Relationship Investing

by Jeffrey S Weiss

  Keeping in mind that the primary market trend comes first, if it appears satisfactory based on my analysis and a specific market sector or sectors also looks attractive, I’ll purchase shares in the names within that group with the most favorable price patterns—not the laggards. Laggards have that label for a reason—they are underachievers. Loading portfolios with these types of stocks, and spending your hard-earned dollars for the privilege, is not the way to achieve stock market success. It’s also not in keeping with our relationship investing theme. Let’s face it: underachieving is an undesirable trait—in both investing and in life.

  But what happens when you have a stock that’s acting well but hails from a poor or lackluster sector? Should you buy it anyway, or wait until its underlying group strengthens? When faced with a situation like this, I consider doing the following: if the stock looks like a potential winner, I’ll contemplate buying part of my intended position (which will be in direct proportion to what I think of its chart pattern and risk profile). If the stock acts properly but the group remains in need of improvement, I maintain the position until such time as I detect strengthening in the latter. Then I’ll consider adding to the position with the appropriate risk management considerations. While the primary market trend comes first, there’s secondary value in assessing a stock within the context of its sector.

  Moral: Just as individuals are often a reflection of their family, the performance of a particular stock will often tend to reflect the health of the sector it represents and, most importantly, the general performance of the market as a whole.

  Chapter 12

  Back to School

  In chapter 1, I touched on the fact that what one learns in the college classroom and what one learns in the stock market trading classroom are two very different things. That’s why you need to start with a blank slate and not have any preconceived notions about how you’re going to invest or what type of strategy you’ll employ. You need to study the market with an open mind. That’s what I did after living through the devastating 1973–1974 bear market. I started from scratch. It was the single greatest learning experience of my life, forming the basis on which I think and invest in the market today.

  Prior to the early 1970s bear market episode, investors hadn’t witnessed a decline of that magnitude in quite some time. It was worse than the late 1968 through May 1970 market setback of nearly 36 percent in the Dow Jones Industrial Average, its first-through-fourth quarter retreat during 1966 of around 25 percent, or the late 1961 through June 1962 decline of approximately 27 percent. And aside from the 1956–1957 consolidation/pullback of approximately 19 percent in the Dow Jones Industrial Average, the 1950s was a wonderful overall period for the market. In fact, the last time a decline approximating that early 1970s magnitude occurred was during the March 1937 through March 1938 slide when the Dow Jones Industrial Average surrendered approximately 49 percent.

  However, investing in the stock market demands that you have an exit plan in case things don’t work out properly—no matter how rare a market event may be. It’s like having a life raft on a boat or safety gear in a car. I didn’t. The market didn’t care that I was all of 18 years old and hadn’t ever experienced a period like 1973–1974, or that most of my money was “on the line,” or any other reasons (read “excuses”) that I made for not having sold my positions earlier. It’s not concerned about your advanced science or mathematics degree, where you attended school, what your grade point average was, or anything else about your academic achievements. Your class rank? Forget it. Debating team and class valedictorian? Nice try. Super high IQ? Nope. It’s simply not an educational arena because the costs of learning the business of investing are way too steep. You certainly can’t learn it by trial and error because by the time you become smart, you can also be broke. How smart you are market-wise depends on one thing and one thing only—your track record, a large part of which will be determined by how well you control losses. Flexibility, humility, and respect for the market’s primary trend should come in handy in that regard. In a relationship, sometimes a couple needs to go back to the drawing board and begin again in order to relearn something in a more effective way—one that enhances their appreciation for one another. Whether that bond lasts will depend, at least in part, on how effectively they do so.

  I realize the psychological difficulty of basically discarding a fine education and its many benefits in order to better comprehend the market’s mannerisms. Many would reason, and it seems perfectly sensible on the surface, that the two would be complementary—the accumulated knowledge gleaned over years from a first-rate education at a fine institution would be a great entrée into the stock market world. In that respect, it could earn one a fine job at a respected firm with an attractive salary and opportunity for advancement. That’s certainly something to be proud of. But in terms of investing in the stock market, I beg to differ.

  Remember that book smarts and market smarts are two different categories. Don’t confuse them. Of course, it’s entirely possible that you possess both of these qualities, that some of your academic credentials may, indeed, be helpful in the market arena. All I’m saying is don’t assume that academic excellence automatically translates into stock market success or somehow gives you an investment edge. It doesn’t. In fact, it could even be a detriment if you’ve already shaped views that are counterproductive to that end. I’ve always believed that it’s easiest to teach my trade to someone with no prior experience, who has an open mind with no pre-conceived set-in-stone investment beliefs.

  Reminiscences of a Stock Operator, published in 1923, is my personal favorite market read. I have lots of company in that view. Technical analysis commentary and books by folks like Michael Kahn and John Murphy are just some of the many available resources that could also be helpful. For those interested in “Candlestick” charting, Steve Nison’s work is also a potential avenue.

  While not a beginner’s book, the classic Edward’s and Magee’s Technical Analysis of Stock Trends can also come in handy. The Market Technician’s Association also offers options for those wishing to delve into the technical analysis discipline to varying degrees. For a complete menu of its offerings visit their website at www.mta.org. You can also view the reading materials in the study curriculum for their Chartered Market Technician (CMT) program. Level one is an introduction. Taking a well-respected technical analysis basics course or two should serve as a good starting point as well. As always, the choice is yours.

  Moral: Stock market intelligence is more important than academic excellence when wading into the market’s choppy and volatile investment waters. They are not one and the same. I strongly believe that one of the potential keys to unlocking the market’s profitable door lies in studying its movements and not trying to apply academic strategies to real-life trading situations. An open and flexible mind is key in that regard.

  Chapter 13

  News

  I once read a humorous definition of the news: “What everyone but you knows about your stock.” As a technical analyst, I’m not concerned with the news but rather with the market’s response to the news, as evidenced by its technical (price) action in relation to its chart pattern and a variety of supply–demand gauges I track. While analysts galore focus on key news items ranging from consumer confidence to economic statistics, from interest rates to retail sales, from oil prices to employment data, and from earnings releases to business inventories, no statistic in and of itself is going to change a primary market trend from bear to bull or vice versa.

  There always seems to be some statistic that the “experts” have identified as a market key, depending on the period. I can remember when the money supply was front and center for a time back in the 1980s, when oil prices, debt levels, or some key economic barometer at a particular time was the number du jour of statistical watchers. They used these fundamental results in combination with other financial measures as a basis to formulate an investment opinion on the market’s directi
on and pen their research reports. But the stock market doesn’t follow anyone’s prewritten script. It’s not a science. It’s an art! Better in this analyst’s view to start with a blank canvas and proceed from there. After all, the market often behaves in a way counter to what you’d expect.

  Do you think that the market can’t climb in the face of seemingly dire economic statistics or slide sharply amid a favorable news background? Do you believe that rising interest rates spell automatic death for the stock market or that lower ones always translate into bull runs? Did the collapse in oil prices from above $140 in July 2008 to the low- to mid-$30s vicinity in the first quarter of 2009 help cushion the market’s slide or help the airline sector gain altitude? Did President Nixon’s resignation in August 1974 stop the big bear market then in progress? No, no, no, and no! I remember that 1974 period like it was yesterday. So what gives?

  What gives is that trying to interpret the effect of news on the stock market without having a handle on the stock market’s condition from a supply-demand standpoint is, to me, practically impossible. It’s like trying to predict how many miles you can go on your existing fuel supply when your car’s gas gauge is broken, or making a budget without knowing your cash on hand. Relationship-wise, can you decide to get engaged without having any idea about what your future plans are?

  Yes, unexpected news can indeed exert a visible influence on the market’s movements; no doubt about it. However, moving beyond key technical price areas and gauges (both on the upside and downside) that have been in force for many months or even years is what usually changes the market’s supply-demand relationship and often causes sustained and substantial directional moves. A market that acts technically well, even in the face of an onslaught of negative news, is usually conveying a favorable underlying trend message. Isn’t this a characteristic of a good relationship as well, where successfully navigating through the tough times without harming the core of a relationship can make it stronger and endure longer? The opposite is true of a bearish overall market trend, where consistently positive news developments fail to lift the market indices above northerly regions that my charts deem of import. That’s what I observe: responses. Obviously, there are numerous gauges I track in attempting to accurately discern the market’s overall trends—a task far, far easier said than done. But at least I’m looking at the market’s price action when attempting to discern these trends as opposed to factoring in external events that exclude the supply-demand function.

  To me, the most important determinant of whether a bull or bear market is in force, and whether an individual issue should be bought or sold, is not a specific news item or development but the action of the market and the shares themselves. Enough said.

  Moral: There’s an important choice to be made here, and it’s a big one: are you going base your investment decisions on news items and other fundamental considerations, or are you going to predicate them on the movements of the market itself? I made my choice back in 1974 because I noticed a disconnect between the prevailing news and the market’s response to it. And I’ve noticed that divide ever since.

  Chapter 14

  Hopes and Dreams

  I think we can all agree on the highly positive aspects of hope and the optimistic tone it conveys in so many situations in our lives. Being hopeful, upbeat, and happy is far better than the alternative when it comes to experiencing so many of life’s challenges. It makes for a better quality of life as well. Far be it for me to dissuade you from this generally wonderful attribute—except when it comes to investing in the stock market.

  Hoping, wishing, or expecting that a stock will go up if you own the shares (or down if you’re “short”) is not an investment characteristic. It’s based on what we’d like to see happen, which doesn’t count for anything on the investment scene. The market doesn’t care. Nor does it matter in the pursuit of a good exam grade or a successful business plan. Each involves hard work on an ongoing basis, not hoping and dreaming. Looking on the sunny side can be blinding when investing in the stock market, so be realistic and don’t substitute expectations for a course of action.

  How often have we heard phrases like “I was hoping the shares would rally on the earnings announcement,” “I wish I had sold the stock sooner,” “I expected the shares to climb on the great news regarding their new product line,” or “I thought the lucrative contract they recently received would boost the share price.” There are so many others; take your pick. These phrases are of no use in helping us decipher the market’s message. In fact, they distract us from it. If I were writing definitions that related to “hoping” in a stock market dictionary, here’s what I’d include:

  1. Piling more and more shares of a poorly performing name into your portfolio by “dollar cost averaging” (purchasing shares with a set dollar sum each month; you buy more shares at a lower price, less at a higher price) in order to lower your cost basis in the belief that the stock will eventually recover; thinking that lower is better, that bad is good.

  2. The opposite of the Don’t Ever Average Down strategy, otherwise known as “DEAD.”

  3. Wanting to add more capital to an equity position that you have already decided to sell in the faith that one big rally will get you to a break-even result; like saying that you need to become increasingly involved in a personal relationship or business venture that you’ve already decided you want to extricate yourself from because you think you’ll receive better terms later on; also referred to as high risk; a stress builder; can get you entangled deeper in a situation you didn’t want to be in to begin with.

  4. Believing in a favorable investment outcome that often never materializes; often accompanied by no risk management plan to address the downside portion of the investment equation because the negative outcome wasn’t expected.

  5. Often prolongs an unsuccessful investment outcome, leading to larger losses.

  One of the many great quotes from that legendary trader of years ago, Jesse Livermore, went like this: “The human side of every person is the greatest enemy of the average speculator or investor.” That’s why I continually stress the importance of knowing yourself and how you’ll react in varying market scenarios.

  Moral: Being an eternal optimist when investing in the stock market can earn you continual tax loss carry forwards on your annual tax return if you’re not careful. Hope is not an investment consideration, nor is it something on which a lasting personal relationship can be built. When an investment is going against you, don’t make hollow excuses for continuing to retain it. It’s the same premise as when you’re in a deteriorating relationship but rationalize enough of a hopeful scenario to continue in that partnership. Either makes little sense.

  Chapter 15

  Reality (and Ego) Check

  There’s an old saying that one should never confuse brains with a bull market. I mentioned this back in chapter 1. In fact, that was the very first investment lesson I learned, brought to me courtesy of the nasty, early 1970s bear market. While I often have a view of where the market or a particular stock is headed, I also remain flexible. As a technical analyst, I’ve always believed that I’m only a market translator, simply trying to interpret its actions and always remembering that it, not I, is the boss. Always.

  But that’s not the way all market participants see it. They have predetermined, premolded market scripts written from which they rarely veer—until a trade or investment has moved badly against them. And by then it’s often too late to recover a significant portion of their capital.

  Don’t be so quick to assume that the market is wrong if it moves in a direction opposite to that which you anticipated. If a position moves steadily against you, revisit your thinking. Don’t commit more capital to it. You may want a seasoned and respected professional with a solid background in technical analysis who has experienced both bull and bear markets over many years to take a look at the chart pattern and analyze the risk management situation. Whether you decide to read a resear
ch report from a respected fundamental analyst with a proven track record is also up to you; it’s not at all a part of my discipline, but I mention it in fairness to that, or any other, analytical method. Remain flexible and realistic. If you suspect that you have erred, you can always sell a portion of the position to reduce your financial exposure while holding the rest of the position consistent with a risk management discipline. As I said before and will reiterate, the stock market is both judge and jury and its verdict is final. That’s why you need to be in a humble frame of mind in the business of investing. Leave your ego out of it. Permanently!

  Sadly, I’ve heard many a market participant utter the painful phrase that a loss really isn’t a loss until you actually take it. In other words, it’s just a loss on paper. What the hell does that mean? If you have a loss it’s a loss regardless of whether you’ve taken it or not, and you need to face up to that reality rather than admit that it doesn’t exist. Were the huge losses that were experienced in many NASDAQ Composite Index listed names following its 2000 peak any less severe simply because those losses weren’t taken? Or the numbing declines in many financial and other well-known household names following the market’s 2007 peak? What about the sharp slides in energy-related sectors from their 2014 highs? Of course not!

  One of the hardest things to do in life (and this is particularly true in relationships) is to revisit situations that didn’t go as well as we expected them to. But it’s only by addressing them, painful as it may be, that we gain the knowledge necessary to avoid making those very same mistakes again. This falls into the realm of psychology and emotion, areas I stress continually in these pages because they receive far less investment attention than they deserve, yet are crucial to a successful outcome.