A Trading Style Not Easily Executed

Readers of this blog understand my trading style pretty well, I’m not one to mix it up a lot.  I know great traders who have a lot of tricks in their bag, all purpose players let’s say.  I am not one of those, I’m never going to win the triple crown of trading (baseball reference).  I’m the doubles hitter who will put 20-30 over the wall each season with a good on base percentage and batting average.  I’m never going to smack 50 over the fence, I’m not Ichiro going for .400, and I won’t steal 50 bases.  My trading philosophy and strategy work well for me and I try as hard as humanly possible to stick with them, when I deviate I get burned, and I have the statistics to back that up.  You can find more on my thoughts about the strategy I run here.

One key tenet of my philosophy is that I am never smarter than the market.  Not everyone bows down to this way of thinking, and for good reason, some people really are smarter than the market.  I’m serious, some people, the deep value guys out there, and even those willing to be very patient with growth stocks that aren’t being loved by the market (yet) can be extremely successful if they execute their strategy and have a risk management plan in place.  Now I’ll readily admit that I still don’t understand how one can have a risk management plan that makes any sense when they believe they are smarter than the market, hopefully someone here can enlighten me.  That’s not a joke, please do.

There’s nothing wrong with believing you are smarter than the market, if you really are.  My belief that the market is inefficient is unshakable, but there is more than one way to take advantage of that.  I choose to swing with the market during the meat of momentum moves.  Other’s choose to take advantage of this inefficiency by buying stocks that have been beaten up for a while and fundamentally should be trading at higher prices given their relationship to historical norms and other assets in the same category.

The recent example I want to mention is Flotek Industries $FTK.

Here you can see a stock that in no way shape or form would I ever touch on the long side until the past few weeks, and even then, I’m just not interested because of the fundamentals and low price.  This stock has been dead for almost two years, just sitting dormant at the bottom of a very very long term downtrend that goes back to mid ’07.

And yet some traders like @The_Real_Fly have been long this stock for quite some time over the past year.  They languished in the position seeing good runs in other stocks while their position went nowhere.  The stock almost broke 1$ for god sake, it was a dog.

But they believed there was value to be unlocked in this stock, and eventually, they were right.  The stock has exploded from 1 to 3.75 in less than 5 months.  Let’s say based on the chart that your average cost basis on the position was about 1.50, a pretty conservative estimation, you’ve more than doubled your position.

Now, I have traded a few positions over the past few years that have more than doubled while on my books.  But partial profits were taken along the way, I’m not quite sure, I would have to go back and look.  But I don’t play for those types of moves.

This strategy of sitting tight and waiting for capital to flow into your position which you believe is undervalued by the market is extremely hard to execute.  Holders of FTK must have second guessed themselves a hundred times over the past few years while the stock languished.  How many times do you think they wondered if they were just plain wrong?

Many holders in financial stocks must feel this way right now.  And no one knows whether or not they will be proven right, it’s all about capital flows, supply and demand.  An asset can remain priced at a certain level for quite some time regardless of its fundamentals, precisely because the market is irrational.  We don’t all buy and sell slowly as the fundamentals change on a daily basis.  We buy and sell all at once as we are hit with the news in one day or one week.  Supply and demand.

I don’t trade this strategy and I never will, although I do have a few positions that I watch which I have extreme fundamental conviction in and are not treated as well by the market as I believe they should be.  I wait until the market starts to realize it has mispriced the stock to act, not before.  To each his own, and congratulations to the guys who stuck this one out and gave a big middle finger to the rest of us.

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