Boy, the market must have taken quite a few of you to the cleaners lately, because when I was reading through my recent mail, one tone came through loud and clear: ornery!
You know, the kind of mood where folks are just plain nasty. Or disagreeable. Or ticked off. But, you know, I can handle it. My concern? Many of you are living and dying by the market, and when you get pasted, you end up kicking not only your friendly columnist, but the chair, your dog and your loved ones. Just keep it in perspective, is all I ask.
Anyway, a few topics to cover today, as I field some interesting questions. The first from astute reader,
My question is: Why trade for a living? If your goal is wealth, why not pick great funds and a few great stocks, let them ride, get a well-paying job and keep adding that to the mix? Even if one is a great trader, wealth would probably increase faster this way. Do you do it for love or for money?
OK, a pretty good question -- or, in this case, questions -- so let me dissect it piece by piece:
Do I trade for love or money?
Well, I'd be lying if I said I didn't enjoy trading. I suppose there is a little bit of "gambler's rush" involved, but objectively, I'd have to say it's more like the thrill I used to get from solving simultaneous, complex equations. In other words, I view the market as an ever-changing puzzle. My challenge is to come up with the answers to all the various variables -- and that part I really do love.
Beyond that, though, I do trade for one overriding reason: I can make good money. And that leads me to the answer for the rest of MJJ's questions. If I thought there were an easier, less stressful way to beat the market, I would pursue that path.
You mention finding great funds, a few good stocks and letting them ride. My problem with that is that I'm not sure that approach is any easier than what I'm doing now. Sure, in retrospect, let me go back and pick the
Janus Twenty fund and
for 1999. Gee, that would be soooo easy.
Unfortunately, I can't do that. So, do I pick the Janus Twenty and Qualcomm for
year? Hmmm, let's see. Qualcomm is down roughly 25% since the start of '00, with the Janus Twenty down 4%. So, all of a sudden "picking a few great stocks" and "finding great funds" doesn't seem so easy. (I did make a stab at this, though, with the Prom Queen contest discussed in
Now, maybe Qualcomm and the Janus Twenty come back and maybe they don't, but the action of both this year reveals another problem for me with your suggested approach: I am incapable of buying and holding, at least for the bulk of my portfolio. Furthermore, I maintain the great majority of "investors" are incapable of buying and holding for the long term.
Oh, they may say they are, but I'm betting that's the result of all the bull-market conditioning they've had over the past few years. We go a few months with day after day of downward movement, and we'll see how people do holding these "great stocks."
My great strength, though, is that I know up front that I cannot weather a severe storm. No, I'd either have to be out on the long side, or even better, in playing the short side. You see, I want to make money on a consistent, regular basis, instead of having periods of high highs and low lows.
Now, is that the "best" approach? Well, all I can say is it's the best approach for me. And because it's the best for me, it ends up being the most profitable as it's the only one I can stick to.
Moving on to a different topic, but still within the same theme, reader
Gary: One of the valuable lessons for me when your focus was more on trading methodology was the critical importance of sticking with your approach through thick and thin. Which is why your willingness to jump on the Trash-Buffett Bandwagon in your column seemed not true. Sure, it is great to change to adjust to changing market conditions. But, let's face it, what has raised Warren Buffett head and shoulders above the Jim Cramers and everyone else is his embrace of your principle of keeping with his system no matter what. It's what is comfortable for him and what he has proven to himself will work over extended periods of market experience -- much as you convinced yourself of your own methods. Had he tossed his method aside in any of the other go-go periods that have come and gone over the last few decades because he was trailing the crowd in the "Church of What's Working Now," wouldn't he have ended just another also-ran? Is the glitz and sizzle of these last few months making it hard to see straight?
Ted, you raise an interesting question, and it boils down to this: How does a trader know when to stay the course, and how does he know when to change? I'm not sure there
an answer. At least not a definitive one.
However, there are a few things I have thought about that may signal when it's at least appropriate to rethink your philosophy:
- When you trail the market for long periods of time. "Long periods of time," by the way, is dependent on your time frame as a trader. For me, that time frame is about a year, and frankly I did have a pretty good year last year -- only to get trounced by a few people who outperformed me threefold and more. Now, do I go about completely abandoning my breakout style and sign up for something else? No, of course not, because I know a lot of folks benefited by picking lottery winners rather than by having a proven methodology.
On the other hand, though, I do look very closely and see if I can
adapt my methodology to take advantage of some of the movement in these highfliers. Mind you, I'm not shooting for 500% gains, but rather any subtle changes I can make that will get me from 80% to maybe 125%. The fact is, if the action of the market makes those gains available, I'd be foolish not to at least think about adapting my style.
Now, has Buffett trailed the market for long periods? Since the start of 1995,
Berkshire Hathaway (BRK.A) - Get Report is up roughly 250%. The
Standard & Poor's? Up nearly 290%. Granted, the bulk of that underperformance has come just during the past 12 months. Still, for someone billed as "the Oracle," that's not an impressive performance.
When there's a change in what's important in the economy. Here the designation gets a bit trickier. However, we can broadly say that the U.S. has moved from an age of heavy industry to a consumer goods-driven age to an age of technology.
And, I will stipulate up front that Buffett has done an admirable job in taking advantage of the economy for the past 40 years or so.
But, the fact is, the bulk of his gains have come from the "inevitables" as he would say. Those companies whose brand names could be defended against all invaders. But, are
Coca-Cola (KO) - Get Report,
Gillette (G) - Get Report and the
Washington Post (WPO) as "inevitable" now as they were in 1990? OK, don't like those? Then how about
See's Candies and
Disney (DIS) - Get Report?
So, even if you think his overall approach is correct, doesn't it appear he's missed the latest wave of "inevitable" brand names? You know, minor stuff like
Microsoft (MSFT) - Get Report,
Intel (INTC) - Get Report and
Cisco (CSCO) - Get Report?
In fact, even if he maintained his rigorous picking and culling process, couldn't he have adapted to add at least a few shares of
some technology companies?
I guess my contention amounts to this, Ted. I'm a big fan of sticking with tried and true methodologies -- unless there's been such a vast shift in the markets or the economy to render that methodology suboptimal. Now, has a vast shift occurred? I guess I'd say yes. I'm assuming Buffett would say no. I suppose we'll all know a few years from now.
Whoops, I can see I've run way long today. Therefore, the
"gap study" I promised? We'll tackle that next Wednesday!
Gary B. Smith is a freelance writer who trades for his own account from his Maryland home using technical analysis. At time of publication, he held no positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Smith writes five technical analysis columns for TheStreet.com each week, including Technician's Take, Charted Territory and TSC Technical Forum. While he cannot provide investment advice or recommendations, he welcomes your feedback at