Monday, March 14, 2005

 

You gotta know when to hold 'em and you gotta know when to fold 'em

I decided to close my short position in Martha Stewart. The stock is down about 40 percent in the past week. I still think it's an $8 stock, but my new rule on short-selling is that I will not short any stock that is less than 200 percent above what I estimate is its fundamental value. This (just) rules Martha out. TZOO, however, continues to be a short, although I may cover if it goes into the low 40's.

On a related matter, several readers have asked how I decide to sell a stock. The truth is that I don't have any fixed rule for this decision, like I don't have any fixed rule about when to buy a stock. The only "rules" that I use are the aforementioned rule about short-selling and the rule that I will not devote more than 5 percent of my portfolio to any one stock. That's it. I don't use technical analysis nor fancy software (heck, I don't even have a broadband connection!).

More generally, I don't believe that one can devise rules to trade profitably on a consistent basis. All the successful investors that I know of use intuition, not rules. That doesn't mean that these investors don't use a "system" for trading stocks. Rather, it means that the system is so complex and fraught with so many non-linearities that it would be impossible to devise a closed form solution to yield some optimal rule about when to buy or sell. In other words, this system is so complex that it can only be described intuitively. You have a gut feeling and you go with it. It's as simple as that.

Of course, that gut feeling is developed through trial and error and only after years of experience. That's why many people buy books about how to invest like Warren Buffet but at the end of the day, the only person who can invest like Warren Buffet is Warren Buffet.

Comments:
yeah, for me it is just instinct and looking at the stats. I shorted NUE X monday and those stocks went up yesterday. I got them at the peak though so was okay. Was also shorting TIBX.

Wednesday, I finally covered them. Again, I set limit orders and the prices were not that far off. So I made some money but not as much as I could have. But then again, each of those shorts were using half of my funds, so I was freaked out if it went up. So basically set limit orders.

I guess if I were not day-trading, I wouldnt use them. I notice I would have made a LOT more money by now if I didnt use them. But at the same time, I am not sure I would have the patience and knowledge to try and catch it. Maybe.... next time, I am going to experiment and sell 80% using limit order and do the 20% manually. Mainly it is because I am impatient and also I am scared of losing profits.

when I say limit order, I mean I dont wake up at 6am to watch the stocks. I just let it automatically ride it out in the mornings. Plus much easier to track things. Dont have to glue myself to the screen the entire day.

I bought a bunch of AMTD and ET when they announced lower numbers for february. I hope that is a smart move. They seem kind of low... but we'll see.

KRB is killing me as is LU. KRB I got because of an interview on Fortune or Forbes. And LU I got because of Jim Cramer. I have to say LU was probably the stupider of the two. Down more than 10% on both.

Another stupid move was buying ET $13 CALL options back in December. I was trying to learn how to trade options. I dont think I will try that again til I get more knowledge. It is so much more different than trading stocks. That is probably my first and last time doing that. Down 88% on it. Fortunately, I only used $1200 but it is still money.

Scott
 
I just took a look at NUE and X... yeah.. if I didnt use limit orders and waited 30 minutes, would have made 2-3 times the profit. Crazy huh...

Scott
 
I think NUE and X is probably continue to drop the next few days. But kind of scared at this point. Thats always how it is. Once you make your profit, you are scared to play with that again. Maybe I'll just short some smaller amounts.

I shorted URBN last friday and it was going up and down like crazy every day. Shorted it and covered at $48.36 just a few seconds ago. Can you freaking believe it dropped to $48.03 IMMEDIATELY as soon as I covered. I mean less than 1 minute. Man.. what the heck am I suppose to do.

Scott
 
What the hell is wrong with the market. Geez.. today is like a massive slaughtering of pigs on the steps of Wall Street. Man.. what a tough day on the lame stocks I bought from months back.

Everytime I get some money, some of it goes right back out through these other stocks. ARGH. I am battling between selling these poison stocks versus thinking long-term and waiting and see. These stocks are not necessarily over-priced or inflated. Just damaged stocks. ARGH..

Scott
 
Great blog.

Regards,

Forex Daytrader
online day trading
http://www.daytradingcourse.com
 
Great blog. Nice job you've done here.

Sincerely,
Daytrader
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