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Monday, March 31, 2014

LETHAL: To Family, Friends, Followers

To Family, Friends, and Followers

I don't normally like to give stock tips or advice, but I feel compelled to keep you aware of possible scenarios that could happen.  When I see ads for pulling equity out of your homes to put in the market, house flipping tips, or jumping into the new IPOs (KING, BOX, etc) it raises some red flags.  Not saying it will happen soon but something you should definite think about or ask your financial advisor.

I jumped into trading because it can be very lucrative, but more so because of my fears.  I fear that I would one day be blindsided when I'm close to retirement and my 401k or IRA "investment"  loses 40-50%.  People say it will never happen to them until it does.  You can ask the millions in 1987, 2001, 2007 and many more before that.  For me I like to have a plan and not be caught off guard.  Being mentally stuck and hoping/wishing my stock will come back is a horrible horrible feeling.  We've all said this "when it gets back up to X I will sell or if it drops to Y I will sell", but never do.  Have a plan!   2013 was an amazing year for all 401k holders.  This is not a normal year!  The music will eventually stop.

I'm not saying the market is going to crash, I'm just saying have a plan and play defensively.  Here is a simple way of how you can protect yourself.  Plot a moving average on a long term chart either on a weekly or monthly basis.  Depending on your risk tolerance you can use a shorter intervals if you are risk adverse or those that can withstand bigger drawdown use something longer.  You can use intervals that may "fit" the chart better such as on this monthly chart I used 24 (2 year average).  As you can see it's not a perfect but its a simple plan and you can manage it once a month.  The moving average is the average price of the stock for X number of intervals (20 is 20 day average) and plotted as each day passes using the new closing price and replacing the old.  These charting tools are available through Yahoo Finance! and Google Finance.

Imagine if you exited the stock market when the S&P500 crossed below the blue line.  I would have saved many people thousands, even millions and a lot of heart ache.  All you have to do is adjust your exits once a month as the blue line changes.  Human emotions are always a factor.  So I suggest using STOPs on all your stocks and mutual funds (if you have mutual funds you should probably exit those because the fees are ridiculous anyways.  We can talk about it another time).  Stops are automatic entries that will exit your stock when it hits the price point.  With Charles Schwab they have a feature called Good till Cancel (GTC, typically last 60 days).  Example below.  This will ensure that you exit the stock.

L.E.T.H.A.L

1. Long Term Investor.  Being a long term investor is just a definition of time/horizon.  People make money by trading day by day and there are people making money trading year by year.  My generation is considered the lost decade.  If you started investing in your 401K in 2000 you would have a gain of 0% as of April 2013!  I started investing in my retirement fund in 2005 when I started working and it just started appreciating in 2013.  I was lucky enough to pay more attention to it and doing much better.

2. Excuses.  Excuses are the reason why we say I wish I did this, I wish I did that.  Ifs are the same thing.  How many times did you say it in 2000 and 2007?  The next crash will be the same. And yes, shoulda woulda coulda

3. Taxes.  These are retirement funds buying and selling in and out of stocks shouldn't be a concern.  It's better to have to owe than have carryover losses.  Owing means you've made money. Just don't withdraw until your age limit.  And many of you make much more than I do so I would consult a tax advisor.

4.  Hope. Hoping a stock will come back up is not a strategy/plan.  Hope will eat you alive.

Here is a story by a trader named William O'Neil.
It's the story of an old man and his turkey trap. There was an old man with a turkey trap that consisted of a box held up by a prop. Wild turkeys would follow a trail of corn under the box. When enough turkeys were inside, the old man would pull a string attached to the prop, thereby dropping the box over the turkeys inside. The goal was to trap as many turkeys as possible. One day he had 12 turkeys in the box. One wandered out, leaving 11 behind. "Gosh, I wish I had pulled the string when all twelve were there," said the old man. "I'll waft a minute and may be the other one will come back." But while he waited for the 12th turkey to return, two more walked out "I should have been satisfied with eleven," the old man said. As soon as I get one more back I'll pull the string." But the turkeys kept wandering out the old man couldn't give up the idea that some of the original number would return. With a single turkey left the old man said, "I'll waft until he walks out or another goes in, then I'll quit" The last turkey joined the others and the old man returned empty-handed

5. Act and be Accountable.  Any action you take you should be accountable.  Can't blame others for your actions.  Whether I'm right or wrong I'm making the decision.

6.  Laziness.  Don't get lazy.  This is a 10 minute task to do once a month!  And after the market does crash the music will eventually play again.  Don't be lazy, find new investments in the recovery.

Here is some additional reading that I think is worth noting.
http://www.businessinsider.com/seth-klarman-on-stocks-2014-3
http://www.zerohedge.com/news/2014-03-08/seth-klarman-born-bulls-bitcoin-truman-show-market

Hopefully this helps.

Alfred

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