Hindsight is a B****!

This is the final blog from the Strategy Lab Open Contest I am participating in. I thought that you will find it useful too. (At the end of this contest, I will be returning to more frequent blogging on this website. I will also be closing out most of my positions for the year 2007 today and tomorrow and document the final portfolio standing for 2007 right after that):

Its fitting we come to the end of the contest in the heart of the winter season. It is time to reflect. What went right. What went wrong. And what went sideways. Most importantly, I believe it is the lesson learnt from each trade and carried over to the next one, that makes you a better investor or a trader.

I would like to hit you with my bullet "isms" that I have learnt from this contest and in general investing and trading

(1) In the End, Agility Wins - I have learnt that if you don't change your strategy with changing times, you will become irrelevant. The contest offered an excellent microcosm of this often overlooked investing philosophy. At the beginning of the contest, the market was in a general uptrend. What would have paid off most would have been to bet on reliable up-trending horsemen like high beta stocks and commodity stocks. Then by the middle of the contest, the market got into this ominous downswing first and remained fairly volatile. What would have paid off most during this phase of the market was risk management. Not knowing the eventual direction of the market, it was important to book your profits on your highly profitable positions and let a small portion ride just in case the market would trend back up. Also it would have helped to identify the failing sectors (finance, for example) and bet against them or pull them out of your portfolio. Towards the end of the contest, we swung to a definitive downswing. What would have paid off most would have been to turn bearish along with selective stock picking and risk management. More specifically, it would have helped to protect your profits, purchase index ultrashorts and still up-trending stocks like solar companies.
In other words you needed to be a trend trader in the beginning of the contest, a risk managing trader during the middle of contest and a stock picker towards the end of the contest to have finished in one of the top slots.
Isn't that amazing? One short contest taught us to adopt different avatars during the different stages of this market. In other words, you had to be agile and you had to be on top of everything. The market's swings worked in favor of providing us with this wonderful opportunity to learn about the importance of the agility I am talking above.
I believe that most of us who came in the top 50 or even top 100 were able to exhibit the above characteristics of agility. This disciplined and flexible behavior allowed us to successfully perform and even handily beat the indices. It is a great feat indeed and while not all of us can be on top, I would like to personally congratulate each and every one of these successful contestants. Hats off to you, my friends

(2) Complacency Is Fatal - Personally my biggest failure in this contest was I let it slip from my attention during the middle phase of the contest as I juggled my priorities with a full time job. Although it seems I will end up finishing in the top 50 or top 75, had I shown the same alertness throughout the contest as in the last thirty days, I would have been far ahead. (side note - curiously though in the last two days my rank is not even visible although marketocracy's percentage gain clearly shows I am in the top 50 with full compliance. I have followed up with the help desk at Strategy Lab Open). I offer no excuses of course. The moral of the story is - you signed up for it. You better show a commitment. Now that I have more confidence in my trading skills and if the strategy lab open board allows me to, I would like to enter their round 2, apply my lessons with full vigor and win.

(3) General Sense Of Sector Behavior Is As Important As Picking Stocks - Many experts offer the advice that if you have picked your stocks right, you don't have to worry about the direction of the market. I have a problem with this theory and the contest offered great examples in that respect. First, it is a vague and general advice that can only be proved, but never disproved. I get scared of such pieces of advice just like a non-practical Zen saying. Second, most of the time the stocks that fall in this category usually happen to be story stocks or biotech stocks. Third, during the duration of the contest when the markets tanked more than once, it also took down with it the stocks of exceptionally well run companies. Example - Goldman Sachs was the best run financial company in the face of turmoil the markets faced during the last few months. Yet it was punished alongside the likes of companies like Morgan Stanley and Bear Stearns that were far less impressively managing the whole sub-prime mess. Granted, it didn't tank as much but its stock was relegated to macro-event trading by active traders who knew how to take advantage of the stock channeling between its support and resistance with the directions being triggered by the sub-prime events that Goldman wasn't as major a contributor to. This and several other examples clearly crystallize a trading strategy - when you buy the stock of a company, also study the trend of the sector it belongs to.

(4) Intuition Should Be Listened To- This may be slightly more controversial as there is no definite logic to it, but I believe in it. At the end of the day after doing your research and due diligence before you execute the trade, I have learnt that it helps to ask yourself - "What is my gut telling me about this trade? Am I feeling uneasy? Am I feeling good?" I believe that your intuition is your biggest "finishing" weapon before you actually execute a trade. This is something that may take a life time to perfect but I think as you keep fine tuning it you start reaping advantages along your way.

(5) Say No To Trading When You Are Desperate or Frustrated- This is almost another version of point 4 but I felt to split it out just in case you find the above point not too practical to follow. Very simply, if you are feeling icky or if you are desperately trading because you just had a major loss and if you think you are looking like someone chasing the big bad truck of momentum, that is a fairly reliable sign to really take a pause before hitting the Enter button.

(6) Best Way To Make Money Is To Actually Sell Some Of Your Profitable Stocks- I feel this maxim is much talked about but least paid attention to. If you have made profits, I have learnt that it helps to book them. It is understandable that you don't want to miss out on a great uptrend. So how do you get the best of both the worlds? Most of successful traders follow the half off strategy that has helped me too - they set a certain profit goal on each stock. When the stock reaches that goal and if the trader feels it still has a potential to go a long way, they sell half of the position and let the other half ride with a stop loss. This is helpful in two ways - it allows you to book profits and make money as a result of the discipline. At the same time you don't feel left out because you are riding the uptrend wave on the remaining half of your position.

(7) Investing And Trading Are As Similar To Each Other As A Chinese Solar Stock And A Muni Bond - I have learnt that it helps to know the difference between investing or trading and what is it that you are personally good at. It doesn't matter what your style is ..what matters is you don't pretend it to be otherwise. Both of them require different strategies and different discipline. Sometimes you can learn about the investing philosophy while being a trader and vice versa. But the bottom-line is your blueprint has to match with your investment philosophy. This contest was more about trading. That said, the contest was unique in the sense that it did offer some wonderful insights into investment side as it provided people a platform to make a case of well run companies through the blogging platform.

(8) There is no such thing as a lost opportunity - During our lifetime we should be getting plentiful of opportunities to exercise our strategies. So there is no hurry as there is no such thing as a lost opportunity. There is such a thing as lost money though. The worst feeling is when you suddenly realize a golden opportunity but you don't have enough money to play it because you put it all on a less researched trade just because you wanted to catch it before the trend was over. I have learnt that the house always wins except in one case - when you can manage your risks and still make confident bets. Its smooth sailing from that point on.

Here is to success, good luck and a great new 2008 to all you wonderful people!

Krish Rathi

After the Cuts - The Story Isn't Over

The following is excerpted from my blog posted yesterday at the Strategy Lab Open Contest I am participating in:

I had been postulating that the Feds would certainly cut and they may use shock and awe again. The Fed did cut but didn't go with the shock and awe immediately. However, the story is far from over. I had also mentioned that the Fed could induce the shock and awe in a different way this time - doing some more radical moves in the coming days such as bigger liquidity injections into the markets or another surprise cut before the January announcement. The latter may sound outlandish while the former is very very possible. But the fact is both of these remain possibilities along with any kind of a measure where the Fed could show some nimbleness just to let the markets know they are still in control. And if it doesn't, you can start counting Ben's last few days.

Now what after the cuts? - The markets tanked because it wasn't an immediate shock and awe. Unfortunately the deep plunge didn't give me enough chance to place all the ultra shorts trades I was fantasizing about. But I chased the momentum before it was too late, and immediately added the ultra shorts on Russell 2000. Other than that, I have kept all other positions unchanged. I will sell these shorts in a day or two and here is why.

I still believe we have more of upside left than downside beyond a 1-2 day horizon as I mentioned in the post just before the cuts. One thing is for sure - as the market digests the Fed speak, they will realize that hey that wicked "uncertainty" phrase leaves the possibility for more rate cuts. Meaning the easing will continue. This along with lot of money on the sidelines will have to play together and create a positive atmosphere as we go into the year end.
In one of my prior posts I had also mentioned that 1475 is the key level for S&P 500. We are very close to that at the Market's close (1477 and change). Not to mention there is lot of support at 1460 and 1440 levels too.

Finally, notice how the markets behaved after the last two cuts. It surged and then tanked in the coming weeks. We are to a certain extent seeing the reversal today. And the only way for the reversal to play is to eventually surge in intermediate term. The big question is - will it be soon enough so that some of us strategy lab contestants can recover on their existing positions? I say yes.

And one last thought. Hey Ben, if you are reading this, two things - (a) it is spelled as a "cut" not with a silent 0.25 but a loud "0.5", and (b) all along I was thinking you knew something that I didn't. Your notes with a generous usage of the word "uncertainty" makes me think I was wrong. And that is scary, Mr Chairman.

Krish Rathi