Ahead of the Herd Blog

Every investment must pass the "Sleep Test".

An investment should not be so large that you lie awake at night worrying about it. To be a successful speculator or investor you must be able to remain relaxed and objective. An uncomfortably large investment or trade, although offering a potentially great return, can jeopardise your ability to remain objective and can thus lead to mistakes.

Avoid the emotions of hope, greed and fear.

Hope is often associated with unrealistic expectations and causes an investor to cling to a losing position, magnifying the losses unnecessarily. Greed causes an investor to buy at the wrong time, such as near the peak of a rally, and to risk excessive amounts of money. Fear prevents an investor from buying at a time when the market presents the best opportunities to buy and prompts him/her to sell at the worst possible time (at the bottom of a correction or bear market).

A corollary to Rule 2 is: Treat your investing/trading as a business, not a Vegas-style gamble.

This involves:

a) Checking your emotions at the door. You won't be able to make objective decisions if you get excited by profits and/or depressed by losses.

b) Following an entry and exit plan for every stock you buy.

c) Not caring what happens to the price of a stock after you sell it. If you constantly worry that a stock will rocket higher after you sell then you will never be able to exit at an appropriate time.

d) Ignoring the cheerleaders. The cheerleaders -- those commentators who become progressively more bullish the higher the price goes and who focus exclusively on the potential for huge rewards as if buying into the market right now were a sure path to great riches -- tend to bring out the gambling spirit in their followers.

Use a disciplined risk-management approach at all times.

It is difficult to admit to a mistake. There is also usually the fear that if I sell now for a small loss the price will immediately rebound and I will have lost the opportunity to profit from the rise. After all, "hope springs eternal" and that stock that keeps dropping like a stone will one day soar like an eagle; all I need to do is be patient.

A systematic approach to risk management, which may or may not include 'stop losses', must be used to protect your investment capital. This is a hard lesson to learn and can usually only be learnt the hard way through experience.

Minimise the role of luck in your investing by playing a percentage game.

Playing a percentage game encompasses the following guidelines:

a) Do not try to make a killing during any given year, but, instead, follow an approach designed to generate above-average returns over several years. In this way you might actually end up making a killing, but be aware that the vast majority of people who set out to get rich quick in the stock market end up a lot poorer.

b) Never plan to buy at the bottom or sell at the top. Instead, plan to buy on those occasions when the reward/risk ratio is high and to not buy, or to sell, on those occasions when it is low.

c) Take some money off the table during periods of extreme strength so you won't feel pressured to sell during the periodic shakeouts

d) Do some buying during the severe shakeouts that periodically occur in long-term bull markets. Note, though, that this will usually only be possible from a financial and/or an emotional standpoint if you previously took some profits into strength

e) Never make whole-scale buy or sell decisions. Instead, scale into positions during weakness and scale out during strength, all the while maintaining exposure to the long-term bull market of the time.

f) Don't 'bet the farm' on any single forecast. Forecasts, regardless of how well thought-out they appear to be, are just opinions, and any opinion can be wrong.

g) Don't risk a large portion of your capital on any single stock. Regardless of how attractive a stock appears to be, acknowledge the fact that 'stuff' sometimes happens even to the best of companies.

Do your buying during those times when the fundamentals AND the price action are favourable.

The fundamentals are favourable if the current price of the stock is low relative to the value of the underlying business, where the value of the underlying business is detemined by the company's assets and growth prospects.

Examples of favourable price action include consolidations or basing patterns within longer-term upward trends.

Don't focus on the profit/loss of a trade while the trade is on-going.

Thinking about how much money you are making or losing on a trade while the trade is on-going may cause the emotions of fear and/or greed to influence your decisions. Have an exit plan for each stock and continue to monitor the fundamentals and the price action to determine whether to hold or to sell.

Make sure your exit plan for a stock is consistent with your entry plan.

For example, if favourable price action was your main reason for buying a stock then you should exit if the price action turns unfavourable. In this case a reasonable approach could involve setting a protective stop just below a technical support level. However, if your decision to buy was based primarily on value considerations then it would make no sense to sell simply because the price became lower.

Remember that there are no absolute highs or lows.

It is often the cheapest stocks that fall the furthest and the most expensive stocks that show the greatest price appreciation. Also, a price level that seems low or high today might appear the opposite in 12 months time.

Always maintain a substantial cash balance.

You must always be in a position to take advantage of any opportunities that arise and the only way to do this is to always have significant cash reserves.

Close an event-based trade as soon as the anticipated event occurs.

For example, let's say a company you follow is about to announce its latest earnings. You expect the company to announce earnings that surprise on the upside and purchase the stock with the aim of taking a profit in the days following the announcement. If the company subsequently announces a result that does not exceed expectations you must immediately sell because the basis for your trade has proven to be false. If, however, the company does announce higher-than-expected earnings then you must sell within a few days of the announcement irrespective of the price action because this was your plan going into the trade. A disciplined approach will prevent short-term trades from becoming unwanted long-term investments.

Don't be stingy when it comes to market information and stock buy/sell prices.

The speculative investor does not day-trade and does not enter a position with the aim of taking a quick small profit. The timeframe for a trade will generally range from 1 month to 24 months and the goal will be to achieve an above average return (for example, a return of at least 30% on a 12 month investment would generally be sought). As such, it makes no sense to hold out for that last few cents when making a purchase or a sale.

Market- or stock-related information that increases your chances of investing/trading success is worth paying for.

Be aware that when the public is either extremely bullish or extremely bearish, the risk of a trend change is high.

When the vast majority is extremely bullish then everyone who is going to buy has already bought and there is only one direction for the market to go, and that's down. Similarly, when the vast majority is extremely bearish then everyone who is going to sell has already sold and there is only one direction for the market to go, and that's up. Beware, though, that what constitutes a bullish or bearish extreme will differ depending on the long-term trend (sentiment can, for instance, become more bullish and stay bullish for longer during a bull market than during a bear market).

Be patient.

On average, you should not realistically expect to find more than two great opportunities per year to profit from market timing (sometimes there will only be one and there will seldom be more than three). As such, it pays to be patient and to wait for the major market reversals that usually accompany extremes in mass psychology. When these opportunities occur, the speculative investor must be financially prepared (refer to Rule 10) and psychologically prepared (refer to Rule 2) to take full advantage.

Remember and learn; don't regret or blame.

Take full responsibility for all of your investment decisions and never fall into the trap of blaming others when things go wrong. Losses are often learning experiences and can actually be money well spent if they prevent you from making the same mistake again, but if your reaction to a loss is to look outside yourself for someone/something to blame then you've learnt nothing from the experience and the money was wasted.

Keep yourself well-grounded.

This encompasses the following:

a) Never complain about losses or brag about profits.

b) When the market is trending strongly higher and your stocks are going up every day remember that you are nowhere near as smart as you think you are; and during the severe corrections when every stock you own appears to be headed towards zero remember that you aren't as dumb as you feel.

c) Be prepared to change your opinion if the facts change. In other words, don't become wedded to any stock or to any market view.

d) Don't act as if the current rally will be the last great money making opportunity. It won't be.

e) Always keep your mind open to new ideas and analysis/evidence that contradicts your current view of the financial world. Most people are quick to embrace anything that confirms/matches their existing beliefs and to dismiss anything that contradicts these beliefs, which is why most people never see the signs of a trend change until it is too late.

Know the story behind every stock you buy.

It is not enough to simply follow the recommendations in any newsletter because even if these recommendations are on-the-mark you won't be able to buy or to hold in the amidst of a selling panic unless you have the confidence that stems from having a thorough understanding of the story.

Know yourself.

For example, if you are someone who gets antsy and has trouble sleeping whenever the stocks you own make big moves, then don't buy volatile stocks. Or if you know you are going to be too busy to fully understand the stories behind individual stocks then allocate most of your stock-market-related capital to mutual funds.

Never use margin debt.

NEVER buy stocks on margin unless you are a full-time professional investor/trader with a long track record of successfully managing risk. This is because as soon as you begin using margin debt you become a 'weak hand' (you become someone who would likely be forced to sell in reaction to a sharp price decline, that is, someone who would likely be forced to sell at a time when they probably should be doing some buying)

Don't take it too seriously - have fun !
After all, it's only money.

http://www.speculative-investor.com/new/index.html

Several years ago, I met someone on the Early To Rise investment forum (let’s call him Trader Joe) who was an expert technical trader. I call him an expert because he lived off of his profits, he was financially independent, and he frequently went on random scuba diving and bird watching vacations at the drop of a hat.

Since this was a time when I was diligently honing my trading skills, I often corresponded and spoke with him about trading. I already had a system in place, so that’s not what we concentrated on. Instead, he helped to educate me about the mental side of trading. And what he shared with me has helped to define my success as a trader.

by anon

To that point, I had never really acknowledged that there was a mental side to trading. After all, I was just looking at charts and playing the setups. But I have to admit, playing the setups wasn’t working out too well.

At the time, I was making about 7-10 trades per month. Most didn’t do so well, but the ones that did always made up for the losses and kept me at a small gain. My account was up, so I figured I was doing okay. But I also knew that the great traders like Paul Tudor Jones and Ed Seykota were able to consistently make many times the returns I was making. In case you’re wondering, Seykota increased one of his clients accounts by 250,000% over a 16 year period (after withdrawals) and Jones realized five consecutive triple digit return years.

I knew there were flaws in the way I was trading, but I didn’t understand what I was doing wrong. So, I shared my predicament with Trader Joe. I asked him why in the world I could not make a yearly gain over 12%.

He laughed... and then he gave me some of the best advice I’ve ever received. But he didn’t tell me directly. He imparted his wisdom in the form of a story:

“Imagine that you’re a deer hunter and you only have two bullets. You cannot get any more bullets until next month. If you miss your shots, you won’t be able to eat any meat this month. But if you make one of the two shots, you’ll eat well.

“Now every time you walk into the forest you patiently wait… and wait… and wait. Most of the time in the forest you don’t even see a deer. Some days you might see an occasional rabbit hopping around. Do you shoot at the rabbit hoping that later you can get a deer? Or do you wait?

“If you hit the rabbit you can eat for a day. But if you miss, you have just wasted one of your bullets on the chance for a small meal. You decide the rabbit is too small for the risk involved, so you keep waiting.

“A few days later you see a deer, but it’s not a clear shot. Do you shoot? If you miss, you’ll have only one bullet left. You decide the risk in missing the shot is too great, so you wait.

“The next day, you see a big buck in clear sight about a hundred yards away. Now the shot is nearly guaranteed. You take your shot and you nail it.”

I immediately understood what he was saying.

I’m the hunter, the market is the forest and my money is my ammunition. Once I run out of money, game over. But if I choose only the best shots, I will do well. In other words, you only want to trade when the odds of winning are heavily in your favor.

In my case, I was trading on setups that were mediocre. To pull the trigger, I needed four of my indicators to line up and scream buy or sell. But when I looked at my past record, I discovered that most of the trades I entered were not based on my system. I would become impatient, often trading when only two of my signals lined up, instead of all four.

In other words, I was shooting at rabbits and taking difficult shots at deer that were out of range. Sure, I might have made a lucky shot here and there, but the odds were not in my favor.

By simply reducing the number of trades and only making those that were optimal, I dramatically increased the profits I earned.

Trader Joe told me I wasn’t alone in making these mistakes. He said new traders do this all the time, perhaps that includes you.

Maybe you become impatient, looking for excitement and feeling that you are missing opportunities if you’re not in the market. Nothing could be further from the truth.

By simply limiting the number of trades you make to those which put you at the greatest odds of winning, you will save money on commissions AND put more money in your account. After all, trading isn’t about excitement; it’s about making money.

There’s no question that Trader Joe’s advice has improved my success. I can’t thank him enough. And I hope that you will benefit from his advice as well. So the next time you’re looking at your trading record and you see less than optimal results on a high number of trades, just ask yourself:

You only have two bullets. What do you do?

Baltic Dry Index - BDI

A shipping and trade index created by the London-based Baltic Exchange that measures changes in the cost to transport raw materials such as metals, grains and fossil fuels by sea.

The Baltic Exchange directly contacts shipping brokers to assess price levels for a given route, product to transport and time to delivery (speed). The Baltic Dry Index is a composite of three sub-indexes that measure different sizes of dry bulk carriers (merchant ships) - Capesize, Supramax and Panamax. Multiple geographic routes are evaluated for each index to give depth to the index's composite measurement.It is also known as the "Dry Bulk Index".

Changes in the Baltic Dry Index can give investors insight into global supply and demand trends. This change is often considered a leading indicator of future economic growth (if the index is rising) or contraction (index is falling) because the goods shipped are raw, pre-production material, which is typically an area with very low levels of speculation. Because the supply of large carriers tends to remain very tight, with long lead times and high production costs, the index can experience high levels of volatility if global demand increases or drops off suddenly.
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Shipowners Idle 20% of Bulk Vessels as Rates Collapse

By Alaric Nightingale

Nov. 7 (Bloomberg) -- At least 20 percent of the vessels most commonly hired to haul coal and ore are sitting empty as steelmakers cut output and dwindling trade credit halts deliveries, Lorentzen & Stemoco A/S shipbroker Kjetil Sjuve said.

Fifty to 100 so-called capesizes, each bigger than The Trump Building in New York, have been unable to find cargoes or their owners won't accept rental rates that have plunged 98 percent in five months, Sjuve said by phone today. Normally about 250 such carriers compete for spot bookings, he said.

``There are simply no cargoes,'' Sjuve said from Oslo. ``It's primarily the steel market but it's even more difficult due to financial markets and letters of credit in particular.''

ArcelorMittal, the world's biggest steelmaker, on Nov. 5 said its global output will decline by more than 30 percent. Cia. Vale do Rio Doce, the world's biggest iron-ore producer, last month said it will cut production. Of the $13.6 trillion of goods traded worldwide, 90 percent rely on letters of credit or related forms of financing and guarantees such as trade credit insurance.

Letters of credit are centuries-old instruments that transfer payments internationally from buyer to seller once shipments have been delivered.

Capesizes that were attracting rates of $233,988 a day as recently as June are now available for $4,793, according to the Baltic Exchange in London. That's below the cost of paying for crew, insurance, maintenance and lubricants.

Capesizes are the second-largest commodity transporters, after very large ore carriers. The Baltic Dry Index, a measure of shipping costs across different ship sizes, has slumped 93 percent from a record in May.

Ships at Anchor

The number of empty capesizes in the spot market may climb to as many as 150 in the next two weeks, said Sjuve, who is a capesize broker. The precise number at anchor is ``very difficult to pinpoint'' because owners don't often announce it, he said.

There are 105 capesizes indicating their status as ``at anchor,'' according to data compiled by Bloomberg. The data doesn't differentiate between ships that are hired and those that haven't got cargoes. On June 30, there were 43.

Zodiac Maritime Agencies Ltd., the shipping line managed by Israel's billionaire Ofer family, said last month it was considering idling 20 of its largest ships. Ukraine's Industrial Carriers Inc. filed for bankruptcy protection last month and London-based Britannia Bulk Holdings Plc was placed into administration under U.K. insolvency laws.

Loan Accords

As many as 20 percent of shipping lines are at risk of breaching their loan accords because the decline in rents has caused a similar plunge in ship prices, Tufton Oceanic Ltd., the world's largest shipping-hedge fund group, said last month.

The 12-member Bloomberg Dry Ships Index has plunged 76 percent from its peak in May, taking its combined market capitalization to $6.7 billion from $27.8 billion.

Global ship orders tumbled 90 percent last month, Richard Sadler, chief executive officer of Lloyd's Register, said in an interview yesterday. The full-year order tally will likely fall more than the 15 percent previously predicted, he said.

The drop in rental rates ``came fast and will be gone quickly,'' China Cosco Holdings Co. Chairman Wei Jiafu said yesterday at a shipping conference in Dalian, China. ``The unusual drop was because of investors' panic amid the global financial tsunami.''

By Meridian

If you are looking at the Canadian resource sector and starting to salivate over all those beaten down share prices, thinking “ if I buy now, I will make huge profits when these markets turn higher”…..STOP !!! Don’t move !!!

On a recent trip to New York I was informed that a certain analyst in New York has compiled a list of nearly 100 Canadian juniors that are earmarked for failure. The list is apparently making its rounds in New York right now. So, if we are in a Commodity Supercycle, how can we be talking about companies in the resource sector failing?

Sadly, it all comes full circle to the concept of a “one way bet”. Just like the financial institutions in New York took a one way bet and thought that the housing market would just keep going higher, the investment bankers who help finance
(and the investors who participate in these financings) the resource sector took a one way bet and thought that commodity prices would keep trending higher. Nobody ever thought that the US Dollar might stage a rally and knock the wind out of commodity prices.

Every cycle, (be it a cycle in tech stocks, financial stocks, airline stocks, railway stocks or resource stocks) always has a period of reckoning where the cycle mentality comes under duress and weaker participants in the cycle fail. We have now hit that part of the Commodity Supercycle and Darwinian Capitalism will manifest itself. With Darwinian Capitalism, the weak species will die off and the stronger species with better DNA will thrive. So, when an analyst in New York compiles a list of potential failures, he is to be taken seriously.

So, what then do you do if you are contemplating an investment in the junior resource sector at this time? You ask questions, that’s what you do. Here now are some questions you should ask when you start calling companies you are interested in:

#1: How much cash does the company have in the bank? If it has less than $500,000 there will have to be a financing done quickly. Ask how the company plans to do the financing. Will it be offering common shares at beaten down prices or will it be using a more innovative strategy?

#2: How close is the company to issuing a 43-101 compliant resource estimate? If such a resource estimate is not in the cards, it is probably best to steer clear of investing in the company. Grass-roots exploration stories will be sure to struggle for the foreseeable future.

#3: If there is no 43-101 compliant resource estimate, is there at least a historical resource estimate from previous company’s who may have worked on this property in years gone by? If no such historical estimate exists and if no 43-101 resource estimate is in the cards, don’t waste your time any further.

#4: If a resource estimate is forthcoming, what plans have been made for a feasibility study to further examine project costs and economics?

These are un-precedented times that demand caution and prudence. Be careful out there. Ask the tough questions. Do your due diligence. The resource sector will recover and the Commodity Supercycle will get back on track, but the train will be leaving the station with far fewer passengers…..

http://www.themarkettraders.com/content/canadian-junior-resource-sector-investing-ask-tough-questions

It was almost two months ago now that I got the phone call from a family member that Ralph was taken to the hospital. They never said much more than that as the precarious state of his health was unknown at least to the family. It was the next day when we found out that his chances of survival were between slim and nil. You see he had an severed artery called the Aorta or as the doctors described it a "Dissected Aorta" and the chances for anybody was small, never mind some guy two months away from his 70th birthday.

Ralph is a big guy, about nopoo's hight, heavier but still in good shape. Like nopoo, he does too much for people and the day before he helped a neighbour move furniture, but hey, that's my brother. Anyway the next morning around 5 am he felt the pain and as he still had the smarts to call 911, they trucked him off to the Chilliwack hospital where they tried and failed to find a pulse. The ambulance attendant managed to detect one so they called for a helicopter and flew hin to Royal Columbian hospital in New Westminster where he stayed for about 6 weeks and three of those weeks unconscious as he was totally sedated. His son was told by an intern on the day Ralph was brought in, to go home and make the funeral arraignments as the chance of him making it till dawn was not good. That guy obviously underrated the power of prayer and resolve.

I have never seen so many hoses and wires connected to anybody in my life as they had plugged into every orifice they could find and even made a few more, but modern medicine and dedicated medical people are in themselves, miracles. I never knew that the aorta also extended down past the diaphragm and in Ralph's case, that's where it broke. It took 11 liters of blood before the repair job finally held and with the initial 5 hours of surgery and several return trips to his mid section, things started to get better. All of his organs below his chest quit working but one by one they came back to life starting with his intestines which they figured would lose much of it's length, yet it survived. His liver was the next to heal and then his kidneys. All of this time he was still out cold so I was never really sure of the status of his brain as it was a toss up as to it's ability to function.

That question was answered several weeks ago when he woke up and stumbling for something reasonable to ask, I blurted out "How do you feel"? Well it was a dumb question I know but to someone just coming back from a long sleep, he replied; "Compared to what"? At least he could still speak and understand my ramblings. The next time I saw him, he was much clearer in his thought process but physically he lost about 40 pounds playing Rip Van Winkle. Since then, they moved him from the ICU to a recovery floor and from there to re-hab. This week they will send him back to a re-hab center up the valley in Chillwack and hopefully from there, home.

Why am I relating all of this? Well the extended family and Ralph's friends believed he would recover and sealed that belief with prayer. He is now eating like a horse and putting some of those lost pounds back on. So we have had our little Thanksgiving up here in the northern part of the hemisphere a few weeks ago and this week our US cousins carve up the turkeys. Sure, this year is a bad one for millions but it is still a good year to give thanks because we are still alive, still able to act and still determined to turn defeat into victory, so what other reasons do we need to be thankful for? In my case, I have my miracle kid brother back who is now dreaming of some future fishing trip together. Sure, it won't be this year but next year will do just fine...much like the market place I would imagine. You just have to believe it first...then act on it. How else could it possibly come about?

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