Archive for October, 2006

The following is an entry into a writing contest I am entering entitled "I Won!"  While it is not necessary that I mention the exact words of the theme in my story, it should be obvious to readers, if only subtly.

I looked down to check the cards on the table and mentally double-checked to make sure that the cards in my hand were strong.  I reached down to my pile of chips and raised the bet.  My opponent and I were the final two competitors in the tournament, and I couldn’t afford to do anything silly.  I glanced back at my opponent, but he wasn’t looking at me.  He was moving his entire stack of chips towards the center of the table.  "I’m all in," he said, looking back at me.  I involuntarily took a deep, sharp breath.  Now what?

I don’t consider myself particularly skilled at poker. For years I have understood the order of the strength of the hands and that the better the hand, the smaller the odds were that you would get them. That part of the game was easy for me. However, it was the other part of the game, the strategy of betting, that was foreign. The ability to determine how much to bet and how to read other players’ body language was a different language. Learning this new language meant I’d have to control my emotions of fear and greed.

The first time I had ever played Texas Hold ‘Em poker was at my company picnic a year earlier. I had come in fifth out of nine players, a respectable position for somebody who had never played before. I really enjoyed it and was looking forward to playing again the next year. In order to win, however, I had to construct a plan.

In the intervening year, I read some articles by stock traders who talked about risk management when it came to trading and poker. I watched TV poker tournaments and made mental notes about what I would do similar situations. I traded stocks on the market, practicing strict risk management with the intention of learning how to control my emotions. With these tools in hand, I went to the picnic with the hope of breaking even.

I paid my entry fee and sat down at the table. The cards were dealt and I looked at my hand. Not bad, I thought. I raised the bet and stayed in the game. In Hold ‘Em, five cards are eventually flipped onto the table and the object is to make the best hand possible with the common ones on the table with the hidden two in your hand. After each draw, players have the option of raising the bet or dropping out. After four cards were dealt on the table, I had a pretty good hand, a straight (a run of five cards of unmatched suits). “Great!” I thought. I had a strong hand on the first round. I raised again and stayed in. Unfortunately, the player on my left, my co-worker, had an even better hand. After the first round I was down 20% of my chips. Hmm, not good.

I quickly rethought my strategy, trying to evaluate where I went wrong. I went through my mental checklist. Had I played a good hand? Yes. Had I bet wisely? Yes – even though I had a good hand I made sure that if I lost it would not wipe me out. Did I still have a plan to follow? Yes. I still had 80% of the chips I started with and my strategy was solid. I knew that sometimes runs of bad luck happen. The key is to minimize your losses when you are wrong so you can stay at the table.

I stuck to my plan and I managed win a few hands. I had recovered enough to get back to third or fourth place. By consistently sticking to my strategy I had managed to outlive six other players. About an hour and a half after we started, I decided to take a chance. As luck would have it, I drew a flush. It was starting to get late and I wanted to leave. I decided that I was going to bet everything. A flush is a strong hand, I figured that if I were going to lose, I was going to lose to an even better hand and I could live with that. I went all in, and to my surprise so did somebody else. Not so surprising, I won the hand and I catapulted into second position. At this point, I knew that I was in a position to finish in third place and get my money back from the entry fee.

I continued to play the game and followed my original plan but I also played a bit more aggressively. One by one, the other players started dropping out. First there were five, then four, then three. I had hit my goal, the break-even point. Shortly thereafter, we were down to two.

I couldn’t believe my good fortune. Both me and my opponent had a big stack of chips. It was hard to tell who was winning. We played a few hands and alternated victories, most of the time with one of us folding quickly. On the next hand, I stayed in. I looked down to check the cards on the table and mentally double-checked to make sure that the cards in my hand were strong.  I reached down to my pile of chips and raised the bet.  I glanced back at my opponent, but he wasn’t looking at me.  He was moving his entire stack of chips towards the center of the table.  "I’m all in," he said, looking back at me.  I involuntarily took a deep, sharp breath.  Now what?

The cards in my hand, combined with the ones on the table, were a straight. This was the same hand that I had lost with in the very first round. I forced myself to focus. I guessed that I had more chips before the round started but if I folded, he would win the pot and hold a slight edge in chips. I mentally rehearsed what I learned during the year: in poker, at the beginning you need a strong hand when there are lots of players. Near the end, when there are fewer, your hand does not need to be as strong. I went over the checklist again: I had a strong hand and there were only two players left in the game. According to the plan the odds were in my favour.

“I’m all in, too.” I pushed forward my entire stack of chips. We both revealed our cards. When he turned over his, all he had was three of a kind. I turned mine over and revealed the straight. His face turned a little pale and I knew that the odds were on my side. The dealer turned over the fifth and final card, it didn’t match his and the game was mine. I won the poker tournament in my second time I had ever played!

My opponent and I shook hands, and I was beaming. The plan worked: play the hands you can win, watch your bet size, keep your emotions in check and stick to the plan. The question now is this: will I be able to retain my title next year?

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Today, on Yahoo Finance, I read the headline that GDP growth has slowed to 1.6%, the lowest reading in three years.  In response to the report, stocks sold off en masse.  I took a look at Yahoo’s intraday chartof the Nasdaq , it took a huge hit.

In my opinion, this is great news for the market, both right now and for the future.  Slower economic growth gives the Federal Reserve another reason to not raise rates.  Indeed, it might be a reason to lower them in the new year.  If investors are running around scared it gives me a chance to buy stocks a low prices.

Secondly, this massive selloff is a major over-reaction because of my first point.  Now is a good time to buy stocks because the weak hands have dumped them.  The smart hands can now pick them up.  When the market over-reacts to news you can usually be sure that it will move in the opposite direction for the next little while.  Slow growth is good news for the markets – lower interest rates, lower energy costs and lower inflation rates.  The only thing that sucks about it is that we first have to get through the soft period.

The market certainly doesn’t foresee hard economic times ahead, they are at new 52-week highs.  It really seems like the weak hands are getting shaken out here.

On the other hand, we’ve been straight up for three months.  Maybe this is the beginning of the end.

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I was reading on another blog a trader who was going to use 0.5R as his new stop, while 1R would be a stop loss.  I asked that if 0.5R was their new exit point, wouldn’t that make it their new R? 

The answer is no, and here’s how I see it: 1R is the maximum amount you will lose.  I set my stops at 8% below my purchase price, so when I buy I also enter in a limit order to sell at 8% below.  This is so that if the market moves quickly against me I can get out before it’s too late.  But, if the market kind of meanders directionless, maybe drifting up before drifting down, I will get out at a 4% loss.

The following qutoe is from a book:

“If the market does not prove the position correct, it is still possible the market has not proven the position wrong. If you wait until the market proves the position wrong, you are wasting time, money and effort in continuing to hope it is correct when it isn’t.”

Good trades seldom move too far against us.  I bought Psychiatric Solutions in late September and I finally sold it today at a 6% loss.  Five days after I bought it, it made a big upmove and I was up 6% but it started pulling back.  It still hadn’t hit my stop loss but in a month it had gone no where while the market is making new highs.  While waiting to be proven wrong (ie, my 1R loss) I am wasting time.  So, today I decided that enough was enough and I decided to sell it.  I took the money and bought Celgene (CELG) on a gap move break-out to the upside. 

I can’t wait for PSYS to continue sucking while other stocks look solid.  I have limited resources so only the best stocks get them.

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I was driving home from a football game today and I heard an advertisement on the radio about a stock trading system that teaches people how to trade by going for 1% gains every two weeks.  That doesn’t sound like much but compounded over a year that’s nearly 30% growth.  Not bad considering that the historical stock market average is 9% growth.  That’s over triple the return.

I actually know a little bit about this trading methodology but I am skeptical that this would actually work.  Briefly, a trading system needs 6 main components:

  1. Setups
  2. Entries
  3. Exits – knowing when to take losses
  4. Exits – knowing when to take profits
  5. Opportunity and cost factors
  6. Position sizing

I’m quite certain this trading system has point 1 well-covered.  There’s a definite pattern of stocks to look for.  But Point 5 would be equally important here.  Trading costs money.  If you open up a $10,000 account and retail trades cost $10 per trade, then a 1% gain is $80 after commisions.  It’s also difficult to guarantee a 1% gain every two weeks because the market won’t always give it to you.

This ties in to point 6 – it is crazy to put your entire position into 1 stock if all you hope for is a 1% gain.  Stocks can jostle that much in a single day (trust me, I know).  Basically, here’s my problem with this system as advertised:

    • It breaks the rule of letting your profits run by prematurely taking profits.
    • It requires a lot of trading if you’re going to consistently exit at 1%.  In order to properly diversify you’d have to have a lot of positions since a lot of them will move against you, and to balance all of those out you will need many winners.  This means you’ll need a lot of trades.

Trading is a very difficult business.  Systems that promise you can be successful at it by doing it a few minutes a day are simply incorrect.  You can’t become a great pianist by practicing a few minutes a day and you cannot become a great trader by doing a few minutes of research each day.

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As we all know, Google bought YouTube a couple of weeks ago for a huge amount of money.  The question is whether or not Google paid too much.

Personally, I don’t think so.  YouTube is the number 1 video sharing service on the internet.  Google Video is number 3.  I don’t know who number 2 is, but YouTube had over triple the amount of traffic Google Video had.  Combining the number 1 and number 3 video sharing sites puts a large gap between the new number 1 and number 2.

Social networking sites are hugely popular and YouTube is a social networking site.  In 2004 (?) NewsCorp bought MySpace, and the site has tripled in value since then.  NewsCorp managed to acquire MySpace at an absolute steal.  MySpace is definitely a social networking site and people like to talk to each other, witness the popularity of blogs.  Nobody reads my blog, of course, but I still like to write stuff.  Google has struggled to get a popular social networking site up and running and the acquistion of YouTube gets them brand recognition.

I think that this acquisition is very strategic.  Eventually, I expect GooTube to work out some deals to show copyrighted material online.  Apple has worked out deals with the music industry, I expect that GooTube will work out deals with the television and movie industry.  I wonder what would happen if Apple and Google ever got together?  My first bet is that GooTube will offer TV shows or movies on their site, either for a paid subscription or, if you’re willing to put up with some advertising, for free.

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I saw an interview with Donald Trump on the Donny Deutsch show yesterday.  I didn’t watch the whole thing, but it seems like the more I see of Trump, the less I like him.

When the Apprentice first came on, I really liked the show and I liked Trump and his associates.  I thought the same thing after the second season.  The third season was okay but by the fourth things were starting to get kind of stale.  It was the same show over and over.  I think this was the season that coincided with Martha Stewart’s show.  I didn’t even really watch the fifth season because I found it was getting boring (I loved Survivor when it started but I don’t watch anymore because they are all the same).

What I don’t like about Donald Trump is that he seems to be a little arrogant.  It’s not simply well-placed confidence.  For example, when Martha Stewart criticized him for firing his associate Carolyn Kepcher, he flipped it around and said she was a sore loser that her show failed while his crushed hers in the ratings.  It seems like he missed the point of her statement.  He states that she was upset about her show failing so she disguised her sour grapes into a criticism about Trump.  Did Trump ever stop to think that maybe she was criticizing Trump’s behaviour and that her show failing and his succeeding was not what she was going for?  Martha Stewart is successful with or without the Apprentice (as is Trump), she doesn’t seem like the one to hold grudges, though Trump certainly does.

I also think Stewart’s original criticism in Feb 2006 is valid.  She claimed that the plan was to have her fire Trump on the air and have her version of the Apprentice on the air.  Instead, Trump insisted on having both.  "Fire me?" says Trump, "why would they fire me when my show was number 1 and hers sucked?"  Why would they do that?  It’s obvious: it was a humorous play on Trump’s catch-phrase that a new Apprentice was in town and was designed to market Stewart’s show.  The new Apprentice fires the old Apprentice, the old Apprentice gets his come-uppance.  I doubt that the producers planned on having Trump off the air forever.  And, having two Apprentices on the air does tire the viewers, it’s the same show back-to-back.  This is not football, it’s reality TV.  You can’t keep showing the same thing over and over and not expect the viewers to get bored.

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The last couple of weeks, I have been playing badminton down at the gym during their scheduled time for badminton.  So, rather than playing against my friends I have been playing against the locals.  These players are people that have been playing for a while so they are significantly better than my friends.

Myself and another friend played last week a few singles games then we teamed up in doubles against the locals.  We got killed.  It wasn’t even close.  Actually, it wasn’t that bad but we were never actually in the game.

Then, this week, I went again by myself and played some singles games against the locals.  I played three different guys and they were each better than me.  For one thing, they informed me in singles that on the serve, the serve goes all the way to the back of the court, not the inside line in singles.  That was news to me, I thought it was inside squares on the serve and to the back during the rally.  The fact that the locals could serve over my head in singles drastically changed me game.  They kept serving to the back of the court, forcing me to play back.  Then, when I was playing back, they would serve it short and catch me.  I rarely, if ever, used to get caught short in singles.  Well, it happened over and over again.

I played against one guy in my first game and lost 15-8.  That was the game I learned that service was to the back.  I played him a second game and lost 15-12.  But, in during that game, I was down 8-0 and 14-6 and made a comeback.  So that wasn’t too bad.  I played another guy and lost 15-10, played yet another guy and lost 15-8, and then replayed the second guy and lost 15-8.  However, at one point in the game, I was up 4-3.  It was an incredible moral victory and I was so happy that I finally had the lead for once.

I found that during these games I was getting quite tired.  I had to run around quite a bit, but I also found that the level of intensity I was putting into the games was elevating my play.  I went for shots I normally don’t go for and I found myself having to move around from corner to corner consistently.  Even though I lost all my games it was fun and I think I made a lot of progress.

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