.
First, Tischendorf has his own trading rules. For any technically-minded trader, these will likely ring true. And from there, Tischendorf has assembled a variety of other trading rules from the pros:
This collection of trading rules is a trove of timeless wisdom, and I’m grateful that Tischendorf was wise enough to compile them for us. For one, I always like to look for common themes and ideas when comparing lists like this. Insights that are shared by independently successful traders are especially worthy of attention.
And in cases where these ideas contract each other, I try to think critically about the point of view of each participant. In most cases, the nuances come clear and even more insight is gained. Think about how these rules relate to the rules you’ve already developed on your own.
Beyond the trading rules above, I encourage you to click through to his website and read more. There’s tons of great information and wisdom that can help you avoid some of the most malicious mistakes that impact new and experienced traders alike. The “Key Posts” in his sidebar are particularly relevant and will be worth your time.
So now let me ask you, what are your key trading rules? What do you think is most important for stock trading success?
I’ve read a lot of trading books over the years. But none of them talk about the most important concept in trading. In fact, I’m honestly shocked that I didn’t discover this critical concept sooner. So what’s the most important idea in trading?
Simply: The most important trading concept is positive expectancy.
But what does this mean?
Well, I’ve written before about the mathematics of positive expectancy. But it’s such a vital idea that I want to touch on it again. Because the truth is, without positive expectancy, you will never consistently make money over the long term.
And as far as I know, consistent profits are the goal of pretty much every aspiring trader, active investor and money manager. After all, if you aren’t consistently making money, then what’s the point?
Positive Expectancy Explained:
Although most trading and investing books don’t talk about positive expectancy, the definition is actually quite simple. It all boils down to (1) how much you win when you win and how much you lose when you lose; as well as (2) the percentage of winning trades and the percentage of losing trades. Make sense? Specifically…
Expectancy = (Probability of Win * Average Win) – (Probability of Loss * Average Loss)
If your expectancy works out to be a negative number, well, you’re never going to make it. Consistent profits become a mathematical impossibility. Got it?
If you want more information, Trader Mike has a great article on expectancy. But basically, you need to have expectancy on your side over the long term. Otherwise you lose. Period.
Essentially, if you have a low percentage of winning trades, your winners must be much bigger than your losers (trend following). On the other hand, if you have a very high percentage of winning trades, your winners might be the same magnitude of your losses (mean reversion). As I understand it, these are two general ways to achieve positive expectancy.
But keep in mind these statistics play themselves out over a series of trades. You must have a big enough sample size. And if your approach is only marginally profitable, you’re likely to have big strings of losers – so it’s best to try and be deep in positive expectancy.
So now that you’re introduced to the concept of positive expectancy, what do you do next? If you are starting to see the importance of this concept, you’ll want to read Nick Radge’s free e-book. He explains this concept better than anyone, and provides key steps you can take to build your own positive-expectancy trading strategies. Thanks Nick!
Seriously, this is important stuff. I wish I had found Nick’s writing years ago – and I hope it speeds up your learning.
If you were a kid in Canada during the 90s, then you must be familiar with The Magic School Bus. For those of you unfamiliar, well, I feel sorry for you!
Just kidding… (kind of)…
For the initiated: Miss Frizzle had a magic school bus that could shrink in size, go into space, and travel through time. As you can imagine, the class had some pretty epic field trips.
But the part I didn’t really appreciate until recently was Miss Frizzle’s motto: take chances, make mistakes, get messy!
As a kid, I didn’t fully get it. And how could I? Our entire educational system is based on NOT making mistakes. There’s no reward for bombing the test. So I got awesome at tests.
But decades later, in the real world, the lesson couldn’t be more clear. And in markets, it’s deafening.
That’s because the future is uncertain. Vastly so. Accept it: We can do our best to model and approximate; but, at the end of the day it’s just an educated guess.
The beauty of this is everyone is on the same playing field. Nobody has a crystal ball. And if someone claims to know what tomorrow holds, well, they’re lying to you.
Because we live in a Miss Frizzle world.
And the only way to make the most of it is to take chances, manage risk and keep learning. Do your best to think in probabilities and protect your downside. But whatever you do, don’t stop taking chances.
You might get messy but it’s the only way you can hit the jackpot.
There is a lot of uncertainty in the markets with central banks attempting to prop up riskier assets in the hopes that this methodology will trickle down and reestablish growth. Stocks are breaking out in some countries while consolidating in others. It’s difficult to find a sustainable direction, and in many cases the breakout is coming up false. One way to avoid attempting to pick the markets direction is to find a market neutral trade.
Market Neutral Trading is a pair trading strategy in which an investor looks to produce returns based on the relative change of one stock to another. Market Neutral Trading is thought of as a relative value strategy, as it does not depend on the outright direction of the broader markets and instead produces returns based on the ratio between two stocks.
Stock pair transaction are where you trade shares by simultaneously initiating long and short stock positions in an effort to benefit from the change in the ratio of the stock pair. Stocks are not the only assets that can be used to generate returns using a pair methodology.
Pair trades are attractive because one stock is considered relatively inexpensive or dear relatively to another stock that functions within the same industry. Market neutral strategies avoid a high beta to the broader market indexes such as the S&P 500 index given the risk is a relative value risk that is uncorrelated to market direction. This type of trading strategy allows investors to diversify their portfolios by allocating capital to an uncorrelated market relative to stocks, bonds and cash.
Market Neutral Trading strategies that focus on mean reversion, seek to benefit when highly correlated stocks experience a divergence in returns over the short term. Investors can back test the relationship between two specific stocks within the same industry to determine if a specific standard deviation from a historical mean of their spread represents attractive levels to purchase one stocks and simultaneously sell short another stock.
The first step in finding pairs of stocks or indices that move in tandem. This could include any set of stocks, including consumer discretionary, staples, utilities, technology, industrials or financials.
An example of two stocks that fit a mean reversion pair methodology is Visa and MasterCard. Both of these companies operate similar businesses and generally have highly correlated returns. The ratio of these companies stock prices historically trade in a range, but when the ratio moves a specific standard deviation from a medium term moving average of the ratio, a pair trade can be initiated to take advantage of the divergence.
Market Neutral Trading is a robust alternative strategy that offers returns that are uncorrelated to broader markets and therefore generate a return payout profile that creates a diversified mechanism toward asset allocation. Investors interested in Market Neutral Trading should research methods in which they can attain safe returns with robust risk management.
Do you ever feel stuck in your routine? Well, personally I love my routines. From exercise, to eating, to finding new stock picks: I have processes and routines for almost everything. It’s how I get a prodigious amount of shit done (if I do say so myself).
And don’t get me wrong, at heart I’m a spontaneous guy. I like to have fun. But I’m also conscientious of our limited time on this earth, so I want to maximize productivity and output. For some reason that feels satisfying.
Unfortunately, this means that sometimes when I’m confronted with new experiences, I can tend to recoil. Instead of focusing on the fun and the potential upside, I compare the activity to my routine or worry about how much less effective a new endeavour is than my tried and true practices. It’s like I’m painfully aware of potential opportunity costs.
But here’s the kicker: although I can be a bit reluctant at first, I almost always enjoy new experiences. I like eating new foods, meeting new people and exploring unique cities around the world. Add a couple good friends to the mix, and it’s almost impossible not to have a good time.
Weird, right? Do you ever experience anything similar?
As you might have guessed by the title, this blog is exactly what it sounds like. The author does a fantastic job sharing his life experiences and adventures. So if you’re looking for inspiration, you may want to check it out.
Without shaking things up every once in awhile, routines grow stale, output suffers, and life becomes a monotonous game of merry-go-round. Know what I mean?
Sometimes you just need to break the mold! Stop split-testing and start fresh. You know what I mean?
So next time you’re presented with a new opportunity or experience, why not take a shot? As Miss Frizzle used to say: take chances, get messy, make mistakes! (more on that in the next post)
And today, I tip my hat to him once again for the wonderful ability to customize push alerts on the Stocktwits mobile app. This is key to my peloton.
Specifically, the ability to choose users (or tickers) to follow and be alerted about is super helpful. If you’re unfamiliar with this feature, I highly recommend you take a look at how it works.
I especially like the ability to follow users because it’s the perfect way to stay up to date with voices you trust, with minimal effort. And of course, if you’re new to Stocktwits you could check out their suggested stream for a great starting point.
But if you’re still unclear of the benefit, let me put it this way: in cycling, the peloton can reduce drag on a rider by up to 40%. Building a social peloton of curated information and feeds has, in my experience, been an incredible way to reduce drag and improve efficiency in my investing decision making. Could you see this working for you, too?
It’s about getting what you need, when you need it. And Stocktwits makes that easy. It’s even better than having an assistant.
By the way, Twitter has tried to do something similar with mobile notifications. But in my experience they for work nearly as well because Twitter abuses the permission and spams you with irrelevant notifications even if you try and turn them off #notrust.
Over the years, I’ve written (and read!) about all sorts of different investment styles. Here on StockIdeas.org, you can find blog posts and videos about everything from buy-and-hold value investing, to day trading penny stocks.
But even after all this, I haven’t made it clear what my own investing style is.
My Stock Picking and Investment Strategy Explained:
As you undoubtedly know, there are a myriad ways to approach the market. And everyone has their own style when it comes to grinding out a profit. For me, it’s about putting the odds on my favour in both the short and long term.
So how do I do it?
First, everything I do is grounded in a value investing methodology. I like buying bargains, and stocks that are selling at a discount to a conservative estimate of intrinsic value may offer a valuation tailwind. In this way, Security Analysis and The Intelligent Investor were big influences on my thinking. But I’m not just looking for any old cigar butt.
That’s because quality counts. As explained in the book The New Buffettology (and The Warren Buffett Way), companies that can compound capital over the long term make very appealing investments. So I’m also focused on finding quality companies. In fact, I have a database of over 300 of just these kind of stocks. And I’m always making additions and subtractions.
But I don’t stop there.
That’s because after years of trying to bottom-fish stocks trading at 52 week lows, I’ve found that a little technical analysis can go a long way. Books like Secrets for Profiting in Bull and Bear Markets convinced me that a few technical filters can go a long way. The results have paid for themselves.
To that end, I try to buy high quality companies, at or below my estimate of intrinsic value, and I only do so if the stocks are making higher highs and higher lows. It’s one of the most often quoted pieces of trading advice, but I must admit that the trend has been my friend.
Technical analysis also helps with risk management. I use stop losses because I don’t like to see my capital tied up in losing or languishing stocks.
Now, I could go deeper. But there’s no sense bogging you down in the details. So I hope this overview provides you with a bit of context for the content on this blog, and how I’m investing in my own stock ideas.
By the way, while my investing strategy evolves incrementally, it’s been the same for a long time. I improve one sprint at a time in a very methodical way. A lot of trading and investing results come down to the mathematics of positive expectancy. And once you have that done, it’s just about maximizing your edge and profits. Make sense?
But now I want to hear from you. What’s your process for picking stocks?