Saturday, December 13, 2008

Aggressive or Conservative

Last weekend a couple of subscribers offered differing points of view regarding conservatism in trading. One, who comments with some regularity suggested that my investing approach was too conservative and defensive for his blood and mentioned that it was unlikely that I had made my money placing collars. Another subscriber and long time investor wrote and took the position that defense and conservatism is an important ingredient in successful investing.

The disparity between the two views points out something that I always address with my individual coaching students. We are all different and we should formulate a trading plan that is specific to each of us. The fellow who argues for a more aggressive style may well be better served by employing more aggressive strategies provided he has the stomach for the risk and truly appreciates the risk he is undertaking. I have found that an aggressive approach entails higher risk than a conservative approach and I am on board with Will Rogers who once said: "I am more interested in the return of my capital than the return on my capital." As Warren Buffett reportedly said when asked how to make money in the markets: "Don't lose." The first rule for all investors, therefore, should be to recognize the importance of staying in the game. I have known and spoken to many aggressive traders over the years who are no longer trading because they lost all their trading money.

That, of course, does not mean that a trader should not use aggressive strategies. It simply means he should use them wisely. He should be prepared to cut losses quickly when things go the wrong way. Little is riskier in the trading world, for example, than buying a stock. When we own a stock we are at risk of losing our whole investment. If anyone doubts that, just look at Enron, Lehman Brothers, Bear Stearns, or Washington Mutual. Does that mean we should not buy a stock? Certainly not, but when we do we should be aware of the risk and, in my view, take measures to reduce the risk by doing something. We could have a stop in place, for example, or buy protective puts, or at least have an alert that we follow and sell when our predetermined exit point is hit.

Blind risk taking may well result in disaster. As the conservative investor wrote, she learned to be conservative over years of investing. I have learned that lesson as well. My aggressive subscriber suggests you can't become wealthy trading collars. He is both right and wrong. Placing a collar is a way to preserve capital and if one just places it and does nothing else, he is correct. However, if one places a collar and then trades the option legs dynamically as I do, he is dead wrong. I recently had a collar on a stock (BIDU) that dropped more than 100 points yet I realized a fairly hefty return because I did just that. Understanding is the key. We can be defensive and conservative and still be quite successful in our trading. We can also be aggressive and may also do well, but when we are being aggressive we must realize we are upping the ante and exposing ourselves to large losses.

by Bill Kraft, Editor
Copyright 2008, Makin' Hay, Inc.
All Rights Reserved


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To comment on Bill's article click on the "comments" link below.

14 comments:

Dario said...

Hi Bill:

I agree 100%. Each one has to use the strategy that best suits their purpose and personality.

Besides, I think that these discussions will enrich our knowledge, as do our mistakes. We will not be afraid to small losses, (If you cut losses quickly) as these give us the best education and experience, because you learn from mistakes, both in investment and in all aspects of life.

I personally think that this is the best time to be aggressive (as long as your timing is correct). The volatility of these days generates movements in prices in a "couple of days", which in normal times are produced in a "several months".

As you've taught us in "Trade your way to wealth," the best way to reduce risk is through the options. I never apply aggressive strategies using stocks. Too much risk. With the options we reduce the risk to the value of the premium we pay.

During the week I was lucky enough to capture the movement more wild, which can have a stock. This is Dryships, which had a rise in value of more than 100% over the week. This is a stock with high Beta, and with a huge debt, which carries a high risk. But as some say over there, even the dead cat bounce.

Technical analysis and timing, are the greatest skills to develop. And breaking out on time, avoiding greed. I got out on Tuesday, when the momentum had not yet been exhausted. But win $ 15,000 with a risk of $ 3200 in a few days.

In the end, it seeks to avoid the fear and greed. Both extremes are dangerous.


Thanks for the freedom of thought, and your passion for the Trading.

Dario

Attach the link screenshot from my Account Activity, to complement the information.

http://img395.imageshack.us/my.php?image=tradingoptions0409dic20lr5.jpg

Bill Kraft, MarketFN.com said...

Great points, Dario. Congratulations on a really good trade!
Bill Kraft

Anonymous said...

Bill, I have read your weekly comments for quite some time. I have paid for training, paid for recommendations and paid for books. Your little tidbits of weekly information can be so sensible I get angry at myself for not thinking of them. Paying for training and recommendations is something I won't do again. Reading is something I'll never stop doing. Please continue these weekly comments that can be a splash of water in the face!

Very much appreciated,
Ron

Robin said...

Dear Bill:

I could not agree with you more on this weeks newsletter. I'm new to trading, and don't have your experience, but one thing I know; the present market is quite trecherous and can make big losses in a hurry.

We have had a full week of profoundly bad economic news, and instead of the market doing what common sense would dictate - i.e. go down substantially,(understatement), it held it's own and even went up on several days instead.

But with the safer strategies that you advocate, it doesn't matter if it reacts contrary to what would be expected; as the market often does.

Great newsletter and I enjoy reading it.

Happy trading,

Robin Martin

papa_hog said...

Bill, this isn't exactly a comment to your blog, but I didn't know another way to contact you.

I have a concern I was wondering if you could help me with. As I mentioned before, I am testing a system that is based on fundamental analysis to pick stocks which I then monitor for an entry point based on technical analysis. Based on backtesting, and paper trading over the course of this current year, it appears to be very reliable. I have several people who want me to provide them a similar service as you do with your paid subscription services so that they can buy and sell based on my system. But I have no idea what kind of license I would need to hold to provide such a service. Any advice you can provide me with would be greatly appreciated. If you wish, you can e-mail me directly at twokuntry@msn.com.

Thanks in advance for any info you can provide.

James Neat

Robin said...

Dear Bill:

I have been watching three ETF's; URE, IYR, and SRS. SRS is presently sitting nicely on firm support. There have been large swings in these lately, especially URE and SRS. If you have a moment, could you take a look and send any comments? Thanks.

Robin

Bill Kraft, MarketFN.com said...

Thanks for writing, Ron. We all learn in different ways and it sounds like reading tops your list. As long as we keep learning, we are moving forward. Sorry I'll never see you as a coaching student, but I applaud you for your determination to add to your knowledge.
Bill Kraft

Bill Kraft, MarketFN.com said...

Thanks for the kind comments on the newsletter Robin. The market can be quite contrary, indeed as your accurate observation of last week's activity shows. I think of market movement as much more psychological than logical much of the time.
Bill Kraft

Bill Kraft, MarketFN.com said...

James, thanks for writing. Unfortunately, I am the wrong person to ask. I write the Newsletter articles for a publisher who publishes the services. I do not give personal investment advice only try to offer educational information with a multitude of important disclaimers. Your question deserves an answer from legal counsel representing you and your interests and while I suspect that isn't the answer you were hunting for, I sincerely recommend you consult with an attorney before embarking on your proposed venture to establish needs for license, appropriate disclaimers, etc. I wish you great success but caution you to lay the appropriate foundation before selling your service.
Bill Kraft

Bill Kraft, MarketFN.com said...

Hi Robin. I am traveling at the moment and expect to be home Monday afternoon. I'll try to take a look then although I generally do not analyze stocks on the blog. Unfortunately, if I did, I am afraid I would be overwhelmed with requests so this would have to be a one time thing and definitely not to be considered a recommendation either way.
Bill Kraft

papa_hog said...

Thank you Bill, It's merely an idea in the back of my mind at this point. But I have been asked by others to provide such a service, and its an interesting idea. I have at times in the past given some buying ideas for free to orther teachers, but the current work I am doing to develop a system is too extensive to give it away for free. I may just end up using it myself and keep my mouth shut. Especially since if enouoh people adopt a specific system, it either creates self-fulfilling predictions or ceases to work. But I do enjoy heping others achieve their goals, so the idea has appeal. But I will definately take your advice (whch is sound as usual) and make sure that all my legal ducks are in a row first.

Thanks!

James

Bill Kraft, MarketFN.com said...

Hi James. I think your idea is good, particularly if you are finding that your system works. I should note that there are a number of ways to market it such as through classes, DVDs, a book, etc. in addition to subscription services. In all cases, though, I'm glad you will seek appropriate legal advice before proceeding.
Bill Kraft

Bill Kraft, MarketFN.com said...

Hi Robin. I promised a quick, one-time review of ETFs about which you asked. Since all three are real estate related, the commentary for each is similar. Here goes:

URE is trading in a range and looks to be compressing in a narrow triangle. That often protends an upcoming breakout, but doesn't tell us the direction. There appears to be resistance at the $6.45 level.

IYR is also compressing into a triangle. As is the case with URE, it has not yet broken out of the downtrend and until it does, I would consider it to be bearish. A break out and up would appear to have a first resistance in the 35 range.

SRS has had a huge drop since November and looks like it may be finding a little support around the October lows. It currently appears to be trading in a range between about 75 and 100.

Any play in any of these ETFs would involve significant risk as do all plays in the market. It is critically important for the trader or investor to completely understand the risk of any position they place. I emphasize the importance of risk awareness and risk management and aversion in my book, "Trade Your Way to Wealth." Before placing any trade or making an investment, the trader or investor should consult with a professional. By commenting on these ETFs as you requested, I am not making any recommendation whatsoever. Please be aware that this is not meant to be investment advice and is not investment advice. Please understand that I am not permitted to give personal investing advice. I promised to look at these ETFs on a one time basis and want to make it clear that while I was happy to do it this time, I will not be doing it in the future since it involves too many requests and demands on my time.
Bill Kraft

Anonymous said...

1 I beg you to write in talking point format such as 1, 2, 3 ect in order of decreasing importance according to you.

2 This will help us you thoughts easier.

3 After your each talking points, more elaborations may be very helpful !!!!!!!