WHEN IT COMES TO
the Kentucky Derby, the Final Four and the stock market, everybody's got a hot tip. Most portfolio managers still focus onwhat>
to trade, not onhow>
Yet when I lose money in the market, it's poor technique, not bum stock picking, that's always to blame. Despite all the emphasis on independent research and proper due diligence, I lose money not when I'm wrong in my analysis, but when I'm undisciplined in my approach.
For example, when a stock of mine is doing well, generally speaking, I get stupid. I scour the message boards looking for praise. I comb through the headlines. I daydream about potential acquirers. I browse the online company store. I look for favorable mentions in the business press. I fall in love.
And when the stock starts to sink, and my profit begins to disappear, I foolishly listen to everything else but the market itself despite my years of experience as a hedge-fund manager.
I'll hold on because I heard the stock mentioned on Cavuto, or read about it in Barron's. I'll blame everyone and everything the president, corporate CEOs, Alan Greenspan, the economy or those pesky hedge funds for what surely> must be a temporary dip. I'll wait because I don't want to pay the commission or the taxes. I'll wait because I don't want to be wrong.
Good stock picking might get you into profitable trades, but good technique will get you out of them before they become unprofitable. Once you've bought a stock, all the research becomes moot. All that matters is how you manage that position within your overall portfolio. When a big position begins to crumble, I'm generally a believer in selling first and asking questions later. Markets don't reflect the news, they anticipate it and whether it's bonds or bullion, you can always get back in later.
Good technique won't only get you out of losing trades, but also can keep you from taking dumb risks. Everybody wants a hot stock tip, but when it comes to trading there truly is such thing as good form. It's not what you buy, but how you buy that ultimately determines success.
Sometimes that means knowing when to stay out. When I trade a few thousand shares "for fun," or put on a huge position just to "scalp a few points," I almost always> lose money and usually big bucks. Not because of my stock picking, mind you, but rather my lack of discipline. There's a difference between risk and recklessness, after all. Yet these addictively dangerous "fun" trades always delude me into convincing myself that I'm not averaging down, but "building a position." I think only of the prospect for a quick gain, and never of the potential for a serious loss. Ouch!
And when I get itchy just to make a trade, not only do I inevitably trade a dangerously large position, but I also waste precious capital on a subpar idea. A whim. Ouch again!
As we've written before, you can't bet on everything. No matter how big your account, there's no sense in putting money on anything less than your top ideas. And although it's painfully difficult to wait for the perfect pitch to sock out of the park, you only need a few good trades a year to make money over time. When it comes to managing a portfolio, most of the time, less is more.
I'll take good technique over a hot tip any day. Because, ultimately, managing a portfolio is far preferable to random investing. A disciplined technique is an investor's best asset in any market environment.
Jonathan Hoenig is Managing Member of Capitalistpig Hedge Fund LLC.>