Tag Archives: stock ideas

Investing and Trading Rule #1

Recently, I wrote about the most important part of stock trading. And today, I want to expand on that.

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?

I hope so.

trading rules from the pros

Trading Rules from the Pros

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?


The Most Important Trading Concept

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.

For those of you that are visually inclined, here’s a chart from The Chartist, Nick Radge that lays it out:

Expectancy Curve

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.


Miss Frizzle’s Model for Uncertainty

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.

The Stocktwits Peloton

I recently wrote about Howard Lindzon, and his great idea to build your own peloton.

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.

What’s Your Peloton

I went for a 7-mile run on the treadmill this morning. I watched the Tour de France. It got me thinking about something I read a few months ago on Howard Lindzon’s blog. One of his ten years of blogging lessons comes to mind:

“Invest in yourself and your network. One of the oldest races is the ‘Tour De France’. The ‘peloton’ is a french word originally meaning ‘platoon’. A well developed peloton helps reduce ‘drag’ or as I like to say, speeds you up by as much as 40 percent.”

And that got me thinking about my own peloton. For me, I think it goes beyond people (although that’s certainly a part of it). I also owe thanks to Howard for creating StockTwits, and helping me find some of my own peloton members.

In terms of tools though, here are some things that I’d be hard-pressed to live without:

  • Finviz.com: This is just one of the most robust and easy to use stock screeners. I’ve done tons of videos about free FinViz stock screens. It’s just a great tool for finding stock ideas.
  • Morningstar.ca: I just love that Morningstar has 10 year historical financial data for almost every stock. It’s a great way to start analyzing investment opportunities. I’m very grateful for this free data source.
  • Google Spreadsheets: These free online spreadsheets are my favourite way to keep my abreast of potential opportunities. You can easily pull data in from Google Finance too, which creates powerful sheets that automatically update.
  • My BrokerHaving a low-cost broker with good execution is critical to success in the stock markets. Low commissions help reduce drag. I also like that my broker has advanced order types, like conditional orders, which can help me customize the way I get filled to try and avoid getting stopped out on head fakes.

Remember, your peloton is what will help you break out from the pack. It’s the boost you need to blaze ahead. Everything else is just the desperate crowd nipping at your heels.

By the way, if you aren’t keeping up with Howard’s blog, you should be. He’s been crushing the Swiss alps with his own peleton.

Doing What’s Uncomfortable

I’m sure I’ve written about this before. But it’s an important theme that’s always good to remember. Basically: it often pays to do what feels counter-intuitive.

I liked this Trading Nation clip from the Crossing Wall Street (CWS) Blog. The host asked, will the Dow reach 20,000? And Eddy Elfenbein, as well as the other guest, indicated it might. But here’s where it gets interesting…

Eddy shared some statistics, about how buying at new highs generally leads to more new highs. But as you might know, buying at new highs isn’t easy.

Especially as value-focused investors, there’s a tendency to try and pick bottoms. And look, I appreciate a good deal as much as the next person. But you need to be careful about being right vs. making money.

Finance is full of very bright people. And there’s a tendency to want to do things uniquely, differently or in a more elegant and complex manner. but sometimes simple is more robust.

If buying at the highs is what works (and the data is pretty compelling), then maybe it’s just best to do that. Even if it’s not easy.

walls and globalization

Globalization, House Prices and Walls

There are lots of anti establishment movements these days. Brexit, Trump and Sanders are the most poignant right now, but there are many similar nationalist movements across Europe. Election results are telling the story.

Is this the downside of globalization? Do people actually prefer an inefficient economy? Are you ready to compete on a global scale?

A local example, here in Toronto and mirrored in Vancouver, is endlessly rising home prices. It isn’t my fellow millennials bidding over asking price to tear down a house and build a bigger one. In the few personal experiences ive encountered it’s  always foreign buyers. The data, more broadly speaking, suggests these overseas agents are having a role.

So is the inability to own an abode the cost we pay for access to global markets? It very well might be. And for me, that’s okay. But did the majority of our politicians and government economists foresee this trade off when they voted for free trade? Do they regret it? Do their constituents? I don’t, but some others likely do.

Plus, is local home ownership something we want to encourage in our communities? Again, data and talking points suggest this could be the case. So it begs the question…

Is that how we got to talk about building walls? On one hand, it’s crass and crude. On the other, well, surely we must do something if we want to maintain our societal norms, right?

Interesting times, as always.

millennial money investing strategy

How Millennial Money Changed My Investing Strategy

Have you read the book Millennial Money by Patrick O’Shaughnessy? I did. And you can read my detailed Millennial Money Book Review right here. But I need to be honest with you…

Even though I liked this book when I read it, it’s not until almost a year after reading this book that I really started to appreciate the value of it. I’m honestly a little bit surprised at the impact it’s had on my investing strategy.

Allow me to explain.

Why Millennial Money Changed My Investing Strategy:

Prior to reading Millennial Money, I was first and foremost a value investor. I really enjoyed looking for 50-cent dollars. And I had fun digging deep into companies to try and find inefficient others had missed.

But that’s hard work. It’s time consuming, and at the end of the day, if you’re buying stocks in downtrend it’s hard to make money. It takes time. And there’s not a clear way to manage risk beyond basic position sizing.

Then Millennial Money provided some data to back this up. Near the end of the book, the author dives into some specific strategies that have historically outperformed their benchmarks.

And in pretty much all cases, it seemed that adding a momentum tilt to your stock selection, improved performance.

Do you follow?

That means the truth is, like it or not, stocks in motion tend to stay in motion. And you’re better to wait for a turn than try to pick a bottom. At least, that’s what the data seemed to show.

A little more research confirmed the idea, or at least, suggested that it couldn’t hurt to try it. So over the last 15 months or so I’ve been tweaking, experimenting and trying to optimize with simple rules-based momentum filters.

But I know what you’re thinking.

Are we watching a value investor embracing technical analysis? Isn’t this against the rules?

Well, first and foremost, I’m a scientist. And it’s irrational to ignore the data. Especially when it contradicts your hypothesis.


Even if picking undervalued stocks makes me feel smart, doing it without any regard for momentum or price trend is arrogant and seems to lead to worse performance. I can’t ignore this fact. It’s irresponsible.

So here we are: in the church of technical analysis, apparently. Crazy, isn’t it?

But let me be clear: I’m not using indicators, voodoo or any other predictive methods to try and time the market. I’m only using price, with a side-dish of volatility to help manage risk.

And now that I’ve been doing this for some time, I’m happy to share the results.

The benefits of Millennial Investing:

To be clear, I haven’t used the Millennial Money criteria verbatim. But I’ve applied the spirit of the approach. Specifically: (1) I’m using price momentum as a filter, and (2) I’m rebalancing (buying and selling) based on explicit criteria rather than any discretion

You probably wouldn’t believe it…

But those two simple criteria have made my life much better. First and foremost, these two tenets have helped me avoid serious losing trades. In a time when energy was cratering and small caps were collapsing, this alone is worth adopting an approach like this (for me personally at least).

Along the same lines, when you have a rules-based approach to buying and selling, you spend much less time worrying about trading decisions and whether or not to bail on a stock. It’s like being your own personal ETF. Cool, right?

The flip side of the above is that you can actively manage your money, without worrying all the time. You’ll probably end up spending less time thinking about the markets. And the time you do spend will be used more productively on big picture system development, risk management or business development.

What’s not to love about that?

And by the way, in my small experiment over the lear year and a bit, the performance results have been better. So it’s not just peace-of-mind I’m after. The bottom-line results are real.

The truth is, as any behavioural economist will tell you, our brains aren’t well-wired for stock trading. We are impulsive, irrational and do the worst thing at the worst possible time.

While that’s easy theory to espouse, I think for me personally, putting this concept to practical test, I’m happy with the results. And it’s something I’ll continue to expand across my portfolios.

But I’m not losing sight of my value and quality foundation either. My universe of stock investment opportunities is still limited to only those which I deem to be worthy. Now, I’m just systematically picking the ones out of that pool with the best chance of continuing to appreciate in price.

So now it’s time to flip the script and ask you a question. Do you think you could use a rules-based approach to improve your investing and trading?

Either way, you might want to check out Millennial Money.

Investing and Trading in Sprints

Trading and Investing in Sprints

Recently, I wrote about how investors and traders alike could benefit from adapting a more agile mindset. Specifically…

By leaning to embrace uncertainty, and develop mechanisms to adapt, you can improve your performance, with less effort and less worry. Sounds pretty good, right?

Well, today I wanted to take that line of thinking one step further. Specifically, I want to talk about trading with and investing with a sprint methodology. Allow me to explain.

Trading in Sprints Explained:

In agile development, tasks are conquered in iterations called “sprints.” The basic idea is that you set a 2-4 week goal and work with your team to achieve that goal. These work intervals are called sprints.

At the end of the 2-4 week sprint, you review your progress, adapt to feedback from the market and plan your goal for the next sprint. Do you see where I’m going with this?

The Advantage of Trading in Sample Sizes:

In the amazing book, Trading in the Zone, author Mark Douglas talks about the idea of trading in sample sizes. He recommends that traders stick to a methodology for at least 20 trades before making any tweaks.

The idea here is that trading and investing happen in a very uncertain and random environment. Just by pure chance alone, you’re likely to have a broad distribution between winners and losers, as well as the magnitude of each.

So make your trades or investments in sets of 20 trades (or sprints of 20 trades) instead of judging each trade by it’s own merit. You simple need a sample size of trades to reflect a given methodology. After 20 trades, you should have a more robust idea of whether or not you’re going to be profitable.

Make sense?

The key difference between trading and agile sprints, is that in trading and investing you need to think of “Event-based-sprints” vs. “time-based-sprints.” Instead of watching your results over 2 week periods, watch your results over 20 trade periods.

So what do you think? Could you see yourself trading in sample sizes to try and isolate your edge in the markets?