Relationship Investing

by Jeffrey S Weiss

  4. Are you able to go to sleep without waking up in the middle of the night to obsess about what the next day holds?

  5. Are you a nervous, patient, or complacent individual?

  6. Are you the type of investor who buys a large position in a stock with a tight “stop” (risk tolerance point), or the kind who purchases a smaller equity position with a looser “stop”?

  7. Do you have the patience to hold a stock that’s performing satisfactorily, or are you more apt to trade shorter term?

  8. Do you find it hard to take a contrary investment view when the prevailing market sentiment is overwhelmingly aligned against you but your analysis is saying otherwise? Does crowd psychology affect your thinking and decision-making?

  9. Can you take a loss or multiple losses in stride as part of the investment process? Can you admit mistakes and not make excuses?

  10. Are you flexible or stubborn?

  11. Do the market’s movements affect your mood and temperament? Are they affecting how you act outside of market trading hours? Are they infiltrating your relationships with family and friends?

  12. Can you act once an investment decision has been made, or do you tend to freeze up and second-guess yourself by being overly analytical?

  13. Are you an investment optimist, preferring to look at a best-case investment scenario, or do you prefer to look at a worse or worst-case outcome?

  I’m not a medical person but I can tell you this: nothing investment related is worth your health. If you cannot successfully deal on a sustained basis with your market emotions, find a highly respected professional to help you do so or don’t invest in the stock market. In addition, and as I noted earlier, if you’re not willing to take losses and admit mistakes, then the business of investing or trading in the stock market isn’t for you.

  Preparation is a necessity in both the stock market and in life, and a key portion of that preparation is emotional. Relationships are stressful, and when you invest in the stock market it’s not just your monetary relationship that needs to be regularly monitored. Your emotional composition constitutes a large part of your investment success or failure, so getting in tune with it is vital. Remember, not everyone is psychologically suited to invest in the stock market. It’s a volatile arena in which your money isn’t the only variable on the line.

  Any relationship can be draining when things aren’t breaking your way, whether it’s in finance, romance, business, or your other day-to-day personal encounters. Sometimes a partial position in a stock should be sold to let you more objectively analyze the remainder of that equity position, while also reducing your stress and worry levels. It’s called “selling down to the sleeping point.” Relationship-wise, it’s like seeing one another less frequently in order to step back and reassess the situation.

  Many of us don’t like to examine our personalities in depth and honestly admit our shortcomings, but we know that relationships can become healthier when we do precisely that. That includes your stock market relationship as well. In short, know thyself!

  Moral: Knowing yourself and how you’ll react in various market situations needs to be addressed as part of any investment discipline. Emotions are a crucial and underdiscussed component of the investment process. Most investors don’t want to face their emotional shortcomings. It’s like analyzing any other weakness—uncomfortable and bothersome. But bother you must. Be as truthful with your investment self as you would be in your valued personal relationships. Honesty is, indeed, the best policy in both instances.

  Chapter 8

  Basic Training

  The longer I’m in this business, the more I’m convinced that it’s forgetting the investment basics that ultimately brings down even the biggest and brightest of investors and money managers. It’s almost as if success has gotten to them, and the investment basics they learned as apprentices are no longer stressed. Or maybe they just forgot them, as one forgets to cross with the light or hold the door open for the person behind them even though they’ve known better since being taught those lessons as kids.

  I’m reminded of an episode of the 1950s sitcom The Honeymooners, where Ralph Kramden (played by Jackie Gleason) is going to appear on a game show with a Name That Tune theme called The $99,000 Answer. With his trusted sidekick, Ed Norton (played by Arthur William Matthew “Art” Carney), accompanying him on the piano, Ralph studies every song there is to be studied until there’s no stumping him. Trouble is, before each song that Ed plays on the piano he leads in with the beginning of “Swanee River,” until one day Ralph has had enough and yells at Ed to stop playing it. The big night arrives, with a supremely confident Ralph proclaiming to the host at the outset of the show that he’s going to go all the way to the top question. The host sets him up beautifully as he explains the game, noting that the questions about the songs become more difficult as the monetary hurdles increase. What do you think the very first, easy question was for Ralph? It was to name the composer of “Swanee River”! Upon hearing a few bars of the song, a stunned Ralph couldn’t believe it. As time was running out and the announcer demanded an answer, Ralph exclaimed, in desperation, “Ed Norton?” “Oh, I’m terribly sorry Mr. Kramden,” consoled the host. As he tried to get Ralph off the stage by uttering several phrases, Ralph immediately used them in song titles he knew, along with the year in which they were sung and who sung them. But it was too late.

  You get my point: not remembering the basics in any endeavor you undertake can have negative results, and let me tell you—investing in the stock market is no different in that regard. Don’t look so far ahead that you skip over the foundational investment principles outlined in this book. Don’t think that any measure of investment success you’ve achieved gives you a pass to stop remembering and practicing the seemingly simple market tenets you learned at the outset of your investment journey. Commit them to memory, and bring them into the field of investment battle each and every day. In the business of investing, no one ever outgrows the basics, and those who think they have leave themselves vulnerable to a harsh and potentially irreversible financial lesson. This is particularly true in down markets, which specialize in separating investors from their capital.

  Relating this investment concept to life, how many times have we said that we “should have known better” or that we “made a stupid mistake”? What we’re really saying to ourselves is that we forgot the basics.

  Moral: Never forget the investment basics. Commit them to memory and review them regularly. Your investment outcome could well depend on it. In all my years of investing in and following the markets, some of the most serious mistakes I’ve seen have been made by neglecting the basics. And whether it’s investing in the stock market or in your personal relationships, no one is immune.

  Chapter 9

  It Lives!

  Here’s the scene: You’ve ridden a stock down from $30 per share to $20 (a problem in and of itself), and promise yourself that you’ll sell it if it ever goes back up to what you paid for it. Lo and behold, the shares start to rally, first to $23, then past $25. And the recovery doesn’t end there. The shares continue to rebound, sailing past $27 and then reaching $29.50. You’re pumped, excited beyond belief—and you’re still losing money! Nothing can stop those shares now. You call your broker or go online, excitedly giving instructions to sell your shares at $30 per share. You begin thinking how you’ll spend the money or start searching for another candidate to purchase. You feel great. Everything seems to be going your way. That order is as good as executed. But wait.

  The stock starts to teeter. That bastion of security strength, which rallied so effortlessly from $20 to better than $29, seems to hit a brick wall. It’s like all of a sudden the stock becomes human, sprouts eyes and ears, knows exactly what you paid for it, and has no intention of letting you get out on a break-even basis. Nonetheless, you become defiant, confidently proclaiming that either you’ll get out on a break-even basis or remain in the shares until you extract what you put in
. What conviction. What financial bravery. What a mistake!

  One of the most financially fatal flaws one can make in this unforgiving business is waiting to break even—putting a lid on how high that stock will go but not having a floor on how low it can go. The investor in this instance is trying to get $30 per share for a stock that is currently trading only fractionally away from that level, and that’s the best-case scenario! What about on the southerly side? Has any thought been given to the $29.50 being risked on the downside to achieve that break-even result a mere half-point higher? Unfortunately not, in most cases like this. This happens time and time again in our business, where investors are content just to get out of a stock with their original investment intact but fail to protect themselves on the southerly end if they don’t succeed in that regard. What kind of risk assessment is that?

  Or consider this: If the best outcome in a valued personal relationship is to tolerate one another, with communication channels strained and laughter and happiness rare, would you remain “invested” in that alliance? What if you held out for a break-even offer on your home just before the real estate market took a drubbing, even though you had a chance to sell it just a bit below your original cost? Is it sensible to hold out for that small amount extra on such a large family asset? Additionally, what about deciding to stretch for a goal just ahead without realizing how far you’ve already progressed and what you’re risking on the downside in its pursuit should you fail? Reaching for that slight bit more so that you can feel “whole,” whether psychologically or financially, not only exposes you to further frustration but the potential for substantial downside as well. Stubbornness and inflexibility are your enemies in such a scenario.

  What would I suggest in the above market example? Sell the stock, realizing that losing that small a percentage is barely even a loss at all. I certainly don’t consider it one. Or consider this: have a predetermined price level where you’re willing to take a reasonable loss on the downside (known as a “stop order”), based on a thorough chart pattern analysis by a highly respected technical analyst (or alternative method if you choose), coupled with your risk tolerance and whether you have a shorter-term or longer-term investment bent. Then remove that sell order at $30 and give the stock an opportunity to move beyond that level. In other words, have some type of floor on how much capital you could lose but don’t put a lid on how much you can make. Then, if the stock surpasses (in our example) that $30 per share level, you can raise your stop order accordingly. You may even decide to have more than one stop order on varying share positions. Technical analysis can be very useful in these circumstances, because it addresses the “just in case” scenario, a central part of the investment equation.

  Moral: The “break-even” syndrome has been around for as long as investing itself. We all want to get out of something at least as much as we put into it. That’s human nature. No one wants to lose. But it may never happen, and the resulting cost of waiting or reaching for that extra small bit when it comes to investing and in the other situations mentioned can be huge. Resist the temptation.

  Chapter 10

  Mirages

  Maintaining a healthy distance from the market’s minute-to-minute movements isn’t always an easy task. Some people observe and trade the market on that basis and feel comfortable doing so. I personally don’t delve into these micro trends. It takes time and energy away from what I consider to be the far more meaningful task of attempting to correctly gauge the market’s intermediate and longer-term trends, not to mention how draining it can be. I also think it inflicts a visibly increased emotional toll in a business where stress is already part of the everyday job. Micromanaging a personal relationship leaves less energy to concentrate on the big picture (its market equivalent being the longer-term trend) and can distract you from your primary goal. That’s certainly true in marriage.

  Believe me, it’s possible to be so sharply focused on the market’s every movement that you start to second-guess yourself or think you detect a developing trend that really isn’t there. It’s almost as if you’re seeing a mirage. With your face so close to your computer screen, staring so intently at the multicolored quotes flashing before your eyes, you may fail to take an aerial view of the market and get the larger lay of the land—a more realistic picture, you might say.

  Speaking of aerial views, you need to make a serious attempt to gauge the market’s general trend. As I said in chapter 1, the market’s primary trend exerts a powerful influence on both its component sectors and individual issues. That’s the grand prize in the analytical battle—correctly gauging the market’s investment trend. It’s the trend within which all the others (like the near-term and intermediate-term analytical time frames) exist, and fighting it can shred your capital.

  Sadly, individual stock recommendations are made day in and day out without any regard to the market’s major trend. It’s like swimming or boating without giving any consideration to the tide, or piloting a plane without assessing the atmospheric conditions. In these instances you need to step back from the individual circumstance to get a wide-angled perspective. Market-wise, this provides investors with an opportunity to better gauge the market’s rhythm. This is a central point because the stock market is not simply a conglomeration of random fluctuations. Nor is a symphony orchestra just a group of varied instruments playing random notes. You could say that while the stocks represent the individual instruments and the market sectors they’re in are the percussion, woodwind, string, and brass sections, the overall market trend is represented by the conductor.

  One of the most common mistakes that investors and traders of all financial shapes and sizes make is trying to equate a stock’s performance with the market’s over a single session or several sessions. It’s like trying to assess a relationship on an hourly basis. To me, hourly is a time measure of payment for parking or paying your baby sitter—not the definition of a market trend or a basis on which to invest. In relationship terms, you may have had a great date, but how is that pairing going to fare over the far more meaningful longer-term span? That’s what really counts. Focusing so intently on a person’s short-term behavior to the extent that you can’t step back and evaluate them overall increases the chance of an incorrect appraisal, just as in our market example. You need some breathing room.

  I can’t tell you how many times I’ve heard a comment about how favorable it was that one’s stock was up on a day when the market was sharply lower or how worrisome it was that a particular holding was down in a session or for a week in which the market rallied sharply. Trouble is, there are rarely any conclusions to be drawn from movements such as these in and of themselves. Go back and look at the action of many technology stocks following the NASDAQ Composite Index bubble that burst in 2000, or that of numerous banking and financial shares during their 2007–2009 plunge. I’m sure you’ll find that they each had their share of individual up days when the market faltered. It didn’t matter, however, because their overall trends were poor and many recorded steep declines over an extended period. Seeing a temporary rally in these sectors while the general market was sliding in those sessions meant nothing to their overall trend. Don’t assign any investment weight to action like this. One good weekend doesn’t cure a bad marriage.

  A stock that holds up well during a steep market descent over a very short span can simply be catching its breath or receiving a “bargain hunting” bounce before proceeding further south, just as a stock that hesitates to rise for several days or weeks during a spirited market rally may simply be consolidating or undergoing some temporary profit-taking within an overall uptrend. Unfortunately, all too often folks read far too much into micro movements that run counter to the prevailing market trend.

  A question the technical analyst asks in situations like this is whether these near-term movements have altered the supply-demand relationship for the stock (or market) in question beyond this minor trend horizon. If you’re a very short-term trader, these micro
movements are of import, but not when you’re attempting to size up the intermediate- to longer-term stock and market trends. Sure, there are exceptions, like there are to most “rules of the road.” But they don’t outweigh this general investment principle of the micro market trend taking a back seat to its investment trend counterparts.

  At this juncture let me say that there are many gifted and successful traders out there. Shorter-term investing has a devoted following, with a large universe of technical market tools available for them. As I’ve already said, my hat’s off to anyone with a respectable track record achieved with the highest moral and ethical standards, technician or fundamentalist, longer- or shorter-term focused. Still, I think that even those who choose the shorter-term trading route can benefit from paying heed to the market’s intermediate- and longer-term trends.

  Moral: In the stock market, as in life, it’s the big picture that counts most. Being too close to a situation can cause you to make a hasty decision, so step back in order to assess it from a wider perspective and get an aerial view. A stock that moves counter to a general market trend over the very short term usually isn’t worth dwelling on. It can mislead you into thinking that you see an important occurrence that is often meaningless. Neglecting the major trend, whether it’s with the stock market or one’s behavior or profession, is a risky bet. So step back and look at the big picture first. It often allows for clearer viewing. You can always zoom in for a closer, shorter-term look afterwards.

  Chapter 11

  All in the Family

  We’ve all heard the saying, “The apple doesn’t fall far from the tree.” Stocks can be compared similarly. They’re generally only as good as the sector they’re a part of. Stronger names often come from stronger groups, and underperforming names often come from weaker groups. An example of the latter would be the energy-related sectors from their respective 2014 peaks. In relationship terms, you can probably see similarities between someone you’re dating and his family member or members. How often have we traced a person’s sense of humor, serious side, generous nature, or adventurous way directly back to his family?