Time Is Money

I received quite a few emails over the past few days expressing concern about the bearish comments by Richard Russell -- author and publisher of the Dow Theory Letters -- which appeared recently in Barron's. The gist of these emails is summed up by reader Dan Colman:

Gary:

Love your column. I imagine that I'm not the first to ask the question but ... do you have any initial thoughts about the interview with Richard Russell in Barron's? He has a very negative outlook on the direction of the markets. Big bear. Does your look at the charts yield similar conclusions?

In a similar vein, I've been fielding quite a few comments on the overall health of the market, including my thoughts on whether a nasty "diamond formation" is appearing with the Dow. The thinking goes that if this is a diamond, we could eventually see Dow 7500.

So, there is a fair amount of fear out there that the golden goose we call the market just might collapse.

With that, let me make my official pronouncement:

I have no idea what's going to happen to the market.

Given that, let me make official pronouncement No. 2:

I don't care what happens to the market.

OK, now that we have that out of the way, let me clarify a bit, in the hope that it will give you some insight into how I trade, and how, perhaps, to think of your own trading. And if you buy into what I'm talking about, Richard Russell's comments and the specter of a "Dow Diamond" shouldn't bother you in the least.

My approach to trading is really pretty simple and rests on five basic principles.

No. 1: I think of my equity as inventory. In that respect, my goal is to maximize not profit per dollar, but profit per dollar per day. In essence, I try to make a small percentage on my equity each day, but compound that amount as rapidly as possible.

No. 2: I believe in inertia ... for a very short period of time. In addition to wanting to compound my equity, the other reason I trade in such a short time period is that I can count on prices continuing to move in a set direction for only a few days at most. If XYZ went up 4% on Day One, then I'm essentially betting it'll go up another 5% before it starts heading back down. But, do I bet that a stock I bought in January will continue to keep heading up in July? Absolutely not, because each day that goes by greatly increases the likelihood of an unanticipated event happening. And that event could be company-specific, or economy-specific. The fact is, I have no crystal ball, so I try to place my "bets" in the shortest time period possible, thereby lessening the impact of outside events.

Ideally, in fact, I'd be a daytrader, but for a variety of reasons (see my column a year ago), that time frame is too short and not as profitable as my current methodology.

No. 3: Direction I don't care about. Trend I care about. My estimate is that 90% of you reading this column only go long, never short. Nothing wrong with that.

However, my goal is to make money on a regular basis. And to do that, I need to go short as well as long, and change directions on a dime.

A good example is the past few months. From May 1 to May 31, a pretty nasty stretch of road, I went long on only five of the 22 trading days. However, I played the short side 19 of the trading days. Why? Because that's what my method was telling me to do, and instead of riding longs down each day, I was able to add to my overall equity by month's end.

Now, do I get whipsawed on occasion? Sure. I was long coming into June 12 and got creamed. Yes, it hurt, and I sold off for a nasty loss. But, there I was again the morning of June 13 going after the short side. Can the market now spring back up, giving me a nasty neck ache? Again yes, but the odds always favor the trend continuing -- at least for a short amount of time -- instead of constantly moving back and forth.

No 4: I never guess. Instead, I react. Thinking the Fed will do X, which necessitates you doing Y beforehand, is guessing. And that's one way to trade, but you'd better be a pretty good guesser.

Instead, in that example, I wait to see how the charts react to the Fed doing X, and then I act, taking my own little piece out of the subsequent move. Do I miss huge moves by not getting in early? Sure, but go back to my first principle: I'm not looking for huge moves, but rather a lot of little moves.

No. 5: Being a good trader is not the same as being a good technician. Look, maybe Richard Russell is a far better technician than I am. In fact, let's just stipulate that he is. Fine.

However, being a good technician is only one aspect of being a good trader. In fact, being a good technician is really a minor aspect of being a good trader. Instead, what makes a good trader is someone who has a solid grasp of money management, methodical thinking, and his own emotions. (The latter, by the way, is what really separates the men from the boys. Or the chart readers from the guys who make money.)

Now, after reading through these thoughts, you probably think I sit here each day like a stone, with any market movement unable to penetrate my thick, workmanlike exterior.

And you'd be wrong. Of course, I care about the market. For one, I can make money when the market is going down, but the fact is, it's a lot easier to make it when it's going up.

In addition, while I'm not dependent on the market's health, there are plenty of other people I care about who are. Like my wife. Like many of you.

But, I said I care about the market. I don't worry about it. And you shouldn't either.

---

Watch Gary B. Smith and Silicon Valley columnist Adam Lashinsky face off at the first RealMoney conference, live in New York, June 28. The challenge: technical analysis vs. fundamental research.

Says Gary: "Technical Analysis rules, especially when my adversary is the pitiful Adam Lashinsky. Don't believe me? Then come watch me square off with him." -- Gary B. Smith

Says Adam: "Because I research *facts* about companies, I almost never agree with Gary B., who practices a form of voodoo called technical analysis. But when we get into the ring together, innocent bystanders generally enjoy themselves." -- Adam Lashinsky

Surviving and Profiting in Treacherous Markets June 28, 2000, Marriott World Trade Center, New York City

For information and registration, go to RealMoney Conferences.