Tag Archives: economy

Right Sizing Your Trading

Editor’s note: Article originally published February 26, 2016. I can’t tell you how many times I have been woken up in the middle of the night by an investor who was sleepless over a position that was going the wrong way. Gold was down $50, the euro was spiking two cents, or the stock market was enduring one of its periodic heart attacks. Of course, my answer is always the same. Cut your position in half. If your position is so large that it won’t let you sleep at night on the bad days, then you have bitten off more than you can chew. If you still can’t sleep, then cut it in half again. Which brings me to an endlessly recurring question I get when making my rounds calling readers. What is the right size for a single position? How much money should they be pouring into my Trade Alerts ? Spoiler alert! The answer is different for everyone. For example, I will not hesitate to pour my entire net worth into a single option position. The only thing that holds me back is the exchange contract limits. But that’s just me. I have been trading this market for nearly half a century. I have probably done more research than you ever will (I basically do nothing but research all day, even when I’m backpacking, by audio book). And I have been taking risks for my entire life, the financial and the other kind, quite successfully so, I might say. So my taking a risk is not the same as your taking a risk. Taking risks is like drinking a fine Kentucky sipping Bourbon. The more you drink, the more you have to imbibe to get a good buzz. Eventually, you have to quit and start the cycle all over again. Otherwise, you become an alcoholic. So you can understand why it is best to start out small when taking on your first positions. Imagine if the first time you went out to drink with your college dorm roommates and you finished off an entire bottle of Ripple or Thunderbird ? The results would be disastrous and nauseous, as they were for me. So I’ll take you through the drill that I always used to run beginning traders at Morgan Stanley’s institutional equity trading desk. You may be new to investing, new to trading, and find all of this money stuff scary. Or you may be wary, entrusting your hard earned money to advice from a newsletter you found on the Internet ! What if my wife finds out I’m doing this with our money? Yikes! That is totally understandable, given that 99% of the newsletters out there are all fake, written by fresh faced kids just out of college with degrees in Creative Writing, but without a scintilla of experience in the financial markets. And I know most of the 1% who are real. I constantly hear of new subscribers who are now on their tenth $4,000 a year subscription, and this is the first one they have actually made money with. So it is totally understandable that you proceed with caution. I always tell new readers to start out paper trading. Virtually all online brokers now have these wonderful paper trading facilities where you can practice the art with pretend money. Don’t know how to use it? They also offer endless hours of free tutorials on how to use their platform. These are great. After all, they want to get you into the market, trading, and paying commission as soon as possible. You can put up any conceivable strategy and they will elegantly chart out the potential profit and loss. Whenever you hit the wrong button and your money all goes “poof” and disappears, you just hit the reset button and start all over again. No harm, no foul. After you have run up a string of two or three consecutive winners, it’s now time to try the real thing. But start with only one single options contract or a few shares of stock or an ETF. If you completely blow up, you will only be out a few hundred dollars. Again, it’s not the end of the world. Let’s say you hit a few singles with the onesies. It’s now time to ramp up. Trade 2, 3, 4, 5, 10, 50, or 100 contracts. Pretty soon, you’ll be one of the BSDs of the marketplace. Then, you’ll notice that your broker starts following your trades since you always seem to be right. That is the story of my life. This doesn’t mean that you will enjoy trading nirvana for the rest of your life. You could hit a bad patch, get stopped out of several positions in a row and lose money. Or you could get bitten by a black swan (it hurts). Those of you who have been following me for eight years have seen this happen to me several times and now know what to expect. I shrink the size, reduce the frequency, and stay small until my mojo comes back. And my mojo always comes back. You can shrink back to trading one contract or quit trading altogether. Use the free time to analyze your mistakes, rethink your assumptions, and figure out where you went wrong. Was I complacent? Was I greedy? Did hubris strike again? Having a 100% cash position can suddenly lift the fog of war and be a refreshingly clarifying experience. We all get complacent and greedy. To err is human. Then, reenter the fray once you feel comfortable again. Start out with a soft pitch. Over time, this will become second nature. You will know automatically when to increase and decrease your size. And you won’t have to wake me in the middle of the night. Good luck and good trading. Disclosure: No positions

Do Stock Spinoffs Still Outperform? A Summary Of The Research

Ever since I read, You Can Be a Stock Market Genius , I’ve been fascinated with stock spinoffs. The book is written by Joel Greenblatt, who is a certified rock star in the value investing community. When he was running his highly concentrated hedge fund, he returned over 50% annually for a decade. Incredibly impressive. In the book, Greenblatt devotes chapter 3 to spinoffs. In that chapter, this line caught my eye: There are plenty of reasons why a company might choose to unload or otherwise separate itself from the fortunes of the business to be spun off. There is really one reason to pay attention when they do: you can make a pile of money investing in spinoffs. The facts are overwhelming. Stocks of spinoff companies, and even shares of the parent companies that do the spinning off, significantly and consistently outperform the market averages . Now this book was written in 1997. Since then, many a hedge fund manager has read the book and the “spinoff anomaly” is relatively well known. You would think that this inefficiency in the market would fade with time as more investors look to exploit it. As such, I wanted to review all studies that are available to see if spinoffs still do, in fact, outperform. Here is what I found: Here are the links to learn more about each study: Restructuring Through Spinoffs: The Stock Market Evidence J.P Morgan Research Report Corporate Spinoffs Beat The Market Credit Suisse: Do Spinoffs Create or Destroy Value The Stock Price Performance of Spinoff Subsidiaries, Their Parents, and the Spinoff ETF Global Spinoffs & The Hidden Value of Corporate Change In short, the answer is “Yes, spinoffs still outperform.” If you want to invest in spinoffs, consider investing in the Guggenheim Spinoff Index (NYSE: CSD ). But if you would prefer to pick your own spinoffs, stay tuned. I will be publishing a series of articles on the stock spinoff market and how to pick the winners. If you would like to read them, follow me on Seeking Alpha and you will be notified when I publish new research. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

February ETF Asset Update: Safe Assets Gain; Stocks Shed

Similar to January, safe assets were in the spotlight in February thanks to heightened global uncertainty. Dimming prospects of frequent Fed rate hikes this year, global growth worries and oil price issues put a lid on the global risky assets and helped the valuation of safe assets to soar. Though sentiments were slightly better than January, the global markets were broadly mixed. Let’s find out where investors parked their money and the spaces that were avoided in February (per etf.com ): Gold Continues to Shine This refuge continued to dazzle in the month as it is often viewed as a safe haven in times of heightened financial risks. The commodity is on a tear this year, with volatility creeping up. As a result, fund tracking the yellow metal, GLD pulled in $3.38 billion in assets in February. Another gold bullion ETF that hogged investors’ attention was iShares Gold Trust (NYSEARCA: IAU ) , which added $760.5 million in assets. U.S. Treasury Bonds Prevail U.S. Treasuries across the yield spectrum gathered assets in February with iShares 7-10 Year Treasury Bond (NYSEARCA: IEF ) taking the third spot by drawing $1.06 billion. iShares 20+ Year Treasury Bond ETF (NYSEARCA: TLT ) also embraced about $841.9 million in assets and made an entry into the top-10 list. Not only the safest bet Treasuries, high-yield bond funds like iShares iBoxx $ Investment Grade Corporate Bond (NYSEARCA: LQD ) and iShares iBoxx $ High Yield Corporate Bond (NYSEARCA: HYG ) – which were long out of investors’ favor – added $944.9 million and $943.8 million in assets, respectively. As 10-year Treasury bond yields plunged to below the 2% mark, investors jumped to the otherwise risky junk bond ETFs space to meet the need for current income. Apart from this aggregate bond ETF, iShares Core U.S. Aggregate Bond (NYSEARCA: AGG ) amassed about $952.1 million in assets. Utilities ETFs a Winner While the stocks tumbled mainly to reflect a retreat in risk-on movement, one safe corner of the equity world, namely utilities, ruled in the month. Also, utilities are known for their high dividend payout which made this space a highly longed-for area against the low-yield backdrop. First Trust Utilities AlphaDEX (NYSEARCA: FXU ) and Utilities Select SPDR (NYSEARCA: XLU ) accumulated about $999.2 million and $856.4 million in assets, respectively, in February. U.S. Equities Fall Flat In tandem with the other risky assets, investors fled the U.S. equities’ space. As a result, the U.S. broad equity ETFs saw huge outflows last month with the ultra-popular large-cap U.S. ETF SPDR S&P 500 (NYSEARCA: SPY ) topping the losers’ list. The fund lost around $2.1 billion in assets while another S&P 500-based ETF iShares Core S&P 500 (NYSEARCA: IVV ) saw about $1.18 billion in assets gushing out. Not only the S&P 500, even Nasdaq-based P owerShares (NASDAQ: QQQ ) lost about $722.8 million. Japan ETFs Lose Status Despite the Bank of Japan’s negative interest rate policy, Japan equities ETFs saw investors shunning the area. This was because as yen gained strength on safe-haven demand, equities suffered. WisdomTree Japan Hedged Equity (NYSEARCA: DXJ ) and iShares MSCI Japan (NYSEARCA: EWJ ) saw asset outflow of $1.19 billion and $704.8 million, respectively. Biotech Breaks Down The biotech ETF space also fell victim to the high beta crash, which is why First Trust NYSE Arca Biotechnology (NYSEARCA: FBT ) saw assets worth $1.43 billion flowing out in the month. Original Post