Relationship Investing

by Jeffrey S Weiss

  Just because someone looks great on paper and their personal credentials look exciting and appear to mesh well with yours doesn’t mean that you’ll have chemistry when you meet face-to-face. Something analyzed on paper isn’t always an accurate reflection of how it will act in the real world, no matter how great it seems or how bright its future looks. Think of a person’s résumé as the underlying company, and themselves as the shares. Which is more important? On which basis will you be making your decision? Thinking that holding shares of a quality company are anything to take much comfort in when a primary bear market strikes is a big financial risk.

  Moral: No matter how blue a “blue chip” may be, it can still put you in the red if the market moves against you. The stock market cares nothing about labels.

  Chapter 42

  The Pick-Your-Price Stock

  Back in the 1970s I used to frequent what were referred to as “visitor’s galleries” in all the local brokerage offices. These were spaces provided by the respective firms, primarily for their clients, with seats and a quote machine and a news wire, which continuously printed corporate and other news stories of the day. Like a roll of toilet paper, it had to be changed when it was used up. That’s what you had to rummage through to look up a specific news item of interest to you. Some offices I visited, like the Merrill Lynch branch in Paramus, New Jersey, went all out. They offered theatre-like seating in front of the New York Stock Exchange and American Stock Exchange ticker tapes, along with donuts and coffee and loads of research reports authored by their analysts lining the surrounding walls. If Zagat’s were rating brokerage firm amenities back then, it would have received top honors. Market talk abounded from the 10 a.m. opening to the 3:30 p.m. close, with stories of “if I had only …” and “I should have …” among the many sadly recalled but frequently uttered phrases.

  One day I was approached by a fellow who told me that he just bought a $100 stock. After hitting the share quote on the machine, I noticed that the price was considerably below his hallucinogenic price. When I mentioned this gaping discrepancy to him, he informed me that I was only seeing the current price, but that in five years’ time this would be a century-priced stock. There was no shred of doubt that I could detect in his mind. His script was written. His mind was made up. Case closed. His crystal ball had spoken.

  I’ve heard this overconfident thinking many times in my career. Only the upside is considered, and a positive outcome expected. What eventually happened to that stock I don’t recall, but I can tell you this in no uncertain terms: the stock market is not a “paint by number” undertaking where each color corresponds to a specific number on the picture, and where the lines are clearly delineated to avoid the potential for painting outside of them on the way to completing that portrait. Rather, the market is a blank canvas on which we each paint our own picture of success or failure based on the colors we choose. That investment palette contains our individual beliefs about the market and money, as well as our psychological predispositions. Each of us paints a different picture and sets our own chances for success or failure (which we discussed in chapter 27, “The Odds”). Nor are there any scripts written for you to follow, because the stock always plays the starring role and it alone is privy to the script.

  The only share price that counts is the one appearing on your computer screen at the time you own the shares. Look, there’s nothing wrong with predicting. I do it for a living. That’s what technical analysis is all about. I savor the challenge. But that’s not the same as stating a fact yet to be proven with no downside mechanism in place should your outcome fail to materialize. When I make an investment assessment based on my chart analysis, I don’t concentrate on the upside because that’s not the side that’s ever going to hurt me. I want to concentrate on the end of the spectrum that holds the potential for harm—the downside. Not doing so is like climbing a mountain and looking upward toward its peak while wearing no gear to protect yourself in case you fall.

  When I buy a stock, I think in terms of the number zero, not one hundred. It keeps me humble and focused on what matters most: capital preservation and risk management.

  Moral: Unrealistic expectations in both life and the stock market expose significant vulnerabilities by not considering and respecting the risks in each. Maybe it’s investing a large sum in what you think is the “ground floor” of a long-term investment without realistically considering the underlying risks, or taking a job where you project your earning power years into the future without factoring in the highly cyclical nature of that company’s business. Because of both a high comfort level with one’s assessment and an unpreparedness in the event of a negative result, a disappointing outcome is psychologically (and, in the case of the stock market, monetarily) much harder to come to terms with. Leave “pie in the sky” scenarios for your dreams, not reality.

  Chapter 43

  “Wax On, Wax Off” (or Rinse and Repeat)

  Whether they appear on a bottle of shampoo or as a line in a hit movie like The Karate Kid, the phrases “wax on, wax off” and “rinse and repeat” also have a stock market application. It has to do with repetition. It has to do with reinforcement.

  In the original Karate Kid movie, the teacher, Mr. Miyagi, had Daniel do repetitive chores. While these seemingly boring tasks had nothing to do with karate in his student’s eyes, the continuous hand motions involved in performing them were the very same ones that Daniel would use in the discipline of karate. One of the chores was to apply wax (“wax on”) to a car with one hand motion and remove it (“wax off”) with another. Other chores included painting a fence and sanding a deck. Practicing these motions in the discipline of karate proved invaluable in learning the art.

  Poor investment habits, if not corrected, can interfere with your investment performance time and time again. That’s why it’s imperative to unlearn potentially dangerous market habits and extricate yourself from this financial quicksand. It’s an ongoing process that demands a perpetual vigil. You can take no days off. None. The one time you forget to follow a key market tenet can seriously affect your financial life. As with any relationship, whether personal or financial, poor habits and unsound reasoning can lead to a regrettable outcome. Mistakes that are glossed over, or not addressed and rectified, have a habit of returning—often in an unpleasant way.

  I mentioned at the outset of this book that learning the market’s language involves breaking old habits—responses to stock market behavior that may have been ingrained in you from investment birth. It’s the same with other market miscues that repeatedly hamper your performance. You’ll never overcome them if you don’t dwell on them, objectively analyzing why they occurred, committing them to memory, and resolving not to make them again. Have a list, like a quarterback with plays strapped on his wrist or a football coach with a laminated page of potential play calls.

  This is perhaps the most difficult part of one’s investment education—unlearning behaviors in which you’ve been engaging for years, maybe even decades. Think about this issue in relationship terms. How can you hope to turn your personal life around if you don’t examine and address the shortcomings that serve to undermine your relationships with coworkers and friends and lessen your chances of a successful romance? Pretending they don’t exist or aren’t that important only serves to ensure their return.

  Let’s review a list of my strongly suggested investment tenets, which I’ve already mentioned but wish to stress again in this numerical, checklist form. You may want to add some of your own rules that, after careful consideration, you deem as having a negative influence on your investment results. Repeat each of the following:

  1. Do not “average down” a losing equity position, but rather respect the market’s verdict because it knows more than anyone.

  2. If you cannot deal successfully and on a sustained basis with your market emotions, find someone well qualified to help you do so or do not invest in the stock market. A poor market temperament can spill over
into one’s personal life as well, so take this subject seriously. Be honest with yourself.

  3. Do not let tax considerations interfere with your investment decisions. Rather, let the investment itself always be your guide.

  4. Do not buy stocks based solely on dividend yield. Your investment capital is always more important than the dividend received on it. Capital preservation comes first.

  5. Price should not be a factor when searching for stocks to buy. You’re far better off purchasing fewer shares of a seemingly “high-priced” stock that rises in value than buying more shares of a seemingly “low-priced” stock with that dollar amount that declines in price.

  6. The majority of stocks will move in the direction of the market’s primary (longer-term) trend, so beginning with an analysis of individual securities is not as important as attempting to gauge the market’s overall trend.

  7. There’s nothing wrong with holding cash or other highly safe and liquid low-yielding investments if you are not comfortable investing in the stock market with your dollars. Be patient, preserve your capital, and let the market action—not your money market yield or whether you have the capital and are ready to invest—dictate when it’s time to invest.

  8. Take some technical analysis courses with highly regarded instructors. Read up and study regularly on the subject.

  9. If your research indicates that a stock has probably reached a significant peak, just because it’s comfortably beneath its high should not deter you from selling all or most of the position (with a “stop” strongly suggested on the remainder), realizing that the stock market is an art and not a science and you won’t be able to sell at exact peaks or buy at absolute bottoms. The reverse also applies to a stock that you believe, in retrospect, has hit a key bottom. As you know, I use technical analysis as my tool in these regards.

  10. Remain in the moment. Don’t dwell on what was or what you “could have” or “should have” done. Stay in the present and make your decision. Remember, in the stock market you don’t always get a second chance to sell a stock at your desired price. My general rule is that I want to be more motivated when a decision to sell has been reached than a determination to buy. After all, it’s my money and I want it back!

  11. If you’re concerned about a particular investment or the stock market in general to the point that it’s affecting your sleep at night or frequently occupying your thoughts during the day, consider selling down to the sleeping point—the point at which your ability to fully function and get a complete night’s rest is not compromised. Besides, nothing is worth your health! Again, investing in the stock market isn’t for everyone. Go back and read tenet number two.

  12. Don’t ignore a seemingly large loss just because you think a stock is at or near a bottom and can’t go visibly lower. Those stocks that “look low” still have the potential to decline significantly more and hurt you financially. Realize that stocks go to extremes in terms of both upside and downside momentum.

  13. How you “think” a stock looks or what you “hope” it does should not be parts of your investment vocabulary. Those are anything but investment factors.

  14. Don’t become emotionally attached to a stock because it’s a long-time family holding. If the issue appears vulnerable and you have a healthy position in those shares, you can always retain a piece of the position for history’s sake without compromising your capital.

  15. If you seek perfection, become a “hindsight specialist” so you’ll be 100 percent correct at predicting the past based on the present. I read this definition in a book decades back. If you can’t be flexible and adjust to the market’s ever changing dynamics, staying humble and accepting losses, the market’s probably not for you.

  16. Remember, the stock market doesn’t know your personal status.

  17. The stock and the company are not one and the same!

  Moral: The only guarantees in the business of investing in the stock market are hard work and losses. As with a relationship, there are no assurances of a happy ending. However, by adhering to some sensible, disciplined tenets like being flexible, staying humble, admitting errors, and realistically assessing your temperament (among others), you stand a better chance of improved outcomes at both. As I mentioned earlier, some—if not most—of the investing views described in this book fly in the face of conventional wisdom, whatever that is. But markets over the years, time and time again, have shown that widely accepted rules of investing have sounded far better in theory than they’ve worked in practice.

  Chapter 44

  The Final Chapter—For Now

  Despite receiving offers to write technical analysis textbooks over the years, I’ve politely refused. Many good ones already exist. So rather than write an exhaustive book with lots of charts and technical commentary that caters to a narrow audience, I wanted to try to reach a far broader audience by using relationships, something each of us can relate to in some way, to communicate the principles of technical analysis—minus the “technical analysis” jargon. At least the vast majority of it. Now don’t get me wrong. That technical analysis jargon is what I preach and practice every single day of my professional life. I live it. I breathe it. No one takes it more seriously than I. It’s just that in this hectic, abbreviation-based world, I thought taking this book’s route was the best course—while hoping you’ll delve deeper into the discipline of technical analysis.

  The stock market is the most humbling monetary arena I can think of. Imagine making money hand over fist every year for multiple years, and then losing the lion’s share of it in one multi-month primary bear market. It doesn’t seem fair, but that’s the market for you. Each and every day is a financial war where you’re not sure what to expect, but you need a plan to deal with it nonetheless. You can be correct in your investment assessments 60 percent, 70 percent, even 80 percent or more of the time and still lose money if you can’t successfully manage the downside portion of the investment equation. Even a single, major loss in just one or two mismanaged equity positions can have a meaningful negative effect on your entire portfolio—cumulatively outweighing your multiple gains.

  Bear markets are separation specialists; they excel in parting investors from their capital, often going to extremes that consensus opinion rarely foresees. So never rest easy! The combination of money, market volatility, psychology, and a twenty-four-hour news cycle is a potent brew in the business of investing and needs to be countered by a risk management plan and investment discipline. Don’t get involved in the stock market to the point that your emotional and financial well-being are hostage to its movements. That’s a dangerous place to be.

  How many years of investment experience one has means absolutely nothing to the stock market, which often moves in a fashion completely opposite to what the news background might suggest. We all have learner’s permits when it comes to investing. There are many unexpected twists and turns on its road. There are no experts. Only the market itself. And no one is immune to its risks! The more experience you have and the larger your ego, the greater the chance that you’ll forget the basics (remember chapter 8, “Basic Training”?) and be lulled into a false sense of security. Then the market has you in its financial sights, and extricating yourself from its grip, especially in a bear market, can be difficult (to put it mildly). Remember, the stock market is the monetary boss.

  Trying to be too smart can lead you to outsmart yourself when it comes to investing in the stock market. Be as thorough and complete as possible in your analysis, but don’t overanalyze a situation to the extent that it causes you to freeze and fail to implement the appropriate measures that your analysis suggests are needed. Remember, there’s the analysis part of the investment equation, the risk management portion of the investment equation, and the implementation portion of that equation. The finest investment analysis and insight in the world mean nothing if you aren’t able to act on them when the situation dictates. The same is true in life; decisions need to be implemented.


  One of the reasons I use technical analysis as my preferred means of both security and stock market research is that it allows me to separate a mere opinion from a view backed by investment capital—capital whose flows translate into the equity and market movements that I track with my technical analysis gauges. These instruments include various types of trend lines, price patterns, moving averages, gaps, and my own momentum barometers, among others. My primary emphasis is on the longer-term market trend, the intermediate-term trend, and the shorter-term trends—in that order.

  Generally speaking (and loosely defined) for our purposes, I’ll go back several years (on a weekly basis) to assess an intermediate-term trend, and multiple years (on a monthly basis) to view the long-term technical picture. In the latter instance I may go back up to a decade or so. The short-term time frame can mean days or even hours these days. Nonetheless, I still go back multiple months (and sometimes longer) when viewing a daily chart. Suffice it to say that market volatility has compressed the time it takes for markets to move similar distances.

  I use both “bar” charts (showing the high-low range for a stock or market index) and “line” charts (displaying only the closing price) for the analytical periods in question. These periods include a daily, weekly, monthly, and sometimes even a quarterly or annual basis. I think it’s safe to say that the number of technicians using the latter two periods are slightly more than the population of a ghost town. But remember, just as larger houses require larger foundations to support those structures, so too does the extent of an upside move in a stock depend in part on the size of its foundation (referred to as a base in technical analysis jargon) preceding that move. The opposite is true on the downside, where the length of its “top” pattern is a partial determinant of its potential southerly move. That’s why I look at those longer-term periods.