Matthew Kerkhoff, options expert and editor of Dow Theory Letters, continues his 14-part educational...
Lessons from Twitter
05/01/2015 6:00 am EST
By citing Tuesday’s emotional news driven event with this social media company as an example, Jim Farrish, on Jim’s Notes, emphasizes the importance of not letting emotions take control of a trader’s decisions and of not letting the trading negatives outweigh the positives.
The market never stops teaching us lessons about how to manage money and the emotions that go with the process. On Tuesday, Twitter’s (TWTR) earnings were prematurely posted on their Web site before the market closed causing quite a stir and reaction from the investment community. The selling was quick as the tweets went out and the news channels jumped on how bad the earnings were. They even halted trading for roughly fifteen minutes. It was just another day on Wall Street and another way to destroy 25% of the value of a publicly traded company. With no market markers to level the playing field the computer trading had a field day with the bid. As an investor who held Twitter stock…what was the take away?
I am a proponent of managing stops to deal with my emotions first and foremost, but also as a way of taking away the emotional decision making. I removed the stops as this unfolded not wanting to get the worst possible execution before I understood what was going on. Now two days later, on Thursday, I still own the stock, I am not convinced I know what is going on, I have my biased opinions, but I do know what I believe about the stock. Thus, the reason I still own it. The long-term outlook for the company has not changed, the poor execution by the CEO to carry out the mission was the weakest link in the chain. He failed to manage the markets expectations for the company relative to revenue and earnings growth, failed to put the company in a position of a net profit annually, and thus the missed revenue and net losses hit the stock hard. It is easy for me to say that because I am not there on a day-to-day basis, but he does get paid a lot of money to do just that; manage expectations and the company growth.
That aside, the company will survive and, if anything, it is a trading opportunity going forward. But, that is not the point of this note/posting. The point is more to the issue of how we manage ourselves and our money. I have been doing this a very long time and I still make decisions that in hindsight seem stupid. Why not just leave the stop on and let it execute at $45 or whatever price the computers would have generated to me? For the simple reason that over all those years of trading, the probability of doing better holding the stock than dumping it has played out in my favor more than two-thirds of the time. Yes, there is one-third where it doesn’t and the jury is still out on this one.
As a money manager (mine and others) I keep notes, I track what worked and didn’t work, I tweak and learn from every trade; good and bad, short- and long-term holding. I have thirty years of scars mentally and financially of dealing with stocks like Twitter. In the end, I have to make decisions about my money and the risk I expose my portfolio to daily. All that said, it is learning to look at the total body of work and not on specific painful experience. Raising four daughters has taught me that lesson more than anything in life. If, at the end of the day, my current stock holdings totaled $4,808 more than I had invested, isn’t that what matters? Am I making money on the entire body of work not allowing one position to ruin my day, my joy, my focus or my life. Stop beating yourself up over losing money in positions…it will happen and happen again. Learn how to manage your money from a view of your total portfolio and keep looking forward. When I played baseball, if I got on base 50% of the time that I went to the plate, it put me at the top of the players at all the levels I played through college. That meant a hit one-out-three-times and generating walks or beating the throw when an infielder was lazy. If managing my stops aggressively during emotional news driven events nets a winner two-out-of-three times, I like the odds of being successful.
Bottom line…Twitter wasn’t a mistake, the choice I made wasn’t a mistake and if it happened again today with Intel or Google I would do the same thing. Why, because it works. When it stops working in my favor, I will change my strategy. I waited two days to write this post because I did what many of you do after something like that happens…I micro analyzed the decision. After hours of wasted time the conclusion was the same…go with what brought you to the dance. Don’t allow fear to paralyze you in the decision process next time because of what happened last time. Again, going back to baseball, if I struck out my first at bat in a game and I let that bother me…I would have likely gone zero-for-four in the game and not achieved the goal of being on base 50% of the time. Put it behind you and keep going forward. The next trade I make will be the best one and that is what I believe every time I hit the enter key to send the trade to that great computer in the cloud to handle my purchase. Trading money in emotional and unstable markets is challenging enough…don’t let the negatives outweigh the positives of this process.
By Jim Farrish, Founder & CIO, Jim’s Notes
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