I have never been long term in anything, except my marriage. (I should get some brownie points when my wife reads this), so it is hard for me to think like a long term investor.

What brings this to mind is the segment a minute ago on CNBC in which someone explained the logic of dollar cost averaging.  The segment explained the advantage of repeatedly buying a stock on the way down as long as everything seems the same.  This creates a lower overall cost per share albeit on a larger position.

Don’t you love CNBC?  What a great idea, except of course for two things. 

One - the current price of anything in free, competitive markets, whether it be stocks or futures, is not a mistake.  The current price represents the combined opinion of all of the market participants who are not just talking about what is happening (a la CNBC); they are risking their money based on their belief.  You can hear a phenomenal explanation of the accuracy of group opinion in the current WNYC Radio Lab podcast titled “Emergence”.*

Two - Dollar cost averaging is a more appealing name for what we call in futures “adding to a loser”.  Adding to a loser in short term trading just creates a bigger loser.  Adding to a loser may bail you out in a few problem trades, but, over time, it will only assure that your inevitable losing trades will be larger than they would otherwise be.  In point of fact, adding to a loser means that your worst trades will also be your biggest trades.

So, I am willing to give CNBC the benefit of the doubt and concede that it is possible that long term investors could benefit from buying stocks at various times and at various prices, but I am convinced that adding to a loser in short term futures trading, however it is described, is just another way of avoiding a short term loss in favor of a larger, longer term loss.

* When you check out Radio Lab for the podcast on “Emergence”, listen to their “War of the Worlds” podcast.  The War of the Worlds radio phenomena started by Orson Wells and the Mercury Theater of the Air in 1938 has been repeated to even greater effect over the years.

Wishing you success in your trading,  Jeff

Copyright © 2008 by Jeff Quinto

All rights reserved

As a longtime speculator (someone who risks losses for the possibility of considerable gains), I was unaware that those of us who attempt to profit from the price movement of the markets were the root cause of $147 a barrel, I mean, $128 a barrel oil.

I am writing after hearing a sound bite from today’s Democratic response to President Bush’s weekly radio address. The congresswoman who made the response from which the sound bite was excerpted said something to the effect that vile, selfish speculators were at fault for high oil prices.

I was taken by her vilification of speculators as it parallels much of what was said in 1932-1940 to place blame for the depression on greedy capitalists and opportunistic speculators.

I recently finished The Forgotten Man: A New History of the Great Depression by Amity Shales which makes the point that the length and the severity of the Great Depression was very likely exacerbated by placing blame for the ills in the economy and penalizing exactly the people who power our free enterprise economy.

I highly recommend the book. But, beware - the parallels to what was done and said in the thirties regarding speculators and business are being said, again today.

Have a great weekend - Jeff (writing from my bunker here in the Newport of the West)

Copyright © 2008 Jeff Quinto
All rights reserved
 

Linda from LA sent me The Dip by Seth Godin and told me that it was a “very small book with a big, important lesson”.  The small part is pretty clear as the book isn’t 100 pages.

After reading The Dip, I can attest to the book providing a gigantic lesson.

The “dip”, according to the book, is that time in learning any skill after the initial excitement of beginner’s luck when learning becomes tough. 

In the beginning, your efforts are rewarded (a la beginner’s luck) so that the return on your effort is great.  However, after this initial rapid learning phase comes the dip when you do not seem to be advancing in your learning, particularly, as compared to what you learned during the initial period.

As this relates to trading, the vast majority of traders never advance beyond the “dip”.  They get stuck in the dip and give up trading, never mastering the skill.

However, just like everything else in life, the rewards are great for those few who succeed. 

Godin makes the point that if you are unwilling or unable to work your way through the dip, you should quit and devote your energy to something that you are likely to be able to move through the dip and succeed.

As I said at the beginning, do not be put off by the size of the book.  Big things often come in small packages.

Wishing you success in your trading,  Jeff

Copyright © 2008 Jeff Quinto

All rights reserved

Last week, my wife and I visited Ken Gaus, my partner in Transformative Trading,  at his home in Rhode Island.

On Monday , we attended the first day of the Hall of Fame Tennis Tournament in Newport, Rhode Island.

The first match was between Rohan Bopanna from Bangalore, India (serving in the picture above) and Kevin Kim from the USA. 

As I watched these two professionals play, I could not help but think of the parallels between tennis and trading. 

In the tennis match, each player tried with all his skill and might to get the ball past his opponent who was trying with all his skill and might to make sure that he did the same.  Each serve and return attempt was the best the player could do.  Sometimes his best worked and sometimes it did not.

Just like trading, each player was giving his all in the clear understanding that a percentage of his best shots would result in points and a certain percentage would not.

Each player knew that he needed to stay focused and not dwell on past losing points or congratulate himself on recent winning points.  He needed to stay focused on the point at hand knowing that if he was able to consistently perform as he had practiced, he would be rewarded.

Trading is like that. 

You stay focused.  You keep doing what you know you should do and, as long as you stay at your best, you will be rewarded on average for your disciplined performance.

There is another comparison between professional tennis and trading. 

Imagine, yourself as a novice tennis player trying to keep up with either of these professionals on the tennis court.  I cannot speak for you, but I would have no chance of holding my own against these professionals.  If I was playing against them, the only good thing would be that the inevitable loss would be quick, if not painless.

In trading, you are competing with the best professional traders in the world, but in trading you do not have to be the very best in the tournament to win.  You just need to consistently do what you have planned; keeping your discipline and exploiting the opportunities presented to you and you will be a winner.

The day after tennis, we reverted to full-fledged tourist mode and visited two of the great seaside mansions of Newport. 

I feel a kinship to Newport as Lake Geneva, where I live, is sometimes called the Newport of the West.

The highlight of our tour of the mansions was visiting Cornelius Vanderbilt’s 70-room, 65,000 square foot “cottage”, The Breakers, pictured below. 

The scale of the cottage is hard to describe.  The dining room is 50 feet by 50 feet and the ceiling is 50 feet high. 

1) Whether I have a winning day or a losing day is governed, in large measure, on whether

Check out the drama aboard the USS Montana.

ussmontana.wmv 

Have a great Fourth of July!

Best regards,  Jeff

P.S. Thanks to Captain Scott in Hong Kong for forwarding this dramatic newsclip.