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Investing, Trading

Trader Mentality Interview

I recently did an interview with Trader Mentality in which I discuss my personal investing discipline and the major influences who helped me develop and continue to shape it. I also share some advice for those new to the markets:

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What Separates Extraordinary Investors From All The Rest?

This post is an excerpt from the most recent edition of The Felder Report PREMIUM:

What separates truly extraordinary investors from all the rest? It’s simple: They are extraordinarily discriminating.

I talk to a lot of investors. Every one of them is looking for that next, great trade. They’re researching, studying charts, reading annual reports and analyzing financial statements, whatever their process calls for, and they should be scouring the markets like this. You can’t expect to reap the rewards of any activity without first sowing the seeds in this way.

The one distinction, however, I notice between average traders and investors (and I’ll use them interchangeably here though they use very different methodologies) and really good ones is average traders put on far more trades than the really good ones do. I’m talking ten times as many trades, at least. Average traders put on trades all the time. They believe they really are capable of finding that many good ideas on a regular basis.

“Charlie and I decided long ago that in an investment lifetime it’s just too hard to make hundreds of smart decisions…. Therefore, we adopted a strategy that required our being smart – and not too smart at that – only a very few times. Indeed, we’ll now settle for one good idea a year.” -Warren Buffett, 1993 Berkshire Hathaway Letter to Shareholders

Really good traders, in stark contrast to all the others, are far more patient. They don’t put on a trade simply because they have an opinion about something or worse, someone they respect has an opinion about it. No. They wait for the perfect setup – the setup that they have profitably taken advantage of time and time again. Until it arrives, they do nothing.

“One of the best rules anybody can learn about investing is to do nothing, absolutely nothing, unless there is something to do…. I just wait until there is money lying in the corner, and all I have to do is go over there and pick it up. I do nothing in the meantime…. I wait for a situation that is like the proverbial, ‘shooting fish in a barrel.’” -Jim Rogers, Market Wizards

Now this is a lot harder than it sounds. And that’s exactly why the average trader can’t do it. It’s hard to watch potential trades go by and not act on them, especially if they would have been profitable – it’s hard not to kick yourself. And there’s something specific to the American work ethic where we feel lazy if we’re not constantly trying to accomplish something.

“I always made money when I was sure I was right before I began. What beat me was not having brains enough to stick to my own game – that is, to play the market only when I was satisfied that precedents favored my play…. There is the plain fool, who does the wrong thing at all times everywhere, but there is the Wall Street fool, who thinks he must trade all the time.” -Jesse Livermore, Reminiscences of a Stock Operator

Once you’ve found a system, though, that suits your own personality and proves its worth over time, you learn to sit back and wait for everything to line up before you pull the trigger. And I can’t emphasize enough how infrequently this happens. Great investors probably only pull the trigger once for every one hundred opportunities they look at. For some, it’s even less than that.

“Only maybe one or two times a year do you see something that really, really excites you. And if you look at what excites you and then you look down the road, your record on those particular transactions is far superior to everything else, but the mistake I’d say 98% of money managers and individuals make is they feel like they got to be playing in a bunch of stuff.” -Stan Druckenmiller, Speech at the Lost Tree Club

You might just say extraordinary investors are the snobbiest of all the snobs in the marketplace. They turn their nose up to almost everything they see. It’s only on that very rare occasion when something comes along that is so attractive that they simply can’t not buy it that they finally give in. This extraordinary patience and discipline is exactly what leads to the extraordinary returns that set them apart from the rest.

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One Of Paul Tudor Jones’ Favorite Indicators Suggests The Bear Market In Gold Is Over

As the best-performing asset class in Q1 there has been a lot of talk about gold lately. The debate seems to focus on whether this strength marks the end of the four-year bear market for the precious metal or whether it’s just another counter-trend rally.

Looking at the chart above, I’m reminded of a quote from Paul Tudor Jones in the book, “Market Wizards.”

“When you get a range expansion, the market is sending you a very loud, clear signal that the market is getting ready to move in the direction of that expansion.” -Paul Tudor Jones

There appear to be a pair of, “range expansions,” on the chart. The first was the breakdown back in early 2013 which served as a, “very loud, clear signal,” that the bull market was over. Afterwards, gold continued to trend lower for the next few years.

This recent surge higher appears to be a similar sort of, “range expansion,” only this time it is bullish rather than bearish. This doesn’t mean that gold will immediately continue higher but it does suggest that the recent rally is probably more than just a flash in the pan.

Related: 

Is Gold Going To $8,000?

Druck Backs Up The Truck And Loads Up On Gold

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5 Different Technical Tools For Traders In One Chart

Last fall I wrote a post titled, “This Is Now The Worst Possible Environment For Stock Market Investors.” My point then was that stocks were very expensive, sentiment was exuberant and the trend had shifted to the downside. In other words, all three of the major components of my investing strategy were bearish.

None of this his has changed (though stocks may bounce after the persistent selling we have seen recently). But, in that post, I shared a version of the chart above which became fairly popular so I thought I’d explain what’s going on it and the individual components noted in it.

First, the horizontal blue lines show a Fibonacci target for the S&P 500 at 2138 (2015’s high was 2134.72 on May 18). This target is calculated simply by projecting a 61.8% (the Fibonacci Ratio) extension of the bull market gains from 2009 to 2013, the point at which we finally broke above the old 2007 high. (Apple reached a similar target about a year ago which was a decent sell signal, as well.)

The vertical blue lines simply measure the time between major peaks. The span from the March 2000 peak to the October 2007 peak was seven years and seven months. Seven years and seven months from October 2007 was May 2015, the exact month the S&P 500 peaked last year.

I’ve also highlighted the momentum divergences on the chart. While prices made higher highs in March of 2000 and October of 2007, RSI was making lower highs, suggesting momentum was waning. The MACD crosses at the bottom of the chart were also decent sell signals on those occasions. Both occurred again last year in very similar fashion to those prior occurrences.

The “9” and “13” on the chart are DeMark Sequential signals. The 9 signifies a completed sell setup and the 13 is the completed sell signal. These are essentially the inverse of the buy signals I highlighted in March of 2009. (I also used these as part of my sell signal in Apple.)

Finally, I have included a 10-month moving average on the chart, roughly equivalent to the 200-day moving average. This may be the easiest signal for individual investors to monitor. It’s also Paul Tudor Jones single most important indicator. When prices close above this average, stocks are in an uptrend. Below and stocks are in a downtrend.

Do these things work on their own merit or do they work because so many traders watch and use them? That’s the age-old question posed regarding technical analysis. However, it’s fairly plain to see that simply paying attention to the overall trend can make a massive difference in your investing success by keeping you on the right side of the market. If it’s good enough for Paul Tudor Jones, it’s good enough for me.

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Greatest Hits 2015

Here are a few of the most popular TFR blog posts from the past year:

This Is Now The Worst Possible Environment For Stock Market Investors

How To Trade Like Stan Druckenmiller, George Soros And Jim Rogers

The Single Greatest Mistake Investors Make

How The Baby Boomers Blew Up The Stock Market

The Most Crowded Trade On Wall Street: Denial

Thanks for reading. I wish you a very happy and prosperous 2016!

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