Trader’s Narrative

Justin Mamis isn’t that well known but he is the author of several trading books, of which “When to Sell” is far and away the best. His book was published in the 1970’s when he was writing The Professional Tape Reader. Yes, the same one that later Stan Weinstein took over. As you’d expect, the two have very similar perspectives on the stock market.

I was just thinking about Mamis’ book these past few days and trying to remember where I’ve put my old copy when I stumbled on Tischendorf’s post about it. Talk about synchronicity!

When you think about it, the ultimate decision is when to sell. I recall reading in the Market Wizards book series an interview that Schwager did with a trader who said that he had tested completely random entries and with his proprietary stop loss and trade management process, it had been shown to be profitable. Not as profitable as when the signal was triggered by one of his trading rules but still, profitable. But when you think about it, when to sell is really furthest from our minds.

Instead, we usually, painstakingly analyze and ponder when and where to enter a trade. This is a case where intuition isn’t doing you any favors. Anyway, Tischendorf quotes from the book:

Rule One of the professional trader is: When a stock doesn’t do what you expect it to do, sell it. No hesitating, no questions or doubts raised no conjectures of the way it should have turned out, or might still turn out, no dreams of how it will do what it was supposed to do‚ tomorrow. The pro never says, “I’ll watch it one more day”. He doesn’t phone an analyst who’s been following the company and ask, “What’s happening? Is there any news?” All too often, the delay in searching for the‚ “why?” is costly. The desire to be perfect is one of the prime bugaboos of the stock market, but it’s a compulsion that belongs on the psychiatrist’s couch, not on the exchange floor.

The whole book is really about tape reading. While technological advancements have made the “tape” an anachronism, the idea of watching the ebb and flow of the market is still at the heart of speculation. And that is why it is the one skill all successful traders have. It is an edge without which you can’t really expect to bank serious coin. This is the skill that Steve Cohen developed as a teenager by hanging around a local brokerage office watching prices scroll across the wall.

If you don’t have Justin Mamis’ book, When to Sell buy it, it will help you become a better trader. There are few trading books that stand the test of time like it.

And check out Tischendorf’s blog. He’s a trader from Germany who has many insightful posts.

If you would like to receive a free copy of Jason Scharfman’s book, Hedge Fund Operational Due Diligence, enter the draw by leaving a brief comment at the above link (making sure you leave your correct email).

There are a lot of newsletter writers and stock market advisory services but I don’t feel comfortable recommending most of them. One exception is Mike Swanson of WallStreetWindow.com. I’ve known him from way back before he even had a site or was charging for his services.

Although it is now almost forgotten, SiliconInvestor used to be a huge trading and investing forum back in 2000. That’s where Mike started to write about his thoughts on the market and individual stocks and setups. I remember it well because it was rare for someone to be so genuine, knowledgeable and to come across as just a really nice guy. If you know anything about internet forums, you know that those characteristics are in short supply. At a time when it wasn’t popular, he was bearish and made a lot of money shorting deflating tech stocks and then going long gold and precious metal stocks.

Eventually he moved to his own site and started a premium service charging for his services. But Mike does things differently. Since access to his membership site is closed for the majority of the year, he spends his time on giving his clients their money’s worth. He only opens it up two to three times a year to new subscribers.

This is your lucky day because today is one of those rare opportunities. And by tomorrow it will be gone.

What I like about Mike is that he doesn’t just say buy this or sell that. He gives you his reasons and really lets you understand his whole trading plan. Although he largely relies on technical analysis he doesn’t ignore other factors like fundamental value and sentiment. Oh, and did I mention he won a Robbins Trading Championship?

So how much does it cost? An annual subscription is $377.00 (or about a $1 a day) while a quarterly subscription is $150.

If you’re still not sure, then you should know that Mike has an unbelievable guarantee that I haven’t seen anyone else dare to offer: If you aren’t happy with your membership at WallStreetWindow, he will refund you 100% of your money.

And on top of that, he will give you $100 (if you ask for it). Yes, read that again.

Can you see now why I feel comfortable recommending this guy?

Here is our recent chat:

What do you think of this stock market?
I think we are in a vicious bear market that is likely to continue throughout the rest of the year. I saw signs of a top in October 2007 due to the faltering advance/decline line of the market and clear problems that appeared in the credit markets. By December I was telling my people that the signs were more than clear and we had to take the bear market seriously. Tha said though I tried to go long in January 2008 and got stopped out and wasn’t able to position myself on the short side until the market rallied in May.

Did you anticipate that the indices would fall so dramatically?
I thought the market was going to drop, but I was surprised at how this bear market has played out. The most surprising thing to me is how we have not really had many powerful rallies in this bear market. Everyone was looking for a big rally off of the November lows for instance and it didn’t happen. Not even much of a bounce.

What are your thoughts about the ’subdued’ VIX? or the CBOE put call ratios that have not shown any real ‘fear’?
I think it is very bearish for the VIX and put/call ratio not to be showing much fear as the market has been grinding lower the past few weeks. This is textbook action of what happens in a leg down during a bear market.

What do you see going forward and how have you positioned yourself or advised your clients?
I’m position righted not in cash and tell people that is the best place to be for now. I’m hoping for a rally to go short on, but in the end I really think there are going to be great opportunities to go long as a buy and hold investor when the bear market is over. Historically secular bear markets have bottomed out when the cyclical P/E on the S&P 500 falls below 10 and often below 7. We’re at 12 now. But when secular bear markets reach a bottom in terms of valuation you can find good solid companies on sale for ridiculous prices. You can actually buy stocks not just to speculate that the price will go up, but to get a solid dividend. I think these opportunities will actually be widespread next year, which is something I’ve never seen before in the US market and unfortunately most people won’t be able to take advantage of since they’ll be so beaten up by the bear market.

Congratulations to Norman, the winner of my latest trading book giveaway!

Thank you to all who entered. I wish I could give each of you a prize as well. Since I can’t do that, with the permission of the publisher, I’m going to do an extra bonus draw for a second winner as well.

That way, two of my readers can enjoy Hedge Fund Trading Secrets Revealed” by Robert Dorfman.

One of the reasons that I enjoy writing this blog is the ability to be able to help others out there who are interested to learn more about trading and investing. These book reviews and giveaways are a great way to do that so look forward to more of them.

Keep watching because I already have two other books on deck and once I am finished reading and putting up a review for them, I’ll be doing a draw for them as well.

To keep the karma leveling up, all of the winners of the book giveaways will write their own reviews once they are done so you can get their perspectives as well.

If you have any suggestions for a book that you’d like to nominate as a candidate, by all means, drop me a comment below. I try to keep up to date on high quality books but with the amount that keeps getting written every year, it is difficult to not miss a few gems.

My last book giveaway was Tim Sykes book “An American Hedge Fund” so with this new book it seems we are continuing a “hedge fund” theme …

“Hedge Fund Trading Secrets Revealed” by Robert ‘the Hawk’ Dorfman.

Dorfman runs the SilverHawk Fund out of Costa Rica and before that used to work for Jim Mellancamp of Genie One Capital Management. I couldn’t find much on Mellancamp or Genie One but I suppose most hedge funds are fairly secretive.

The first few chapters of the book tell the story of how Dorfman came from humble roots in Cranston, Rhode Island, thanks to a fight in a restaurant was able to attend Brown University and from there, discovered Wall Street.

If you are new to trading or investing, the book contains a lot of basic to intermediate information that you’ll find useful. I don’t think there are many “secrets” revealed about hedge funds, other than they know more and have more resources than the average retail trader.

Still even someone who is experienced and relatively knowledgeable will be able to pick up a few things here and there. For example, Dorfman talks about Thompson Financial’s AutEx, an institutional liquidity pool I wasn’t familiar with.

As well, he outlines his basic strategy:

“…we enter trades based on these institutional trading firms’ actions as reported by Thomson Financial’s incredible global, pre-trade execution and communications network called AutEx, which provides us with an in-depth view of the moves being made by over 800 institutional traders…”

His basic thesis is that “the price simply will not make a sustained move without the power of institutional buying or selling”. Which is hard to argue with. He describes in some detail how a hypthetical order from an institutional trader will be pounced on by others and result in the price being pushed against the order.

Unfortunately, there is a chapter devoted to the “Universal Law of Attraction“. I’m more than skeptical about this New Age phenomena. I don’t think it has any validity but the good news is that in this book it is only a small part and can be easily ignored.

Most importantly, there is significant portions of the book devoted to capital allocation and risk management. He talks about maximum position allocation (MPA) and describes how to calculate it. As well he discusses scaled entry for an order (that is increasing size as the trade goes your way). On the whole, while important, it is fairly basic stuff. If you are curious about similar topics of risk management and capital allocation, check out the “Way of the Turtle” by Curtis Faith.

Dorfman’s book will be a disappointment if you naively believe its title. But if you dedicated to learning more about trading and especially about how large institutional traders operate, you’ll pick up some good information.

If you would like the chance to receive a copy of Robert Dorfman’s book for free, drop me a comment below. Make sure you write your email correctly (so I can contact you in case you win the random draw!).

If you would like to receive a free copy of Tim Syke’s book, An American Hedge Fund, leave a brief comment below (making sure you leave your correct email). I have TWO copies to send to two of my randomly chosen readers as a Christmas [slash] Hannukah [slash] New Year’s gift.

Timothy Sykes’ book An American Hedge Fund takes you through a conversational, breezy account of how he took $12,000 of Bar Mitzva money and traded it to $1 million. Although Tim peppers his book with specific trades, the book doesn’t have any charts. This is disappointing because it would have been so enriching. Maybe for the second printing

While I respect and admire Tim’s drive as a trader, I can’t help but think it was sheer luck that he didn’t completely blow up before he made serious money. Although the story takes place during the tech bubble of the late 1990’s, when turkeys flew like hawks, his complete disregard for risk is breathtaking.

The string of luck catches up to him when he sinks 33% of the capital under his management into Cygnus (now Accesso) a private company that later in the story goes public on the pink sheets. This is not only a continuation of his disregard for risk management, it is a colossal style drift, taking him from trading short term price patterns to long term investment into an illiquid holding.

I don’t recall every reading about any thought of capital allocation or money management. That is, measuring trades using R to standardize the risk that was taken to provide the resulting return.

To Prop or Not to Prop
After his initial success, while considering the options available to move him away from casual trading to a more serious undertaking, Tim decides against joining a proprietary trading firm because it “would only serve to increase [his] risk, not reduce it.”
Continue reading ‘An American Hedge Fund: Book Review & Giveaway’