NEW YORK (TheStreet) -- Doug Kass of Seabreeze Partners is known for his accurate stock market calls and keen insights into the economy, which he shares with RealMoney Pro readers in his daily trading diary.
Among his posts this past week were entries about reward vs. risk and haters.
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Know When to Dial It Back
Originally published on Friday, June 7 at 9:24 a.m. EDT.
Every day should not be played as a playoff game for investors and traders.
"Life will always throw you curves, just keep fouling them off. ... The right pitch will come, but when it does, be prepared to run the bases."
-- Rick Maksian
In the past, I have written that playing defense not offense is a key to delivering superior investment returns and that time frames and risk tolerance are important ingredients in positioning.
To be sure, it is important to bring intensity to the investment business, but today I want to discuss why every day shouldn't be played with the intensity of a playoff game. Every day shouldn't be played with the same degree of confidence and positioning.
To me, assessing one's confidence in the reward vs. risk in every stock position is the key determinant. I size my positions according to my assessment of each stock's reward vs. risk rather than a specific price target of a long (the upside target) or a short (the downside target). I superimpose on top of this whether the primary market trend is up, down or trendless.
Let's look at my SPDR S&P 500 ETF Trust short as an example. Given the same economic/data assumptions, a SPY short provides better reward vs. risk at $167 compared to $163. If there is no change in data, I am typically inclined to have a lower SPY short exposure at lower levels (with an inferior reward vs. risk). If the data has deteriorated more dramatically, however, I will typically maintain the size or even increase my weighting.
Now let's look at my SPY short if it goes against me, rising from $167 to $171. Again, playing defensively, I will typically reduce the position if it goes against me, especially if the data points are unchanged. This is playing defense and controlling risk, an integral part of managing money.
But what occurs if the SPY goes against me and rises from $167 to $171 and the data points, in support of my view, erode. Then it becomes (importantly, with a loss position) a function of my risk tolerance.
There are times to go all in, but they are rare, as they occur only when the market appears to be in a clear trend, our confidence is high, the data points are supportive and assessment of reward vs. risk and price come together in a beautiful symmetry.
In my diary, I try to be transparent of view, analysis and entry/exit points. I don't, however (except in very general terms), depict my exact size. I do try to use terms like small, large and, at times, quantify my overall net long or short exposure. It would be far too difficult to communicate my exact sizing all the time, but I try to give subscribers a sense of my weighting and exposure.
Playing defense (stopping out loses), letting your profits run, determining your risk tolerance (a function of many variables: net worth, income, expenses, age, etc.) and understanding your investment/trading time frames are critical issues in our business.
But one hat doesn't fit all, and every game is not a playoff game. So, appropriate sizing is one of the most important reagents and less discussed factors in delivering good investment results.
In other words, if your unit of investing in SPY is 500 shares, it doesn't mean you should always be long or short 500 shares. You don't need to trade/invest with the same intensity and sizing every day.
Hank Aaron's motto was "always to keep swinging." It worked for him in baseball but won't work for us in trading and investing.
"One of the beautiful things about baseball is that every once in a while you come into a situation where you want to, and where you have to, reach down and prove something."
-- Nolan Ryan
Always try to wait for the right pitch.
Mr. Market exists to serve us -- it's not always the bottom of the ninth inning in the final World Series game.
At the time of original publication, Kass was short SPY.
Haters Gonna Hate
Originally published on Thursday, June 6 at 7:51 a.m. EDT.
My policy going forward is to never respond to haters again.
"When I was young I thought that money was the most important thing in life; now that I am old I know that it is."
-- Oscar Wilde
Wall Street is a tough business, as big money and our security are at stake.
Legendary trader (and my old partner) John Jakobson once told me that there is a reason why there was a church on one side and a cemetery on the other side of the old New York Stock Exchange.
Of course, none of us will be right on the markets or individual stocks all the time.
The keys, as I have written, are to conduct solid/comprehensive analysis and risk management, especially when you are wrong.
No one likes to lose money, and when I make an investment boner on my diary, it hurts me because I know some subscribers take my analysis on face value and sometimes don't do their own research.
I believe (actually, I know) that Jim "El Capitan" Cramer feels the same way. He takes his mistakes to heart. After 15 years, I know that it actually hurts him when he delivers a wrong-footed message and bum investment idea. And, importantly, he doesn't gloat on his victories.
But one thing you can be certain of is that both Jim and I do a lot of work in delivering investment ideas and market opinions. Again, we might get things wrong at times, but thoroughness of analysis is rarely the reason. The subjectivity of the decision process is usually the root cause, because that judgment is often integral to getting it right or wrong.
Which brings me to haters.
Haters come (when I get cold) and go (when I get hot).
From my perch, life is too short to deal with haters.
My skin is thick after being exposed to haters over the years. As I wrote, they come and go.
Mostly they go.
I am a sucker, I guess, for when a hater attacks me, my initial response is to try to respond analytically and address the differences in opinion in a respectful way. This approach, taught to me by Grandma Koufax, is rarely reciprocated. Indeed, initial and substantive market/economic differences and subject matter are usually not directly addressed by haters -- typically their analysis is shallow or even fatuous -- instead, they often deflect the argument conveniently into another realm of conversation.
To be honest, after having my cancer operation in December 2012, my patience is now near zero tolerance for haters.
I have a lot on my plate, and my day is too busy to fight unproductive battles with them on Twitter or in our comments section.
I have learned that haters are flawed (sometimes very) and often have an alternative motive behind their ad hominem attacks (usually it is to sell something that is not worth much).
I have also learned that the worse the hater, the more the amount of people they hate!
As I have clearly learned from February to May (given my wrong-sided market view), I will not even be close to being right all the time -- no one is.
It is not batting average of your picks, but the way one manages risk when you are wrong (and letting your profits run) that form a good combination for delivering superior and profitable returns over time.
Finally, as many want to believe and others want to sell, there is no special sauce.
Technical analysis can provide a road map for investors and traders, but looking at a chart only tells us where we have been and not where we are going.
Nor is there any quantitative model that produces accurate ranges for the S&P 500 or can guarantee buy and sell levels on individual stocks. If there was, SAC, Lee Cooperman, Paul Tudor Jones and/or George Soros of Fidelity Management (with their near-unlimited resources) would have acquired it!
Bottom line: My policy going forward is to never respond to haters again in Real Money Pro's comments section and elsewhere.
As Grandma Koufax used to say, "Dougie, that is a big waste of time."
At the time of original publication, Kass had no positions in the stocks mentioned.