Category: Finance

Letting your winners run is an art. When you do this, capital compounds on capital – if you bought something and it goes up 10%, suddenly you have 110% of your original investment in play, and a 10% gain on top of that will not result in a 120% investment, but rather at 121% of the original investment. In a more extreme case, when something you own doubles, it only requires a 50% gain from that point to amount to another double on the original investment.

This must be balanced off with knowing when to take gains. That time is not now. Everything in my portfolio at present I have a reasonable price target of above the current market value. If anything, I should be adding to the positions.

So the best action I can take is to twiddle my thumbs. People feel fearful of the equity market at present, which is good.

I have not been doing much equity research over the last little bit as recreational matters have generally dominated the landscape. One chart I have been curiously watching, however, is the 10-year note yields, which has dipped from its 1.4% minimum:

Which way are the yield winds blowing, up or down?

The Canadian 10-year note equivalents have a similar yield curve and are trading about 15-20 bps above US treasuries in yield. One would think that you could do better than 1.8% over 10 years by taking a little bit of risk…

Over the past couple years, the news portion of the Yahoo Finance portal has been increasingly filling with useless computer-generated articles, such as Forbes articles on every stock that is going ex-div, or paying out their dividend:

Is there any way to filter this type of stuff (or anything from Forbes, the Motley Fool and Seeking Alpha)? I’m finding going through my email spam box to be a slightly more productive use of time than sifting through these types of “news” headlines.

David Merkel writes an article he titled “The Future Belongs to Those with Patience“, but the summary explanation is about how peoples’ expectations drive asset values. Waiting for when expectations are low and investing will generate superior returns. Easier said than done.

The article he wrote contains very powerful information and is well worth reading in entirety (along with most of what else Merkel writes), but is probably too abstract for those that are not in tune with the marketplace to understand. I believe it was a Warren Buffet quote that said “There are no called strikes in investing”, and using this analogy, it is if you are playing a game of baseball and every (investment) “pitch” equates to every security you end up researching. The only difference is that in a real game of baseball you’re out if you receive three good pitches and don’t swing, while in the investment world you can still wait for that perfect pitch.

Since the third quarter of 2011 I have been averaging at about a 70-90% cash balance. I started deploying this late in the second quarter of 2012, and am currently sitting on around 30% cash. I don’t know of many people that can keep large cash balances for a significant length of time – it is easy to get “itchy” and take a swing at some marginal bets. This is how you lose capital.

I always get puzzled at articles that claim that retail investors are getting turned off the market because of high frequency trading.

If you are an active trader in the market (i.e. your sole method of generating returns is through the relatively frequent buying and selling of stocks) then I can see how that is the case. You are perpetually front-runned by computers and it is the financial equivalent of getting bitten by mosquitoes.

For most investors, computer trading doesn’t make a difference at all. The only two impacts are if you are trading on margin and some sort of “flash crash” triggers a margin call on your account, and the second impact is if you are planning on making an entry below a certain price or an exit above a certain price and you get your limit order hit.

When establishing positions in less-than-liquid stocks, however, getting front-runned is a pain in the ass and is an unavoidable cost of trading. My suggestion would be to keep order sizes microscopic to average volume and accumulate when somebody is distributing (or vice versa if your task is to exit). Another method is to wait for the company to have a poor quarterly earnings report (that does not reflect a fundamental change in your perception of the business) and when the stock gets hammered, start accumulating in measured steps. There is no science to this – the shares you want to be accumulating at the bid, somebody wants to be selling to you at the asking price and there are times when you see a ask of a sufficient size that it is just worth putting in the limit buy order at the asking price.

In general, unless if you are employing some sort of mechanical algorithm, people that trade more often than not will have worse performance.