Thanks, but I’m not that good!

It’s always nice to get positive feedback from subscribers. One subscriber praised me for my trading model and wanted real-time updates of signal changes (which I already provide but wound up in his spam folder).

 

Another subscriber complimented me on my series of tweets indicating an oversold market on Thursday, which suggested that the market was poised to rally should the Jobs Report on Friday morning was benign (click links to see tweet 1, 2, 3, 4, and 5).

Thanks, but I’m not that good.

Teaching my readers how to fish

Humble Student of the Markets is not intended to be a trading service. I addressed this issue in my post Teaching my readers how to fish.

Think of a building a boat as like building a portfolio. The portfolio management process consists of the following steps:

  1. Deciding on what to buy and sell;
  2. Deciding on how much to buy and sell; and
  3. Deciding on how to execute the trade.

While we discuss step 1 endlessly in these pages and elsewhere, the other steps are equally important. Step 2 is also a reason why what I write in these pages is not investment advice, namely I know nothing about you:

  • I know nothing about your cash flow, or spending needs;
  • I know nothing about your return objectives;
  • I know nothing about how much risk you are willing to take, or your pain threshold;
  • I know nothing about your tax situation, or even what tax jurisdictions you live in;
  • And so on…

If I know nothing about any of those things, how could I possibly know if anything I write is appropriate for you? I was asked recently why I don’t post my portfolios and their performance. While posting my trades represent a disclosure of any possible conflicts in my writing, my own portfolios are a function of my own cash flow needs, my return objectives, my own pain thresholds, etc. How could any portfolio that I post be appropriate to anyone else?

A terrific call, or terrible call?

Consider the following example. On February 24, 2009, a week before the ultimate market bottom, I made a call to buy a high-beta portfolio of low-priced stocks, which I termed a Phoenix portfolio (click link for post):

  • Stock price between $1 and $5 (low-priced stocks)
  • Down at least 80% from a year ago (beaten up)
  • Market cap of $100 million or more (were once “real” companies)
  • Net insider buying in the last six months (some downside protection from insider activity)

Was that a terrific call, or a terrible call? You be the judge.

 

At one level, the call to buy a high-beta portfolio a week before a possible generational bottom for stocks could be a career making call. On the other hand, the market fell -11.9% based on closing prices before the final bottom was reached.

For investors, the Phoenix portfolio was well-timed and it went on to roughly triple its value in about a year. For short-term traders, the 11.9% drawdown was a disaster.

This brings me to my point. Don’t blindly follow what I do. My return objectives are not the same as yours. My pain threshold will be different from yours, which affects the placement of stop loss orders.

Your mileage will vary. I can only teach you how to fish, not fish for you.

8 thoughts on “Thanks, but I’m not that good!

    1. Think of stop losses in the following framework:
      1) They are meant for risk mitigation
      2) Any form of risk mitigation will have a cost

      How you place your stop loss will represent a calculated trade-off between risk mitigation (catastrophic loss) and potential return (if the stock/index reverses course after you get stopped out). How you make that volatility adjusted trade-off is up to you. I can’t tell you what your risk/return trade-off should be.

  1. Unfortunately, in our business you are only as good as your last trade. If nothing else the market and the clients teach us a lot of humility. Money managers (hedge fund managers included) loose their client base if they have a bad quarter, a bad call or a bad year:

    http://www.wsj.com/articles/mutual-fund-king-bill-miller-makes-comeback-1404095931

    Cam, I personally enjoy your exhaustive research. To agree or disagree is a personal choice we all make. I for a fact believe that even if you make one good call (and you make dozens) is worth the cost of admission.

    Please keep us the good work.

    Regards,

    Rajiv

  2. I am sure you don’t want compliments, but I am giving you one anyway. You are doing a great job and especially with the several writings each week plus the wonderful email alerts, I am happy with this service. Thank you!

  3. Glad to have Cam’s input in making important financial decisions – not to mention that in the last year or so since I’ve signed up he has been more right than not. Thank you Cam !

  4. Very wise words there, Cam!

    I still keep the “amazing journey” of Select Comfort Corp’s stock price (a $20 stock in 2007) in my chart archive to remind me of the opportunities that are available in the depths of chaos!! 😉

    See the roller-coaster ride here: http://imgur.com/a/g1TRC (click on the chart to enlarge it)

    Impressive returns, but as you point out, any brave trader who made a stand, for example, on Feb 24th 2009 had to withstand a mighty draw-down, before winning the mantle of “master of the universe”!!

    Cheers, Donald

    1. I got a couple of positive comments (see start of post). I didn’t want to create unrealistic expectations.

Comments are closed.