Tag Archives: seeking-alpha

Adding To Positions: A Simple Rule

I want to share a simple rule that has worked well for me over the years. I’ll explain the how and why, and then wrap up with some thoughts about when this rule might not be appropriate. So, imagine you are in a position, and then, for whatever reason, you know it’s right . In fact, it’s so right that it’s time to add to the position, and so you do. Now, think about what happens if the trade turns out to not be right, or to not develop as you expected – what do you do? Here’s the rule: if you add to an existing position and it does not work out as expected, you must get out of more than you added . Simple rule, but effective. To put numbers to the idea, say you are long 5,000 shares of a stock. As the trade moves in your favor, you get a signal to add to the trade (and that “signal” could cover many possibilities.) So, you add 2,000 shares. Somewhere down the road, the trade does not work out, and probably is under the price at which you added. Now, you know the right thing to do is to reduce the position size, and you must do so, but how much do you sell? Answer: more than 2,000, and probably more like 4,000 than 2,100. You now hold less than the original position size, and you’ve booked a loss on part of the position, but you’ve also reduced your risk on a trade that was not developing as you thought it might. One of the classic trading mistakes is to have on a winning trade, add inappropriately, and have that trade become a losing trade. For some traders, being aggressive and pressing when they have a good trade can add to the bottom line, but there is a tradeoff: when you become more aggressive you do so by taking more risk. The psychological swing – going from aggressive to wrong – can be one of the most challenging experiences for a trader, and many mistakes happen in this heightened emotional space. The rule of exiting more than you added is a simple rule, but it protects you from yourself. Now, no rule fits all styles of trading all the time. There could be styles of trading for which this is inappropriate, (for instance, when we add planning to scale in as the trade moves against the entry.) However, for “simple”, directional technical trading, this rule might be helpful in many cases. So much of the task of trading is just about avoiding errors and mistakes, and correct rules lead to good trading.

Everyone Wants To Hit The Long Ball

If you ever go to a golf driving range count the number of people hitting their driver relative to the number of people hitting their pitching wedge. You’ll notice that the vast majority of amateur golfers focus excessively on how far they can hit a golf ball. This makes no sense though. If you’re like most amateurs, you probably have trouble breaking 100. And that means you’re going to pull your driver out of your bag fewer than 15 times including the par 3 holes (unless you’re like me and you regularly keep that driver out to account for Mulligans). The point is, about 15% of your shots will occur with the driver. 85% of your shots will likely occur with an iron or putter. The short game is far more important than the long game. Golfers focus on hitting the long ball because it is a greater form of instant gratification. It’s the what have you done for me lately effect. A golf round can last for 3, 4, 5 or 6 hours. A few moments of instant gratification can make a seemingly arduous day appear worthwhile. Of course, this is precisely the wrong way to win these games. You win by doing lots of little things right and avoiding big mistakes. Ironically, going for the long ball increases the odds of making big mistakes, which increases your chances of performing poorly. The investing corollary is the constant reach for the next Apple (NASDAQ: AAPL ), the next Microsoft (NASDAQ: MSFT ), the “market beating” fund manager or what Peter Lynch called the “10 bagger.” This chase is as alluring as the long ball in golf. And it’s just as destructive. But like most amateur golfers, the average amateur investor doesn’t fully realize that what they’re often doing here is increasing the odds of making big mistakes in their portfolios rather than increasing the odds of winning (achieving their financial goals). For most of us, achieving our financial goals has nothing to do with finding the next Apple, “beating the market” or landing the next 10 bagger. For most people, allocating their savings boils down to two simple goals: Maintaining your purchasing power. Avoiding an excessive amount of permanent loss risk. But the allure of the long ball and instant gratification is often too enticing to ignore. And so we keep pulling out that driver. Again and again and again.

Oneok: Some Perspective After The Massive Fall

Oneok provided solid guidance for 2016 that boosted the stock over the last two trading days. The energy infrastructure play is positioned to meet distribution goals next year without an equity offering. The high yield at Oneok highlights the risk, but the company is positioned to survive in the current environment. Anybody reviewing the chart of Oneok (NYSE: OKE ) will see a stock that recently completed a round trip over the last four years. The stock went from roughly $20 to start 2011 to over $65 by 2014 and all the way back to below $20 recently. (click to enlarge) The company is the general partner of Oneok Partners, L.P. (NYSE: OKS ) , one of the largest publicly traded MLPs. With the sector under pressure after several years of strong performance, an opportunity likely exists in the sector now. The stock got a big bump on Monday and early Tuesday from positive 2016 guidance that claims the distribution is safe. With a dividend yield sitting at 13% prior to the announcement, a big rally isn’t a huge surprise. The question now is whether investors should chase the new 10.5% yield? On the surface, the guidance for 2016 suggests stability and the ability to cover distributions. The key tenants of the guidance were these points: FCF after dividends for Oneok. Cash on hand of $250 million at Oneok to support Oneok Partners. No public equity offering for Oneok Partners until well into 2017. Oneok Partners’ distribution coverage at 1.0x or better in 2016. The key to the whole distribution forecast is that NYMEX future strip pricing of $40 to $45 per barrel of crude doesn’t slip lower. The current price of oil won’t support the distributions. As with most energy plays including some infrastructure plays that have recently cut dividends, the whole issue of forecasts are the reliance on unstable commodity prices. With a 41.2% ownership stake in Oneok Partners, Oneok is highly reliant on the business that obtains the majority of profits from natural gas liquids. The remaining business comes from the gathering, processing and transmission of natural gas via pipelines. As with most domestic energy infrastructure plays, the business is set up for long-term growth. Low natural gas prices are set to fuel demand growth and facilitate the export of LNG around the globe. The company expects to see immediate growth from the Williston Basin where a substantial amount of gas is flared due to a previous lack of pipelines. At the same time, one-third of all ethane being rejected comes from the Oneok Partners system again providing more upside when petrochemical plants on the Gulf Coast are completed by 2017. The whole problem with an investment in Oneok is surviving the drastic fall in energy prices combined with sizable debt loads. With the shift to more fee-based contracts in 2016 and the extra cash at Oneok to support Oneok Partners survive the brutal pricing environment for commodities, the stock is a solid long-term investment in a very diversified portfolio that can absorb the risk. The recommendation is for investors to not chase Oneok higher today. Let the stock come back down before starting a position as the MLP sector likely faces more strains as other industry players undoubtedly cut dividends.