The Depth Report – A Better Way to Think About Trading and Investing

Introduction:

I got a great question from a new subscriber last week.  He wanted to know if I thought he should buy the stocks currently on the DKI recommended list, or if some of the positions that had big profits should be considered a “hold”.  It’s common for large investment firms to hire performance psychologists.  Their goal is to uncover any irrational or unhelpful trading “rules” people make for themselves and replace those bad rules with more effective methods.

 

I’m not a performance coach or a psychologist, but I’m in my fourth decade in finance, and have identified some valuable ways of thinking about investing that both answer the above question, and which can be used to weed out future bad decisions.

 

Buy and Hold Are the Same Thing:

I don’t make a distinction between buy and hold.  An old mentor of mine once told me that you’re effectively buying every position you own every day.  To the extent that I could sell any position right now, he’s right.  People have a tendency to think about positions as if they have a history.  That’s not a helpful mental model.  With the exception of tax-related selling, or holding onto a winning trade for a few extra days to get long-term tax treatment, your positions have no relevant history.  It doesn’t matter what you paid for a stock and when.  The only thing that matters is whether your investment thesis is still intact at the current price of the stock.

 

The takeaway:  If it’s on the recommended list, I own it.  If I own it, I’d buy it today.  If I change my mind and exit a position, I tell subscribers immediately.

 

How to Think About Investment Recommendations:

Let’s go over a few things to think about when you see an investment recommendation from someone.  These aren’t hard rules, but can help you figure out whether someone has a point of view that’s worth your time and capital, or whether you should be skeptical.

 

Is it Clear or Can They Claim Victory No Matter What Happens:

One reason I responded so emphatically to the question from our new subscriber is because DKI prides itself on being clear.  Imagine a hypothetical situation where I told him that the position was a “hold” for me and that he shouldn’t buy it.  If the stock goes up, I can declare victory and tell him that I owned a winning position.  If it goes down, I can tell him that I advised him not to buy.  If someone can claim they were right no matter the result, you should be skeptical of that “advice”.  I won’t be right about everything, but I do own everything I recommend.  At DKI, we share the performance of our ideas with our subscribers and clients.

 

The takeaway:  Good counsel will allow you to determine whether the investment idea was right or wrong.  Bad counsel can claim a win no matter what happens.

 

Is There a Clear Course of Action:

We’ve had a lot of fun this year at the expense of JP Morgan CEO, “Hurricane Jamie” Dimon.  Back in June, we wrote this:

Last week, JP Morgan Chase CEO, Jamie Dimon, said that the economy is “sunny” at the moment but predicted there’s a storm coming.  He just doesn’t know if it will be a big storm or a small one. He advised that investors “brace themselves” for the coming hurricane while noting he didn’t know if it would be a minor storm, a Superstorm Sandy, or a Hurricane Andrew.  He noted rising energy costs, higher commodity costs, and increasing interest rates as potential problems which could cause a recession.  He also cited the uncertainty caused by war in Ukraine.

If Mr. Dimon worked for the National Oceanic and Atmospheric Administration (NOAA), his projection would be tantamount to “the hurricane will hit sometime between today and next Friday, and land somewhere between Boston and Miami.  Also, it might just be a minor rainstorm.”

Notice not only that his prediction is incredibly non-specific; but also, that there’s no recommended course of action.  What is he doing to protect his portfolio from the coming “hurricane”?  Is JP Morgan recommending that clients establish short positions?  Are they telling clients to pull money out and hide it under that mattress, or to buy gold?

 

The takeaway:  At DKI, we’ve made specific predictions, explained our thinking, and told subscribers exactly what we’re doing to make money in the current environment.

 

Do They Give You Well Thought Out Reasons:

I’ve been spending more time on FinTwit (Financial Twitter) this year.  You can follow me here.  One thing that I find incredibly unhelpful are the pronouncements people constantly make on the platform:

  • “Markets gonna rip”
  • “Bad week coming for the bears”
  • “Bonds are cheap”
  • “Fed pivot coming”

None of these thoughts are necessarily wrong, but they lack reasoning.  Half the time, I can’t tell if the person making the pronouncement, has a reason for their thinking, if they’re just cheerleading and hoping, or if they’re being silly/sarcastic.

 

Ready for a Wall Street “secret”:  Frequently, when you read that a well-known investor or investment firm is buying something, that information can be both correct and worthless.  Hedge fund “X” might be buying a stock, but what you don’t know is they’re short 2 of the big competitors and are just laying off some industry risk.  Famous person “Y” might be buying a stock, but what you don’t know is they have huge put positions against the stock and are just adjusting their risk profile.

 

It’s much more important to focus on the “why”.  One filter I use to determine whether to take someone seriously is whether the idea comes with the word “because”.  “Stocks are going up” is worthless.  That same sentence with the word “because” followed by great research and reasoning is valuable whether you agree or disagree.

 

The takeaway:  Pronouncements are worthless.  Research and explained reasoning is valuable.

 

Conclusion:

Every one of these “rules” will have exceptions, but they will give you a good filter to start to think about investing and investment advice in a more effective and systematic way.  What’s working for you?  And what investment mantras did you used to have that you’ve let go of recently?

 

 

Information contained in this report is believed by Deep Knowledge Investing (“DKI”) to be accurate and/or derived from sources which it believes to be reliable; however, such information is presented without warranty of any kind, whether express or implied and DKI makes no representation as to the completeness, timeliness or accuracy of the information contained therein or with regard to the results to be obtained from its use.  The provision of the information contained in the Services shall not be deemed to obligate DKI to provide updated or similar information in the future except to the extent it may be required to do so. 

The information we provide is publicly available; our reports are neither an offer nor a solicitation to buy or sell securities. All expressions of opinion are precisely that and are subject to change. DKI , affiliates of DKI or its principal or others associated with DKI may have, take or sell positions in securities of companies about which we write. 

Our opinions are not advice that investment in a company’s securities is suitable for any particular investor. Each investor should consult with and rely on his or its own investigation, due diligence and the recommendations of investment professionals whom the investor has engaged for that purpose. 

In no event shall DKI be liable for any costs, liabilities, losses, expenses (including, but not limited to, attorneys’ fees), damages of any kind, including direct, indirect, punitive, incidental, special or consequential damages, or for any trading losses arising from or attributable to the use of this report.

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