7 Investment Disciplines to Practice

By Jim Farrish | December 02, 2008 | 9:32 AM |  0 Comments

When it comes to investing, the challenge is maintaining a disciplined approach to managing your portfolio. Too often the emotions of the market cause you and I as investors to throw discipline out the window. The current market environment is an example. I have been teaching disciplined investing for more than 20 years. Every time we have a major correction readership goes up significantly. Whenever we have an irrational rally investors ignore the articles on discipline because the market is going higher and they are making money. The reality it is market extremes up or down that discipline plays a key role in being successful. I want to cover seven investment disciplines that are important to implement every day.

1. Keep your eye on the big picture. It is always easier to focus on the problem versus the bigger picture. In today’s market we are focused on the financial sector. The problems with liquidity and credit have many micro managing the market versus stepping back and looking at the horizon. While the outlook remains negative in time things will improve and the outlook will improve. Looking at the broad market and the 10 major sectors which make up the US equity markets we can see what is lagging and what is leading. This is how you start to see improvement. For example, currently energy, industrials, consumer durables and utilities are holding up under the selling pressure. These pockets are where strength is likely to develop first. Therefore, by watching across the sectors you begin to see where the strength of the market is as well as the weakness. This allows you to have a discipline strategy to take advantage of the opportunities when they arise.
2. Don’t fight with the Bulls or the Bears. Attempting to make a case for being a bull or a bear is a losing proposition. The trend is your friend and following the trend will dictate being bearish or bullish. If your strategies aren’t working in the current market cycle find the one that does. Don’t fight with the market. I have heard too many time investors tell me emphatically the market should be ____. You can fill in the blank. The market will do what the market does. By learning different strategies to approach the market, bullish, bearish or neutral, you put yourself in a position of playing the trend versus fighting it.
3. Be willing to sacrifice. As the country song goes, “you’ve got to know when to hold em’ and know when to fold em’. This is knowing your personality as an investor. If the risk of the market is too great for you, sit it out. If the risk of a particular position is too high, pass. There is nothing wrong with missing out on a particular investment. Know your risk tolerance and threshold of pain. This allows you to avoid the more dangerous pitfalls of investing.  I have called this money psychology for many years. If you can analyze yourself you will be well ahead of the game. I know personally when the risk premium of the market rises I am happier in cash than I am trying to pick the right investment at the right time. If I protect my principle I get to play another day. If I lose my principle I have to work harder to make it back, not to mention the brain damage from losing. Stay focused on your portfolio and your money management discipline, not someone else’s.
4. Remain calm. This is not easy to do when the proverbial crap is hitting the fan. I talk about developing a discipline strategy of scanning the market, watching what I scanned and liked, then putting into play positions from my watch list as a way to approach investing. This is followed up with putting on plays that I predefine the entry, exit and target from my watch list. The key is knowing. This knowledge arms you with the best defense for emotions. If you don’t have a strategy for entry, exit and target, panic could take over. No rational decisions are ever made during a panic attack. Develop a plan and stick with the plan.
5. Motivate yourself. During periods like this I have to understand that even though I am in cash and only making 2-3% money market yields, I am not giving up 30% of my money to the selloff in the broad markets. I also know there will be ample opportunities to put my money to work as the market bottoms. The same is true on the upside, taking profit is what provides me the lifestyle I want from my money. If you buy an investment that goes up 20 or 30% and you achieve your goal, it is okay to sell. It is okay to take profit! This is what provides the lifestyle of why I am investing to begin with. The idea of making money is to put the money to use. This is why you have a goal for your portfolio.
6. Claim the victories. This is taking profit from positions you built in your portfolio that worked. Taking a loss based on your discipline is also a victory. Even though you don’t think so in monetary terms, it is in terms of following your discipline. This goes back to the process of defining the entry, exit and target prior to buying any position in your portfolio. Following your discipline is a victory every time you do so.
7. Stay positive. If you can’t be positive in a negative market – walk away! Take a vacation or have a party. A negative attitude will cripple you when it comes to managing your money. Even in down markets there are opportunities if you look for them. When you get focused on the negative market environment you tend to miss the opportunities it creates.

Maintaining a disciplined approach to managing your money is ultimately what makes it fun. Too often we think of discipline as a negative, but in reality it is what creates the fun that results from winning. The most fun I have is when the market presents an opportunity and as a result of my discipline I capture the resulting benefit. No matter how big or small the victory, it is the confidence that results from being disciplined. Practice discipline in good markets or bad so that you can achieve the goal of your portfolio.

Drilling Into Energy

By Jim Farrish | November 25, 2008 | 10:12 AM |  0 Comments

To go with the thoughts of the Obtaining Energy Sector Exposure piece, there are two charts worth watching relative to the Energy Sector. The first is ExxonMobil (NYSE: XOM). As we discussed in the spotlight the short term downtrend line on the energy index could be broken with a continue push to the upside. Drilling into the sector to find what is driving the index higher, turned up ExxonMobil as one of the leaders. As you can see on the chart the downtrend line was broken to the upside yesterday. This is a potential opportunity to the upside with a target of $90. The 200 day moving average at $82.66 would pose the first point of resistance on the move. This is on my watch list to confirm the upside momentum.

The other chart of interest is Sunoco (NYSE: SUN). This refiner has tried to complete a double bottom and accelerate through the downtrend line over the last couple of weeks. This is a stock that has been on my watch list for awhile and has give several short term plays, but I am looking for a move near the $45 mark short term. The volatility has picked up in the stock along with the news surrounding other refiners and their inability to execute short term on the decline in oil prices. Sunoco has been guilty by association and not execution. I look for the stock to move higher through this volatility. Any plays here would need to give room for the volatility to play out and that increases your risk to the position. Be cautious and disciplined in how you approach this stock.

Both of these charts are looking at the technical view of the opportunities. Fundamentally both are doing well relative to the sector overall. If you don't follow technical analysis I would suggest to use this as a learning opportunity and follow how these play out. Don't risk money on something you are not familiar with. Educate yourself first before you put money at risk. If you are familiar with technical analysis these will be updated if they work out and the breakouts continue. If not  I will update them based on what happened. Either way develop a strategy before you put money to work in the markets. This is an extremely volatile market cycle and you should play accordingly.

 

Emotions Taking on a Bigger Role

By Jim Farrish | November 24, 2008 | 11:11 AM |  0 Comments

Investors by nature are bullish. We all learn about stocks as investments, meaning we look to buy them and hold them over specific time period. The end objective being to make money on the investment. When that doesn't happen we start to build doubts about the market. If the process ends in losing money too often we will abandon the investing idea and buy CDs or other guaranteed investment vehicles. We are in a market cycle currently is causing many to doubt equities as a viable investment. With the markets being down nearly 50% in some areas it is completely understandable how we would develop those feelings. The challenge lies in the fact that we forgot the manage our money. Money management is essentially risk management. We have to manage the risk or else we experience the 50% downside in our portfolio. No matter how much you hear, "you're a long term investor and it will recover." You can't get over the fact you have lost so much money. Thus, the need for a disciplined strategy for investing ‘your' money.

On my podcast this week I spent time going over the need to have a disciplined strategy for investing your money. The beauty of investing is you, the investor,  get to determine what strategy you will implement for managing your money. I am constantly telling people there are more ways to manage money and make money than we can count. The key is finding the one that fits your personality. Herein lies the challenge. Most investors never take the time to determine what is right for them. They accept what they hear, are told and/or read as gospel. There is truth in everything you read and hear, the challenge comes in applying to you personally. As an investor who experienced the correction in 1987 personally, I found losing money, even on paper, disheartening. Therefore, I set out to find a strategy that fit me and my needs. In so doing I have developed a disciplined approach that works for me. You as an investor must do the same.

How does this apply to what is happening now? Simply put, I found out I couldn't tolerate emotionally seeing my portfolio down 20% or more. Why? Because of what it takes to get back to even. The old adage we learned still applies. If you have $100,000 and lose 20% you now have $80,000 working and need to earn 25% to breakeven. I stated early there are parts of the market down 50%. They need to earn 100% to breakeven. That is why I don't like to lose money. So, my personality is risk adverse, therefore I manage my money accordingly. As I have stated in many of my articles I am in cash equivalents (85%) currently. This allows me to have a positive attitude towards the markets currently and see them as an opportunity to make money versus wandering how I am going to get my losses back. Investing is more psychological than logical. You as an investors should take the opportunity to measure your risk tolerance now in the midst of a correction to get a benchmark of your emotions towards investing.

As the year comes to a close take the time to evaluate your psyche for investing. Determine if you are taking more risk with your money than you can tolerate emotionally. Doing so will cause you to act irrationally and do things that may end up costing you more money in an attempt to get your money back. If you have ever been to Las Vegas and watched gamblers, there are many similar parallels. Trying to get your money back usually ends up costing you more, especially without a defined disciplined strategy.  Approach the markets based on what you are trying to accomplish with your money over a specific timeframe. A defined objective for your portfolio in addition to a disciplined strategy for building and managing the positions that make up your portfolio will determine success. 

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Is this Support or Resistance?

By Jim Farrish | November 19, 2008 | 11:47 AM |  0 Comments

Support or downside resistance? The major indexes continue to barely hang onto the lows of October. The outlook is for a bounce, but the maybe we should be looking at the other side of the coin. A break lower would open the way for another 10-13% on the downside. If we look at the chart there is  a descending triangle forming on the S&P 500 index. If you follow technical analysis this is a bearish pattern. The triangle typically breaks in the direction of the prevailing trend. In this case that would be down.

click chart to enlarge

There are more comments being made from technicians and news reports considering this pattern which in some ways could be self-fulfilling. The prevailing sentiment is negative along with the economic data. The government bailout programs that were instituted to give investors confidence have been like most government promises, diarrhea of words and constipation of ideas. I'm not holding my breath on that front.

I am watching this closely with the pressure building to the downside there could be a potential play short the S&P 500 Index. ProShares UltraShort S&P 500 index ETF (AMEX: SDS) is one way to play the move if it develops. Practice discipline with a defined entry, exit and target.