Saturday, April 9, 2011

The Kirk Report

The Kirk Report

15 Fundamentals To Win The Battle

Posted: 09 Apr 2011 09:40 AM PDT

Gerald Loeb

Gerald Loeb was a founding partner of E.F. Hutton, a renowned and successful Wall Street trader, and the author of the books The Battle For Investment Survival and The Battle For Stock Market Profits.

Mr. Loeb promoted a contrarian view of the market as too risky to hold stocks for the long term in direct contrast to many of his generation. At the time, many considered Loeb’s comments heresy to the buy and hold doctrine so common among many in the industry. While Loeb never had the opportunity to trade in an environment now ruled by quants, algorithmic trading and massive government intervention, his wisdom and insight is still applicable in today’s environment. After all, the more things change, the more they always stay the same!

Based on his two books, here are 15 fundamentals Loeb argues that you need to understand to win the battle not only against yourself, but also against the market:

  1. What everyone else knows is not worth knowing.
  2. Stocks are always way overvalued in a bull market and way undervalued in a bear market.
  3. The best stocks will always seem overpriced to the majority of investors.
  4. Expectation, not the news itself, is what moves the market.
  5. Three basis elements should be considered when evaluating a stock – 1) quality (fundamentals, liquidity, management), 2) price, and 3) trend (the most important).
  6. Stocks act like human beings and go through the same stages and phases as people do, including infancy, growth, maturity, and decline. The key in trading is to be able to recognize which stage the stock is in and to take advantage of that opportunity.
  7. Pyramid your buys – start with an initial position and then add to it only if the trade moves in your favor.
  8. The more experienced and successful you become, the less you should diversify.
  9. Traders must always resist the urge and temptation to change their strategies for each and every different market cycle.
  10. To succeed in trading you must 1) aim high, 2) control the risks, 3) be unafraid to keep uninvested reserves and 4) be patient.
  11. Successful traders are intelligent, they understand human psychology, they practice pure objectivity, and they have natural quickness.
  12. You must always trade with the actions of the market and not simply by how you might think the market should trade.
  13. Knowledge through experience is one trait that separates successful stock market speculators from everyone else.
  14. The stock market is more an art than a science and far more complex than most people understand.
  15. Always sell when you start patting yourself on the back for being smarter than the market.

In reflecting upon these 15 fundamentals, ask yourself the following question: Among all of these fundamentals, which of these do you disagree with and/or do not reflect your personal experience so far? In doing so, I want you to consider that not only could you be wrong in that view, but that knowledge of the difference may help you to explore a new path to improving your performance.

I recently undertook this simple exercise with one of my members. In doing so, they disagreed adamantly about Loeb’s recommendation that “The more experienced and successful you become, the less you should diversify.” Then we followed that up by taking a closer examination of his portfolio and performance over the past couple of years. So, what did we find out by dong this? Long story short – this member’s performance was significantly hindered by having too much diversification. His portfolio, for example, held an average of over 30 stocks and ETFs, most of which were highly correlated with each other. This in turn not only increased his taxes and cost basis, but ultimately weighed heavily upon his performance. By being so diversified, he was putting himself in the hole and providing himself with a false sense of security which was preventing him from achieving the results he desired. Yet, when I initially asked him to review Loeb’s 15 fundamentals, this is the one he had the most trouble with because it directly challenges is belief and view of the importance of being diversified.

In sum, many times the paths to new ways of thinking and improvement will often be direct contrast to your own preconceived notions. No matter who we are, we all have those. Many of them unfortunately work against us, unless we really do take time to actually test and validate those beliefs with the bottom line facts. This is also why in my experience those traders who have an open mind at all times, who are always focused on learning new things especially when those things directly challenge their own beliefs and strategies, will often find the most success.