Tortoise and Hare

Good morning here is the third entry if you missed the last two you can find them in the workbook tab. 
Best Of Success trading today!

Swing Traders, Position traders, Long term Value Investors, Long term Growth investors and Short Sellers   

For me the number one and most important rule when it comes to any of these strategies is you must have some knowledge about the company. For me this is a fundamental strategy first and technical strategy second. It can be extremely powerful to align technical with fundamental. However, you need to recognize that a high percentage of technical breakouts fail. Holding a Biotech company overnight because it has a sweet looking setup into a binary event like FDA approval can be very rewarding or it can be an extremely painful lesson. Holding the latest hot small cap tech company that has a potentially game changing product but is burning through cash faster than the fed can print it, with no sign of profitability on the horizon thru earnings, can also be eye opening and devastating to your emotional state as well as your portfolio. VRNG would be a good example of that, I recently held it though its supreme court decision I had done a significant amount of due diligence and recognized it was a binary event and the outcome was unfavorable. I was prepared for that and adjusted my risk accordingly.Doing your due diligence by studying a company, its product, management, and financials will not eliminate your risk but it will help you determine the amount of risk you are willing to accept.

       

While day trading is full of excitement and stress that can lead to fast fortunes or quickly wipe out a portfolio. Investing can be a painstakingly slow process to wealth or a slow bleed to insolvency. It requires patience, vision, and the ability to recognize trends and opportunities early. You have to have the fortitude to wait for the story to develop and let all the pieces fall into place in the face of adversity. You have to feel comfortable reading a 10k /8k and balance sheet. You should be actively involved in conference call participation staying on top of developments that could change the investment thesis. I have yet to hear of a day trader that has become a billionaire strictly from day trading. There may be some day traders out there that are billionaires but I would suggest that their wealth comes from a mix of day trading, book sales, educational programs they produce, chat rooms memberships, and a host of other products and services. There are many examples of billionaire investors; Warren Buffet, Carl Icahn, Carlos Slim, and the Koch brothers are just a few that come to mind. This type of investing or trading does not require a huge bankroll. When I first started investing I did it with a thousand dollars.

Ultimately even if you decide to become a full time day trader it’s my opinion that you should also venture into becoming an investor at some point. Day trading is great for catching those small spikes a stock may have but investing can catch an entire run which can be substantially more profitable with less tax ramifications. Combining fundamentals with the technicals that are used in day trading and applying them to longer time frames can lead to astonishing investment results. So let’s go through each of the different styles of fundamental investors.

Swing Traders

Swing traders hold equity overnight for very short periods anywhere from one day to a couple of weeks at the most. These types of plays are great for momentum names that just broke out of a solid technical formation usually accompanied by some type of fundamental event like earnings. Typically a good breakout can last 3 of 4 days. Swing traders will work with longer time frames when it comes to chart analysis typically they use the weekly, daily, 60 minute and the 5 minute charts. This style of trade is ideal for the person that is still working full time but wants some exposure to the markets. It doesn’t require you to be glued to a computer all day and you can manage your risk with well-defined stop placement. With swing trading the tolerances are more liberal in terms of cushion for trade execution. You do not have to be as tight with stops and exits as you do with day trading. The benefit being you can capture a larger percentage of a gain.

The downside is you are subject to gap downs if something material were to happen to the markets or stock specific. Even if you have a stop placed you could still wake up to big losses and maintain possession of the stock even if it’s trading below your stop price. Stop losses do not get triggered on gap downs. Another thing worth noting is if you have a stop placed it’s not uncommon to see what is called “stop shopping” take place. For example let’s say you are in a stock and you have clearly defined a level of support where you feel as though if the stock were to violate that price it would be prudent for you to exit the position. You set your stop just below that support area. Odds are that if you see that area of support then so does everyone else. A stock can get flushed down just below that area in order to trigger all the stops that are placed there, which enable’s someone to pick up your shares on the cheap. After the stops have been shopped the price resumes its upward trend unfortunately leaving you on the sidelines.

  

Position Traders, Long term value, Long Term Growth

Position trading is considered long term investing. Position traders are not concerned about short term fluctuations. Typically position traders have done their due diligence and believe that eventually all the short term volatility will smooth out over time and continue to move in its primary trend. They can hold stocks for months to years. For technical analysis they typically look at the weekly or monthly charts to get a sense of where the equity is in terms of a given trend. It would not be uncommon to see a position trader “dollar cost average”. Dollar cost averaging is purchasing a fixed dollar amount of shares on a regular schedule regardless of the share price. Resulting in more shares being purchased when the price is low and less shares being purchased when prices are high. Position trades are typically in what could be considered safe equities with a big market capitalization like Microsoft, Cisco, Caterpillar, or IBM. They are considered slow movers or “thick stocks” meaning they have large amounts of shares available for trade in the float. They aren’t typically going to make 20 or 30 percent moves in a day. You can build a position in more speculative names that may be in the midst of a restructuring or potential turnaround with a thin float but these are not for the faint of heart. Regardless of the type of stock the basic premise is you are going to be holding it for a long time.

Some positions are taken because the fundamentals suggest the equity is priced below its intrinsic value. Other positions are taken for projected growth regardless of a company’s fundamentals.  A good example of each would be Microsoft for value and Facebook for growth. Microsoft was considered cheap because of the amount of cash on hand, dividend yield and the lock they had in the PC market. If you were to look at the intrinsic value it appeared cheap. Until recently, it was a value trap. The company failed to unlock that value for shareholders, trading at a very low multiple and staying in the same price range for 5 years because it was considered to be a dinosaur unable to change with the times and produce meaningful returns for its shareholders.

Facebook and Twitter trade at very high multiples not because of their balance sheet but because of the perception of growth potential. People are willing to pay a premium because they believe that eventually the company will grow into or surpass all expectations. These companies are often over valued and can develop into long term momentum stocks like Amazon, Tesla or Netflix. Growth stocks typically do not pay dividends and reinvest their retained earnings into capital projects. Growth companies are not always growth stocks. A true growth stock is expected to grow at an above average rate relative to the overall market. Some anticipated high growth companies can grow without their share price following Groupon and Zynga would be good examples. After the big stock market crash in 2008 there were some stocks that could be classified as both value and growth. Wynn resorts, Las Vegas Sands and Melco were good examples of this. They all had perceived intrinsic value and potential high growth with the development of the Macau gaming market.

This type of investing could be considered the hold and hope strategy. However, if you have your sights set on a longer term time horizon and you have done your due diligence this can be an extremely rewarding strategy. I have had some tremendous wins over the years with this type of investing. Marvel enterprises, Sirius Satellite radio and Melco Crown are just a few that come to mind. If you have the patience and the will to spend hours studying a company while staying on top of current events that may impact your investment thesis the results can be tremendous.

     

Short Sellers

Short sellers are disliked by the average retail Investor because it can be considered “un- American” to be betting against a company and counting on its demise or failure to make a profit. I like to compare short sellers to the guy that bets against the shooter at a craps table. The truth is a successful short seller is shrewd and meticulous with their assessment of a company’s financials. They spend thousands of hours researching to determine if a stock or a market is inflated. Often times they could be shorting a stock or market with the belief that that there are serious fundamental issues like accounting fraud that are not yet known to the average investor. Or there is a bubble like the one created by over leveraged financial firms that led to the housing collapse in 2008.

Short Sellers play a vital role in our markets and one could argue that their research is more stringent and exhausting than the average long term investor is willing to endure. Shorting an overpriced stock or market makes their opinion heard and helps regulate prices. The misconception with shorting is the perceived notion of unlimited risk. In theory the loss potential is infinity. However, you can manage a short trade just as well as a long trade, limiting your risk with stops. The real danger is being subject to gap ups. Longs are subject to the same issue with gap downs. It can be more risky to be long stocks in a bear market where it’s not uncommon to see a market decline by 20 percent or more. Unlike a long term investor who may simply buy and hold a stock, the short seller is holding until the perceived balance of price and intrinsic value are returned to normalcy. The danger is being early since prices can stay inflated and overvalued for quite some time until the next down cycle.

The ugly side of short selling is the firms or individuals that run “short and distort” campaigns to temporarily damage the share price with inaccurate or speculative articles that undermine the stock so that they can benefit from their already established short position. So called “cult stocks” are often targets of these types of practices since the investors in these equities are often emotionally invested in the names and it can create quite a feeding frenzy on social media. One thing I have always found interesting is that there appears to be two cults in cult stocks. One is long and the other is short. The shorts will call the longs cult followers because of their passion and conviction in the company’s long term outlook. Yet the shorts are just as passionate with their conviction that it’s a pump and dump or a bankruptcy waiting to happen. If you do your due diligence you will be comfortable recognizing fact from fiction and use these despicable events to load up shares of an unfairly beaten down equity.

     

While this breakdown of the different styles and types of investors may not have covered all that exist it gives you a basic understanding of the most common. The questions you need to ask yourself are; what will your bankroll and your time allow? What is your time horizon? Are you more comfortable with fundamentals or technicals? Which style will you enjoy the most?

We are all different and every style can be successful. Aligning yourself with the style that works best for you will give you a powerful head start. Focus your time and energy on becoming consistently successful at your chosen style. The shotgun approach will only confuse you and limit your ability to achieve the results you desire.