Lessons Learned in Nov 2019

I learned some painful lessons in November, 2019. But, then again, every lesson learned (when it comes to the Markets) is usually painful, so I suppose there's nothing unusual about that. And because I have only recently found my "niche" as an options swing-trader, I should probably just assume that I still have many painful lessons to come.

Let's talk about the positive take-aways from November first.

For the first time ever, I went a whole month without having any options contracts expire. That, for me, is a big, big deal. September and October were horrible in that regard, with 5 expired trades in September, and 4 in October. Lesson learned: Pick expiration dates that are at least a month out, and choose strike prices that are deep in the money to ensure they maintain some intrinsic value and suffer less time-decay.

Speaking of expiration dates, I also learned a lesson that was the flip-side of the one above, which is: Don't pick an expiration date so far in the future that there isn't a market for the trade. I made the astonishingly dumb mistake of trading an option for which I turned out to be the only one interested and/or trading. If there's no market for it, you can't sell it, no matter how "profitable" it looks. I bought calls at $1.19, hoping the price would rise. And it did! It's now priced at around $1.60... but it's still showing a loss, because of the initial spread (duh!) and the fact that no one is interested in buying it! (double-duh!) Luckily, it wasn't a huge trade, but it was (and still is) painful, all the same.

After a lackluster and disappointing October, November gave me nice gains. From 1 November to 30 November, I banked almost 700% in profits. Absolutely no complaints there! (My portfolio suffered a mild retracement the first week of December, but that's another story.)

In October, I made 43 trades, with 28 of them turning into gainers, and 15 of them losers. As always, I worked very hard at minimizing losing trades and maximizing winning trades but, honestly, I feel I could have done a much better job of it. I will have to keep reminding myself going forward that losses are losses, whether they are "realized" or not, and so it is better to close them out quickly and efficiently while the losses are still manageable. Bad news doesn't get better with age.

My best trades in November:

Bought Target ($TGT) 20Dec 112 Calls for $4.97 on 11/18 and sold them on 11/20 for $10.05 for 102.2% profit. Bought more at $4.14 on 11/19 and sold those for the same $10.05 for 142.8% profit.

Bought BJ's Wholesale ($BJ) 20Dec 22.5 Puts in two purchases on 11/20 for $0.33 and $0.35 and sold them all on 11/21 for $0.82 for a 148.5% and 134.3% profit respectively.

Bought Dollar Tree ($DLTR) 20Dec 108 Puts on 11/21 for $4.60 and 11/25 for $2.60, and then sold them all off 11/26 for $12.33 for a 168.0% and 374% profit respectively.

Bought Best Buy ($BBY) 20Dec $72.5 Calls at $3.95 on 11/21 and $4.23 on 11/25 and sold them on 11/26 for $6.95 for 75.9% and 77.1% profit respectively.

On the downside, I had several trades that were carried over into December which have either shown a significant loss ($DLTR -60%, $UBER -28%, and $GTT -6%), or are still pending ($NLNK, $DELL, $KEYS, $URBN, and $VEEV).

On the $DLTR losing trade, I was simply guilty of "going back to the well" one time too many. As to the UBER and GTT trades, I believe I was guilty of paying too much attention to the short term charts without back-checking my assumptions against the longer-term charts. I definitely held the losing $DLTR trade too long.

I did better in November than in October at cutting losses while they were still in the 10-20% range. Remember - due to the "spread," most options trades start out with an instant 10-20% loss from the moment you make the initial buy. That's a significant downside to options trading. The upside, of course, is the leverage that can bring you profits of 100-300% in a matter of days.

All in all, a good month.  I can only hope I take these lessons seriously and have as good a December.

Jesse Livermore's Trading Advice

Jesse Lauriston Livermore

Livermore's trades are legendary and have led to his being regarded as arguably, one of the greatest traders who ever lived. He inexplicably took a massive short position the day before the San Francisco earthquake on April 18 1906. By selling Union Pacific stock, he amassed $250,000 when much of San Francisco was destroyed. These intuitive decisions that almost always resulted in huge profit, were a mystery to Livermore as much as anybody else. All he knew was, that when he got a gut feeling, he was wise to follow it.   

In the crash of 1907 Livermore had huge short positions that could have netted him immense profits. He was, however, requested by J. P. Morgan, who had bailed out the entire New York Stock Exchange during the crash, to refrain from further short selling in the interests of the national economy. Livermore agreed and instead, profited to the tune of $3 million by buying into the rebound. 

Possibly his greatest known trade was during the stock market crash of 1929. He had amassed huge short positions before the market tumbled, using more than 100 stockbrokers to hide what he was doing. When the crash came he netted approximately $100 million and, following a series of newspaper articles declaring him the Great Bear of Wall Street, was blamed as personally responsible for the crash by bankrupt members of the public.

His advice:

"All through time, people have basically acted and reacted the same way in the market as a result of: greed, fear, ignorance, and hope. That is why the numerical formations and patterns recur on a constant basis."

"The game of speculation is the most uniformly fascinating game in the world. But it is not a game for the stupid, the mentally lazy, the person of inferior emotional balance, or the get-rich-quick adventurer. They will die poor."

"Wall Street never changes. The pockets change, the suckers change, the stocks change, but Wall Street never changes, because human nature never changes."

"Stocks are never too high to buy or too low to sell."

"Instead of hoping, he must fear; instead of fearing he must hope. He must fear that his loss will develop into a much bigger loss, and hope that his profit may become a big profit."


"What beat me was not having brains enough to stick to my own game."

"The Wall Street fool... thinks he must trade all the time. The desire for constant action irrespective of underlying conditions is responsible for many losses in Wall Street among the professionals who feel that they must take home some money every day, as though they were working for a regular wage."

"It never was my thinking that made me the big money for me. It always was my sitting."

"It is almost as important to know what not to do as to know what should be done."

"A man must believe in himself and his judgment if he expects to make a living at this game. That’s why I don’t believe in tips."

"Without faith in his own judgment no man can go very far in this game."

"A man can excuse his mistakes only by capitalizing them to his subsequent profit."

"The game taught me the game. And it didn’t spare the rod while teaching."

"If I hadn’t made money some of the time I might have acquired market wisdom quicker."

"There is nothing like losing all you have in the world for teaching you what not to do. And when you know what not to do in order not to lose money, you begin to learn what to do in order to win."

"A man will risk half his fortune in the stock market with less reflection than he devotes to the selection of a medium-priced automobile."

"I was convinced whatever was wrong was wrong with me and not with the market."

"I never argue with the tape. Getting sore at the market does not get you anywhere."

"A loss never bothers me after I take it. I forget it overnight. But being wrong – not taking the loss, that is what does the damage to the pocketbook and to the soul."

 

Bernard Baruch - "Dr. Facts"

Bernard Baruch was known as "Dr. Facts." Just out of college, he lost $8000 of his father's money, and later on, another $6000 in the stock market. Determined to learn from his mistakes, he studied the market intently, and in 1897 turned 100 shares of American Sugar Refining into $60,000. After some large gains and losses, in 1901, the year President McKinley was shot, he turned the market uncertainty into a short sale that netted him $700,000 in profits. In the great crash of 1929, Baruch earned over $615,000. His estate, at his death in 1965, was worth over $14 million, even after having given away over $20 million.

"When good news about the market hits the front page of the New York Times, sell. "

"The main purpose of the stock market is to make fools of as many men as possible. "

"I made my money by selling too soon. "

"Nobody ever lost money taking a profit. "

"There is something about inside information which seems to paralyse a man's reasoning powers. "

"If a speculator is correct half of the time, he is hitting a good average. Even being right 3 or 4 times out of 10 should yield a person a fortune if he has the sense to cut his losses quickly on the ventures where he is wrong. "

"If all you have is a hammer, everything looks like a nail. "

"If you get all the facts, your judgment can be right; if you don't get all the facts, it can't be right. "

"In the last analysis, our only freedom is the freedom to discipline ourselves. "

"Millions saw the apple fall, but Newton was the one who asked why."

"Most of the successful people I've known are the ones who do more listening than talking. "

"Never follow the crowd. "

"Never pay the slightest attention to what a company president ever says about his stock. "

"A speculator is a man who observes the future, and acts before it occurs. "

"Consider and reconsider the facts, and your opinions. Stubbornness as to opinions - cockiness -must be entirely eliminated."

"Every man has a right to his opinion, but no man has a right to be wrong in his facts. "

"Do not blame anybody for your mistakes and failures. "

"Don't try to buy at the bottom and sell at the top. It can't be done except by liars. "

"During my eighty-seven years I have witnessed a whole succession of technological revolutions. But none of them has done away with the need for character in the individual or the ability to think. "

"Only as you do know yourself can your brain serve you as a sharp and efficient tool. Know your own failings, passions, and prejudices so you can separate them from what you see. "

"Two things are bad for the heart - running up stairs and running down people. "

"Whatever failures I have known, whatever errors I have committed, whatever follies I have witnessed in private and public life have been the consequence of action without thought. "

Cramer Quotes

"Lesson number one: When it comes to buying or selling a stock, don't tell me where you bought it, tell me where it's going. That's all that matters."

"Lesson number two: Always use limit orders. Only amateurs and fools enter market orders... Never use market orders, ever!"

"Keep up on your stocks... The problem isn't the time. It's the desire to do the work. You have to ask yourself whether you like this stuff enough to stay on top of it."

"Ignorance - and the buy and hold pattern it instills - is not bliss."

"The biggest rewards come from identifying stocks of unknown companies at the beginning of their journey, whe they might be worth no more than a hundred million dollars and are undiscovered, unknown, unloved, and most important, uncovered by Wall Street."

"There are no asterisks in this game. You can't say, Well, I would have had a great year if it weren't for WorldCom.. or Enron."

"The key to balance sheet analysis is to figure out what kind of interest the company has to pay each year on its equivalent of a mortgage it might have taken out."

"There are always unknowable facts in the investment process. Always. But we can;t let them undermine judgment to the point that judgments can't be made."

"I am trying to get you to buy stocks that go up quickly, in a time frame that matters to you now, and get you to avoid stocks that go down rapidly, that could wipe you out.... I don't care how we catch the moves... I just want us to catch the darned moves."

"This [is] the best house in a bad neighborhood thesis: No company, no matter how good, can truly transcend its sector."

"You must never forget that these are [just] pieces of paper. Pieces of paper can go down the drain as quickly as toilet paper if they are the wrong ones, or we get into the wrong market."

"Investing [is] a much more lonely and difficult process than most people think. You have to love stocks when people hate them, you have to leave stocks when people love them."

"I know human behavior. I know what happens in real life when you ignore the playbook, when you stick with the so-called secular growth stocks while the elephants are dancing to the cyclical tune. What happens is you panic. You sell at the worst time, the bottom. You bail."

"The stock market is not a science. It is just a humbling collection of pricing decisions involving the supply of equities and a level of demand mitigated by greed and fear."

"On Wall Street, we care about growth, growth, and more growth... Nothing trumps growth."

"While I accept the simple equation that E x M = P, I refuse to be bounded by it."

"The M anticipates the E."

"If you are going to buy stock in a business, you must find out what metrics [in that sector] are important."

"The market cares more about future growth than it does about past growth."

"That's right, all the way down [the analysts] kept reinterating their buys, saying how cheap the stock is, trapping you in [it] for the horrible slide. But at the bottom, they cut their numbers... and take the stock to a hold or a sell. That's precisely the moment I cover my shorts or begin to buy. How do I know when to get off? I sell it when all of the analysts love it again."

"If they [big market particpants] even smell [Fed interest] rate hikes, they are going to sell whole groups because they anticipate decline in the economy... when these elephants move, they move stocks with them. To ignore their activities - especially when they are so easily predicted and anticipated - is a tremendous waste of money for all investors."

"A chart is never enough to buy a stock from. Never. Don't be conned into believing that looking at a chart can suffice for homework; it simply can't."

"I am always on the hunt for damaged stocks where the merchandise underneath isn;t that badly damaged... Not damaged companies, but damaged stock prices."

"You have to be willing to change your mind and your direction. Nowhere in the commandments of investing is it written, One shall not change one's mind even if it may be wrong."

"The reason I failed so dramatically when I first bought stocks is that I, like everyone else who has ever bought a stock... foolishly believed in [these] three rules: (1) Buy and hold because that's how you make the most money, (2) trading is always wrong, owning is always right, and (3) Speculation is the height of evil.

"If you chose to never sell becasue, say, you are afraid of the tax man, or because you despise paying commissions, you need to get your head examined."

"Approach it like a job. Investing can be a hobby, but trading can't."

"The saving grace of stocks is that they can only go to zero. Don't laugh. I've owned some stocks that were so bad that it was a blessing that they stopped at zero."

"They irrationally fear the losses that could come from the single-digit stocks that don't make it; they act as if stocks can go to minus something."

"I don't care about the past, I don't care about where you bought the stock, the only thing I care about with a stock is what's going to happen next. Most people don't grasp this simple concept."

"We can anticipate what the crowd wants, the chattering classes, those people who can't control themselves because they think that every idea is the next Microsft or Amgen... My method expploits the crowd's inability to distinguish a 10x idea from a lot of ideas that just fizzle and gets you in and out before the fizzling starts.""

"Speculating, particularly when you are younger, is not only prudent, it is essential."

"You have to be prepared to love the stocks at one moment and leave them unmercifully the next. You may have to flip on a dime. Flexibility is everything when you trade these kinds of [red hot] names."

"Why is the investing intelligensia so unwilling to embrace a Game Breaker strategy? I think it is because such a strategy involves two decisions, a buy and a sell. The traditional... approach to investing, which I scorn, simply doesn't consider any purchase of a stock that requires a later sell as part of the investment process."

"I am neither a bear nor a bull, I am an agnostic opportunist. I want to make money short- and long-term. I want to find good situations and exploit them. "

"I got in the business because Lynch said you didn't have to go to Harvard Business School to be in the business, that you could pick stocks. Lynch gave me hope that amateurs could turn pro. "

"I think there are a thousand stocks out there that could make you rich, totally independent of what you do for a living. "

"The people who are buying stocks just because they're going up, and they don't know what the company does, deserve to lose money. "

"I'm not smarter than the market, but I can recognize a good tape and a bad tape. I recognize when it's right and when it's wrong and that's what my strength is. "

"It's the most objective industry in the world. If your numbers stink, you're out. If your numbers are good, you get more money. It's... Darwinian, it's beautiful, it's brutal, it works. "

"I think that stocks have been this tremendous, tremendous equalizer for people in this country. Guys who can't make a lot of money at their jobs have been able to make a lot of money in the stock market. "

"My advantage is that I'm very good at interpreting the information. "

"You'll do as well as most professionals. Most professionals don't beat the market. Let's not over-rate my industry."

"Peter Lynch made me a lot of money. So I like him. I had my IRA with him when I was making $125 a week as a cub reporter. He made me more money than I made in my job."

"We are all wrong so often that it amazes me that we can have any conviction at all over the direction of things to come. But we must. "

Cramer's 10 Commandments of Trading

#1. Never turn a trade into an investment.

#2. You first loss is your best loss.

#3. It's okay to take a loss when you already have one.

#4. Never turn a trading gain into an investment loss.

#5. Tips are for waiters.

#6. You don't have a profit until you sell.

#7. Control losses; Winners take care of themselves.

#8. Don't fear missing anything.

#9. Don't trade headlines.

#10. Don't trade flow.

Cramer's 25 Investment Rules

1. Bulls and bears make money; pigs get slaughtered.

2. It's okay to pay taxes.

3. Don't buy all at once; arrogance is a sin.

4. Look for broken stocks, not broken companies.

5. Diversification is the only free lunch.

6. Buy and homework; not buy and hold.

7. No one ever made a dime by panicking.

8. Own the best of breed; it is worth it.

9. He who defends everything, defends nothing. Discipline trumps conviction.

10. The fundamentals must be good in takeovers.

11. Don't own too many stocks.

12. Cash and sitting on the sidelines are fine alternatives.

13. No woulda shoulda coulda.

14. Expect corrections; don't be afraid of them.

15. Don't forget bonds.

16. Never subsidize losers with winners.

17. Hope is not part of the equation; this is not a sporting event - this is money.

18. Be flexible.

19. When high-level people quit a company, something is wrong.

20. Patience is a virtue; giving up on value is a sin.

21. Just because someone says it on TV doesn't make it so.

22. Always wait thirty days after an earnings preannouncement before you buy.

23. Never underestimate the Wall Street promotion machine.

24. Be able to explain your stock picks to someone else.

25. There is always a bull market somewhere.

Farley's 20 Golden Rules for Traders

1. Forget the news, remember the chart.

2. Buy the first pullback from a new high. Sell the first pullback from a new low.

3. Buy at support; sell at resistance.

4. Short rallies, not sell-offs.

5. Don't buy up into a major moving average, or sell down into one. (see #3)

6. Don't chase momentum if you can't find the exit.

7. Exhaustion gaps get filled. Breakaway and continuation gaps don't.

8. Trends test the point of last support or resistance.

9. Trade with the tick, not against it.

10. If you have to look, it isn't there.

11. Sell the second high, buy the second low.

12. The trend is your friend in the last hour.

13. Avoid the open; they see you coming, sucker.

14. 1 - 2 - 3 - Drop - Up. Look for downtrends to reverse after a top, two lower highs, and a double bottom.

15. Bulls live above the 200 day MA, bears live below.

16. Price has memory.

17. Big volume kills moves.

18. Trends never turn on a dime. The first dip always finds buyers, and the first sharp rise always finds sellers.

19. Bottoms take longer to form than tops.

20. Beat the crowd in and out the door.