Staying Atop the Market

The stock market is always one step ahead of you. The sooner you accept this fact, the better for your trading results. It helps to think of the market like the rabbit on the rail at the greyhound racetrack. As an investor, you should never mistake yourself for the rabbit or else the market will have to humble you and remind you that you are just a dog. The best you can expect to be is a greyhound in close pursuit, tethered to this market rabbit by an invisible rope. The fact is that the market rabbit is not really in the race. You are racing your fellow greyhounds. They are the ones whom you want to stay out in front of.

The questions you should ask are twofold. The first question is how to stay tethered to this rabbit. The second question is how closely tethered you actually want to be. Candidly answering the first may result in your answering the second by default. So focus on the first question and then ask yourself this: what you are willing to do each day to maintain your connection to the market? Your personal daily circumstances as well as your emotional commitment and discipline should guide you to generate a reasonable answer. With those inputs, you can then decide whether you allocate 30 minutes a day or 30 minutes a week.

The point here is that your allocation should be unique to you personally. To be successful, it must be based on brutally honest inputs by you about yourself. For this to work best, you must be willing to put it in writing, making it easier for you to revisit on a regular basis. You should also note that it’s not unusual to be overly optimistic at first about your abilities to pay attention and stay on top of the market.

As real time investing plays out, it might become a bit more comfortable to adjust your routines – let out some rope, so to speak – and not try to stay so close. By default, you therefore answer the second question. How closely tethered to the market rabbit do you really want to be?

It becomes crystal clear that the more closely you remain tethered, the more significant the commitment in both time and emotional capital required to do so.  A day trader better be prepared to be tethered to the market rabbit on a very short rope.  The position trader less so. A long-term investor comfortably less so.

The bottom-line is that there is no one magical tether. The challenge is to construct individual routines that match the personal fire in your belly so that you remain in equilibrium and are able to maintain consistent focus and discipline over the long period of time that you will be tethered to the market rabbit by this invisible rope of your own design.

Trade well; trade with discipline!
-- Gatis Roze

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Money Management: Why Market Wizards Claim It’s the Secret Sauce

In his Market Wizards books, Jack Swagger interviews an outstanding collection of renowned investors, traders and money managers.  The single most common thread that each mentions as being a major contributor to their success is their money management skills.

The challenge is to understand what they mean by money management.  The internet is full of definitions, ranging from simplistically useless to overly complex and potentially harmful.  In past years, I’ve surveyed my classes for their personal definitions.  On two separate occasions a decade apart, we constructed in class definitions that I believe accurately capture what these market wizards meant when they attributed their success to their money management skills.

What both groups of the investors I surveyed agreed upon was the notion that money management is a process.  In its most basic form, it involves setting goals, getting organized and executing a written investing plan.  Both groups also agreed that money management is very personal and individualistic in nature.  It will change over time as the investor’s needs shift, but honesty and candor are essential ongoing ingredients in any effective written money management plan.

My first investor group formulated a money management process consisting of 8 issues constructed as questions that challenged each individual investor to answer in writing in a manner most appropriate for him or herself. 

How do you get your money?  What are the sources of your cash flow and are they dependable or variable?How do you feel about money?  Did you inherit your wealth and see money management as a burden or part of your lifestyle?  What is your tolerance for risk?Where do you move your money?  What percentage of your assets are you comfortable placing in various asset baskets?  Do you see yourself as an investor, a trader or a watcher?How do you move your money?  What are your investment analysis routines and which trading methodology do you employ?Why do you move your money?  How will you decide it’s time to invest?How do you protect your money?  What sell disciplines do you have in place?  Have you adequately insured yourself and your family to protect all your assets?How do you spend your money?  What are your lifestyle priorities?  How much money will you invest, spend and distribute?When will you spend your money?  What is your time horizon and does your current estate plan reflect your present wishes?

Ten years later, I surveyed the second class of student investors.  Their definition was more concise yet the parallels were undeniable.

“Money management is a written, personally-appropriate financial framework describing the types of investments and strategies that you feel will align with your personal goals, objectives and priorities.  These guidelines describe the rules and tools you deem appropriate in managing your wealth.  They acknowledge your risk tolerance and the risk management techniques you employ to protect your assets.  Finally, they provide an ever-changing lifelong timeline and roadmap recording the methodologies and resources you use to ensure disciplined stewardship of your assets as you attempt to maximize the return on your investments.”

The key take-aways for all you budding market wizards are these:

A. Get organized and put it in writing.

B. Put the odds in your favor by having clear goals, routines and an investment methodology.

C. The roadmap to success requires that you know yourself and know enough to stick to your rules.

Trade well; trade with discipline!
-- Gatis Roze

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