Global Growth Investor - The Home Of Growth Investing

One of the biggest challenges everyone faces now is information overload: we’re constantly bombarded by information. Europe is on the brink, the market’s tanking, Mr Gloom thinks this, Mrs Boom thinks that.

Ahhhhhhh!!!!!

It’s becoming a major issue.

Information, of course, is potential power: it can be used for good or to profit. But the problem now is the sheer volume thrown at us. The market, with constant noise and movement and opinion, is particularly bad.

The constant flow of information draws use closer and closer to the market until we’re completely beholden to it. Before you we know it, our emotions rise and fall with each market rise or fall. We totally lose perspective on what’s happening.

Talking to traders, that’s exactly what happened in 2011: everyone became so obsessed with a bit of volatility and economic doom that they totally forgot it wasn’t a really disastrous year; and that the US market’s are still probably in a bull market.

So what to do? ‘

Here are a few things to help cut information overload:

1. Focus on what is happening, not what might happen

Ignore constant predictions about what might happen, which can cause panic and confusion, and focus on what is happening right now. That is the best clue to the future. For aggressive growth investors, are bullish chart patterns developing? What companies are generating accelerating sales and earnings? What companies are developing innovative new products? When it comes to the broader market, are there signs …

You look at thousands of charts and reams of fundamentals, but how do you keep track of which stock has real potential, which ones are slightly interesting, and which ones you actually want to trade?

I’ve developed a simple system that helps you monitor hot stocks that you’re about to trade, but also allows you to keep an eye on other stocks that have potential but that you aren’t yet ready to place orders on.

As you can see in the screen shot below, you simply divide stocks into three categories: targets, watchlist, and uptrend. You can do it for longs and shorts as I have.

Every time I do a complete market scan I filter stocks into these three categories

So how do I determine what goes where?

Uptrend stocks – They’re trading above their rising 50-week moving average. But they may be overextended or have slightly sloppy charts. Basically I want to monitor them because they’re strong, but I don’t think I’d be likely to place a trade in the next few weeks at least.

Watchlist stocks – These guys are more interesting. They usually fall into two categories: they’re forming a base/consolidation pattern that means they could be traded in the next few weeks; or a fundamental screen has shown them to have excellent fundamentals. Unlike uptrend stocks, there is potential for a trade in at least the next month. I want to keep a close eye on them.

Target stocks – These are …

Mark Minervini is one of Wall Street’s most remarkable success stories. A former musician, Minervini began trading stocks in 1983 and weathered a number of losing years. But he persisted and his breakthrough came when he read Richard Love’s little-known book Superperformance Stocks, which outlined the characteristics of the market’s biggest winners.

Minervini honed his strategy and – as highlighted in Jack Schwager’s Stock Market Wizards – in a five-and-a-half-year period generated an average annual compound return of 220 per cent. To put that in perspective, a $10,000 account would explode to $3.3 million under those returns. Even more impressive was his risk – Minervini had only one losing quarter when he was down just a fraction of one per cent. 

Minervini also took out the 1997 US investing Championship with a 155 per cent return, and went on to run a successful investment advisor firm, Quantech, which worked with some of Wall Street’s leading hedge funds and investors.

But it has just been spectacular returns that has marked Minervini out. He has also made a series of prescient market calls and protected his account with defensive moves. In August 1998 he publically said the market was showing similarities to the 1987 crash. The next day the market slumped 508 points. He then turned bullish a month later and rode several stocks to huge gains. In May 2000 Minervini successfully called the bear market in internet stocks and put most of his account …

Just a quick note wishing a Merry Christmas and happy New Year to all the site’s readers.

2011 was a tough year for everyone.

Hopefully 2012 will be better.

While things are difficult now, it’s often worthwhile looking back at previous tough patches and realising that we come through them eventually.

Also opportunities always spring from bad times.

The economy will heal, and get better, there will be another boom, and everyone will have forgotten this period.

There seems to be a lot of carrying on about momentum stocks imploding after huge runs, as if it’s something terrible and scary. 

Stocks like Green Mountain Coffee Roasters (GMCR) and Netflix (NFLX) have plummeted over the last six months or so.

 ‘Oh my god, a momentum stock has cratered’!!!!

I know it’s not pleasant getting caught up in crashes, but if you don’t think momentum stocks should or will fall, then you have no business trading them.

It’s called risk and volatility.

We’re riding the gales of creative destruction.

Momentum stocks are risky. That’s why they outperform the market over time. It’s why momentum traders earn a premium.

So what can you do about it? Here’s 9 things:

1. Accept the risk.

Momentum stocks sometimes implode. Of course they do. That’s the nature of the beast. They are growing rapidly and have high earnings estimates. When that growth slows the market is disappointed. You’re also playing the game with other trigger-happy traders who flee at the first sign of trouble.

If you don’t like risk and volatility, buy bonds, or invest in cash, or buy an index fund. All are very valid options.

2. Get out as soon as a stock falls 

There is no excuse for being caught in a steep sell off. As soon as the stock starts going down, as defined by the Only Profit-taking Rule You Need, you’re out of there.

I spoke about this recently with regards to GMCR

That said, sometimes you just can’t avoid getting caught in a company, with a strongly trending chart, that issues a profit warning.

There …

Gold is at a an inflexion point. If you look at the chart below, the gold price is supported by the 50-week moving average and the long-term uptrend. As I’ve said before, the uptrend for gold is powerful and means gold deserves respect.

But at the same time, the chart below shows it has clearly made a lower high. If it falls below the last recent low then it would be in a fresh downtrend.

As I wrote recently, there have been opposing forces at work with gold. On the bull side are fundamentals (ie central banks printing money and global uncertainty) and the long-term uptrend; on the bear side is the fact that gold has become too popular.

When there are opposing forces like this what do you do? Firstly, nothing drastic. You don’t go massively long or short. There’s no harm waiting for more information. If gold enters a downtrend and breaks the support of the long-term trend line and 50-week moving average, then you might peel off some of your position if long; and perhaps initiate or add to your position if short.

I had lunch with a fund manager friend of mine on Tuesday. It was his shout and after we’d finished he paid. The waitress left with his credit card to process the bill. 

I then said my retirement account was invested purely in index funds. Naturally, as an active fund manager, he was offended and he pretended to ask for the bill back so I could pay for my own f-ing lunch.

I explained my rationale: over a 30-year period (about when I’ll be retiring) it’s almost impossible to beat the market. My retirement fund and paying down my mortgage would mean I’d have a very comfortable retirement.

Moonshots

I then said that, outside of my retirement account, I would make “shoot for the moon” investments. I called them “moonshots”.

Moonshots?

Basically, investments that have potential for massive returns: investments that could turn $5,000, into $50,000 or even $500,000; investments that could make a material difference to your medium-term wealth.

A moonshot has limited downside, but huge upside. It’s a stock where you risk $1 a share but could earn $100 or more.

Moonshots provide spice, and hope, if your income potential is limited and most of your portfolio is conservatively invested.

Made $30 million and retired

My friend was sceptical when I mentioned moonshots.

Then he remembered what he described as ‘coterie’ of London-based Australian brokers who had done exactly that – bought moonshots.

They bought into an Australian resources company at around 5c a share. It was later bought out for over $5 a …

This interview first appeared in Your Trading Edge magazine

At some stage in a trader’s career, they’ll be hit by the uncomfortable questions: am I winging it? Do I really have an edge?

The answer, of course, is to begin testing your system or method. But for a discretionary trader, many of whom use charts and intuition, learning how to test existing and fresh ideas can be bamboozling. 

One person who is helping demystify the complex world of trading system testing and development is Henry Carstens.

Carstens, who is based in Portland,Oregon, develops and trades systems through his company, Vertical Solutions, and has recently begun trading other people’s money.

A protégé of trading legend Victor Niederhoffer, Carstens is developing a growing reputation as an insightful teacher of systems development and testing.

His ‘Introduction to Testing Trading Ideas’, which is available at http://www.verticalsolutions.com/, is an excellent outline and recommended by trading coach Dr Brett Steenbarger.

Henry spoke with YTE’s Ben Power about how traders can boost their trading through systems testing and development. He has helpfully provided a number of links to papers available on his site that readers can follow up.

How did you get into trading?

I bought my first stock, Anglo Lautro, when I was 12. I it bought at 1 1/8, the high was nine and it was eventually nationalized by the Chilean government for no gain.

Later, I noticed that on some days the market really seemed to take off and run in one …

Green Mountain Coffee Roasters (GMCR) shares had a mini-crash after hedge fund manager David Einhorn questioned the company’s accounting and shipping practices. Should a momentum trader care what Einhorn thinks?

Way back in 2009 I wrote that GMCR was a classic momentum stock and that after a big move it was tough to hold onto, but probably the right thing. Since then the stock (which as been split) has effectively rocketed from just under $20 to over $100.

In the chart below I show how you would have played it with the only profit-taking rule you need. As you can see, each time the stock consolidates, then makes a fresh new high, you move the stop beneath the consolidation.

One a daily chart below, you can see the trailing stop would have been triggered in August, well before Einhorn sent the stock lower.

Should you be concerned about the possibility of GMCR being involved in “accounting shenanigans?” From an ethical point of view, yes. But from a trading point of view no. As a momentum player it’s not really your business. Some of companies I’ve made my biggest profits in have gone on to crash and burn amid scandal.

As a momentum trader we’re interested in only a few things when we buy: the stock has gone up, the stock is still going up, the company is growing strongly.

When we sell we’re only interested in one …

If you invest properly it’s boring. In fact, when you work out how the average person should handle their finances it’s quite disappointing, because there is little or no action.

We grow up with tales of swashbuckling Wall Street traders. Then we realise they were cheats, lucky, died broke, or killed themselves. We also decide we don’t want to die poor, or to leave our spouses and children poor, so we start to learn personal finance properly.

And we find there are a few basic principles:

Save: spend less than you earn — around 20% of income annually (boring)
Buy an affordable house and pay off the mortgage (boring)
Get insurance for death, injury, home and contents, and work (boring)
Have an emergency cash fund (boring)
Have a tax-efficient retirement investment account – 401k, superannuation, etc (boring)
Invest in low-cost index funds (boring)
Diversify between domestic stocks, international stocks, real estate, and bonds (boring)
Rebalance the portfolio periodically — six monthly, annually, etc (a bit of action)

THE PRINCIPLE OF SENSIBLE FINANCIAL PLANNING

The principle of sensible investment planning is William Bernstein’s notion that our goal is not to get rich, but to not die poor: we want to take enough risks to fund our retirement, but not enough risk to put ourselves in jeopardy.

That requires the boring path above.

It’s a simple as that.

Actually, it’s not simple. In a world where we’re bombarded with luxury ads, credit card offers, get-rich-quick schemes, etc, just accepting the above list is a difficult journey. Accepting the …