22.0 Killer Instinct

There is something about Assassin Movies that draw me over to watch them first before other movies. Albeit visceral, Assassin Movies provide me much needed adrenaline rush in the comfort and safety of a movie house sans broken limbs and bones. I love Assassin Movies whether this involves a stealthy ninja, a ruthless hired gun, a former government agent on the loose, or a femme fatale on vengeance path. Why am I talking about Assassin Movies in this post? Because assassins are good at what they do for a living as they possess something that is so lacking in my trading psychology; something that I have been wanting to acquire yet thus far only managed to get hold for a few seconds of trade only to lose it the next. That something is called "Killer Instinct". 

"Killer Instinct" is defined as "an aggressive and ruthless determination to win or attain a goal" (www.dictionary.com). While being aggressive and ruthless may be innate to assassins, the same may not always yield excellent results for stock traders and may even lead to devastating outcome instead. This is not the Killer Instinct that I have been wanting to develop for months now. What I am trying to develop is something better explained by a story (please indulge me at my attempt in writing a fictional assassin character as inspired by the many Assassin Movies I have seen). Here goes.

"He is a hired gun, the best in the business of taking down those who run opposed to the interest of his clients. Though he works with tipsters, forgers, hackers, and other underworld characters, he basically works alone. He does his job cleanly. No questions asked. And once the job is done, he disappears without a trace. Not a word  is heard nor a shadow of him is seen until the next assignment comes. That is why, his clients trust him. 


Every new assignment is treated like a first. He studies every detail of the subject, spending days and nights of stakeouts casing the subject's regular activities, acquaintances, as well as other routines and habits. He patiently waits and stealthily moves with the subject sometimes from a distance and occasionally just a few feet away like when he followed the subject to the comfort room for a pee. On these rare occasions, he does not stare at the subject but only gives him glancing looks like a wind that passes by but hardly noticed. Even during those times when he could have taken down the subject easily, he bided his time. He could have done so but the timing was not right; the exit plans were not yet made. For him, patience is a virtue. He knows judgment day has come only when he has the subject all figured out. He lays down the plan to the smallest detail - the time, the location, the exit plan, and cover up. He rehearses everything in his mind as if it is all too real. 

However, there were times that judgment day did not go as planned and had to be aborted. There was a time when his subject was already standing in front of the hotel exit door with his forehead already right at dead center of his sniper rifle's telescopic sight. But just seconds before he pulled the trigger, three cars screeched to a stop, doors swung open, burly men with pistols drawn stood out and took defensive positions, and the subject whisked off inside the middle sports utility vehicle and in seconds, he was gone. He could still have pulled the trigger and accomplished his task but it was all too risky. Once his position was exposed, a terrible shootout would have happened between him and the bodyguards resulting in several deaths, among them innocent bystanders and pedestrians. These were not part of the plan. That deadly scenario would have cost him his reputation if not his life. Hence, he kept his cool, aborted the operation, and calmly walked away. He, long ago, reconciled with the fact that some days do not always favor the assassin. But those times are few and rare. 

On countless times, the assassin does his assignment swiftly. Like today when judgment falls on his latest subject - a crossover showbiz politician on the verge of getting his party's nomination for presidency. His adorable personality disguises the inner devil who deftly machinates different social classes to achieve his ultimate ambition of someday becoming President. Unknown to many, he is the shadow protector of the largest land-grabbing syndicate in the country hiding behind his pro-poor, human rights charade. He pressures the very government he serves to pay the squatters as condition for them to move out of occupied lands while convincing landowners to sell these lands at bargain prices to the syndicate. Once done, the syndicate then sells these lands to the highest bidder among property developers. The showbiz politician then publicly donates to the largest religious charitable institutions and media foundations to further add to the masquerade. This made him hugely popular among the poor, his showbiz fans, the church, and media organizations. It is perfect crime. Until today.

The assassin was hired three months back to eliminate the showbiz politician by an anonymous client or clients. Three months of surveillance and he has him all figured out. His political party has recently endorsed him as their political candidate for the Presidency. He is set to deliver an acceptance speech in a national convention where movie fans, urban poor, the church, and the media are also in attendance. A week before the convention, the assassin already rented a room in the third floor of an apartelle that sits right across the open grandstand where the showbiz politician is to deliver his speech. In front of his room is a tree which serves as a perfect camouflage. The street is lined with bright streetlights which effectively reduces the spark that comes out of the barrel. Everything is set.

The time has come. The name of the showbiz politician is called and as he walks to the podium he raised his hands waving at the adoring crowd not knowing it is going to be an act of final surrender for him. The assassin hugs his M107.50 Caliber Long Range Sniper Rifle on the floor like a man for priesthood ordained. The assassin takes his aim and sees his target on sight up close in his telescope. As if acknowledging his presence, he sees the the showbiz politician turns towards his direction smiling. He then nods his head. With that symbolic approval of death, the assassin squeezes the trigger without a moment of hesitation. The silver bullet travels 853 miles per second hitting the target on its mark. There is pandemonium everywhere. The assassin stands and packs up his things.  It is another day at the office."

I am using the above story to describe four psychological traits of an assassin which I believe an independent stock trader must develop to succeed in the stock market. I believe you have figured it all out. Otherwise, you would end up at the other end of the assassin's gun for the stock market is full of it. Have the Killer Instinct or be killed. 

21.0 Stock Trading and Poker

I love Poker not because I am an addicted gambler but because Stock Trading and Poker are pretty much alike. Poker betting terms like "call", "check", "raise", and "fold" are equivalent to stock trading terms as "bid", "hold", "jockey", and "cut loss".  It is so alike that I practice my emotional control and derive some of my trading strategies through the lessons learned from playing it. But that is going ahead of the story.

Once a month, my six friends and I gather to play poker - probably the most intelligent and exciting card game ever invented. Two are lawyers who are partners in their own respective firms, one is a managing director of the shared services arm of the world's leading chocolatier, another is an extraordinary salesman of electric generators who counts the Manila Cathedral, the top 3 banks, and El Nido resorts as clients, the other works for the BIR, and the sixth is the wife of one of the lawyers who is completing her master's degree at the State University. And then there is me - banker, philanthropist, playboy (joke only), turned stock trader. One of these players is a certified poker master who has already won a championship game at a poker club somewhere in the Metro. But that is not me. I am referring to one of the lawyers.

While we are the best of friends, we are all merciless combatants at the poker table. While that may be the case, we all leave and call the night as better friends savouring yet another opportunity at enjoying each other's company and "cutting each other's throat" and, of course, the winnings that come with it. To the losers, there is always the hope of winning in the next encounter and that hope never fades despite the grieving protestations of our better and bitter halves.

One of the “benefits” I learned from playing poker is mind reading which is the ability to detect the strength or weakness of the players' hands through body language, verbal communication, eye movements, facial expressions, as well as betting patterns. In stock trading, it is like having that unique ability to read market sentiments from news about global and domestic economic affairs, corporate disclosures, chart patterns, volume traded, and price action, among others. It is a continuing lesson because serious poker players have the ability to maintain poker faces as well as confound you with bluffs. In the same manner that reading market sentiments can be made difficult when domestic and global events run in opposite directions, and when the market is inundated by rumours and gossips, false information, padded volumes, and price manipulations.

In poker, if you bet more often chances are that you are going to lose. Betting frequency does not determine more positive outcome. What determine positive outcome is the number of outs your hand has versus the number of outs the other guys have. The same can be said in stock trading in even greater magnitude. The more frequent you trade, the more you are going to lose. The reason I say "in even greater magnitude" is because in stock trading you are actually trading with not six or nine individuals, as in the case with Poker, but with thousands or even millions of traders across the world. If you have been watching World Poker Tour (WPT), the players normally do not bet so often even laying down cards that for me have good chances of winning. Now tell me, if this is not the case.

One of the questions often asked is when to buy stocks or raise a position in a particular stock? That is the same question you face in Poker, "When do you call or raise the bet?" In Poker, the answer is the number of outs as above-stated. In stock trading, you buy stocks or raise your position in a particular stock if you have a high probability trade. A high probability trade happens when all your selected indicators confirm each other and there is a positive disclosure about the company. This is regardless of whether the overall market sentiment is up or down. Of course, this is discounting bluffs in poker or hype and dump in trading or the opposite of it.

I learned a valuable lesson from our Poker Master when he said that if you want to win big in Poker knowing what you have is far lesser in importance than knowing what others have. That is very true indeed because you are not playing by yourself but against everybody else in the table. When I was still new in this game, I always committed this mistake of thinking only about my cards and disregarding what my opponents have. He said to me that studying betting behaviours and patterns as the cards are shown on the flop, turn and river will give you indication about what the others have. In stock trading, it will certainly pay dividends if you keenly watch the price action and volumes of bids and ask. If you notice buying or selling pressures always try to learn what is going on from corporate disclosures or from your brokers if you can.

I can go on and on but I will stop with this last lesson – “Learn to cut your losses”. When I was new in both Poker and Stock Trading, I played and traded with a stubborn determination not to fold or cut my losses even when it was already apparent that the tide was going against my favour. My pride in not admitting I was wrong had the better part of me. I kept telling myself that the right card would show up in the river or that the price trend would soon reverse. But it did not . . . until it was too late. Cutting losses is a bitter pill to shallow but this will save you a lot of trouble down the road. It is foolhardy to consider paper losses as just only on paper. Believe me, a paper loss is as real as it can get.

Now, here is a bonus lesson from the game of Poker, “Poker takes a day to learn but a lifetime to master.” Let those who have ears hear this, “Stock Trading takes a day to learn but a lifetime to master as well.” Do not be a fool to think you can beat the market all the time. The market is like the enigmatic Monalisa, “many men have fallen on her doorstep.” However, please do not let this dampen your appetite but let this serve as a guiding lesson to dampen your losses instead. Now, onwards my fellow stock traders and poker players to the greatest inventions ever created by man –Stock Trading and Poker.

  

20.0 Mind Games

If you want to be successful in the stock market, you have to be really good at mind games where 1) understanding and riding market sentiments correctly and 2) having the ability to make tough and decisive actions account for probably more than half of your success or failure. The other half or lesser percentage is accounted for by your technical skills, be it in fundamental analysis or chart reading. A small percentage is given to luck. After more than a year of active trading, I arrived at this surprising conclusion. Surprising because market sentiment and trader psychology were not given prominence as topics of interest in the certification program I enrolled in (See Blog Post No. 8, "Back to School") more than a year ago. While this may have come a bit belated, it still is never too late to be useful for me in  my next trades and for any neophyte trader who cares to profit and prosper in this profession. 

 

In my previous trades, I basically relied on technical analysis in screening stocks. I tried coming out with different stock selection methodology for uptrends, downtrends, sideways, reversals and pullbacks but the result is always inconsistent (See Blog Post No. 18, "Staying Alive") . Sometimes I won and sometimes I lost and lost badly I did in not a few occasions. So what gives?

My misplaced belief that technical analysis is the only tool to having winning trades is what gives. I totally disregarded general and specific market sentiments here and abroad and doggedly bought stocks that my stock selection methodology screened out for me even when the market was down. When the market is bullish my stock selection methodology is validated and I have a winning trade. But when the market is bearish I end up having a bad trade and am left  questioning my methodology.

Realizing this, do I now throw technical analysis out of the window? The answer is no. My technical analysis is not wrong but market sentiment tells me that the timing is off. This is the one missing ingredient all these months. If I have to make an analogy, it is like figuring out correctly that the girl you were eyeing on also had hots for you but  things fell apart because you asked her out at the time she had dysmenorrhea.  Not being able to understand market sentiment will make you lose money and disregarding it totally will make you lose your head. Wrong timing, even when the analysis is right, equals bad trade.

Now, how do bad trade become worse? The answer is bad trader psychology. Because I was not prepared to accept trading mistakes, I stubbornly held on to these stocks even when they continued to go down. Cutting losses was not in my vocabulary arguing these were just paper losses.  I simply watched my portfolio as they lost market value instead of taking decisive action to stop the bleeding. I always told myself things will be better but every passing day it did not. Those days were filled with great anxiety and it certainly hurt my pride.  

But why did I not do anything at all? That is because in my mind there is a little angel and a cute little devil playing games. The little angel is telling me to cut losses and move on but the cute little devil is telling me to hold on and just enjoy the pain. As was the case, the cute little devil almost always won. But this is no longer now; I learned my lesson well. I say not anymore, never.