These Four Lessons Mean
Everything Today

4 | By Shah Gilani

Talk about information overload…

There’s so much news and data, so many opinions about events and data points, so many financial publications, so many shows, so many stocks, mutual funds, ETFs, futures, options, derivatives, so many opposing points of views about everything, it’s enough to make your head explode and your investing comfort level implode.

Most people tend towards like-minded analysts and economic analysis that confirms what they’re seeing and thinking. There’s a kind of comfort zone there, where “We’re in this together and if we’re wrong, well, I wasn’t alone; but if we’re right, boy am I smart.”

Then there are the “skittish” investors who think they know what they’re doing – that is, until they hear a different opinion from someone, anyone, they think has a leg up on them. And what do they do then? They usually ask, “Really?” Meaning, “Do you know something I don’t know?” Chances are, at that point, they are going to panic.

And, of course, there are those investors who know they are right, and stick by their convictions and positions all the way to, well, you know where.

Maybe you’ve been there.

I was there myself when I started trading professionally on the floor of the Chicago Board of Options Exchange in 1982.

But I quickly distanced myself from all the noise that distracted me from being a successful trader.

There is no magic bullet to being a successful investor; that’s the bad news. The good news is that it’s a lot simpler that everyone makes it out to be.

Here are the four most important trading lessons I have learned:

  1. First of all, never be greedy. Never throw a lot of money onto a “sure thing” or any one position. There is no such thing as a guaranteed profit.
  2. Second, when there’s nothing to do, do nothing. And don’t chase trades or investments. Trades are like busses: if you miss one, there’s always another one coming along.
  3. Third, trust yourself. It’s okay to take advice and listen to others, but make sure you do your own homework. It doesn’t have to be a lot of work, just enough that you can be comfortable with your decision. After all, it is YOUR decision, your money.
  4. Lastly, have a plan. At what point will you exit the position if it’s not working out? You can use a hard stop or a mental stop; just make sure you have an exit plan. Take profits. You don’t have to take off all the position if it reaches your profit target, unless things have changed regarding your outlook. If the position is profitable and keeps going up, raise your stops.

So, what do these simple lessons mean today? They mean everything.

Why? Because we’re looking at a light at the end of the proverbial tunnel… but we don’t know if it’s the light of day or a train barreling straight for us.

Sure, we got a healthy year-end rally. Sure, the first week of the New Year was positive. Sure, we’ve gotten a fair amount of better-than-expected economic data here in the U.S. Sure, there are “green shoots” of growth, and there’s hope that the U.S. may be decoupling from global woes.

Unemployment is down to 8.5%; it has fallen for four months in a row. U-6, the measure of the unemployed and the underemployed, is down to 15.2%, a three-year low. But of the 200,000 jibs created in December, 42,000 were temporary messenger and delivery jobs needed to accommodate on-line sales deliveries over the holiday season. In 2010 we saw the exact same number of “delivery” jobs created, and they all disappeared in January, the following month.

So are we really making big strides in employment? I hope.

What about the year-end rally and last week’s rally? Will it hold? Of course, we hope it will.

But the truth is that we’re seeing a lot of rally-chasers. Institutions – and that includes hedge funds – that missed the year-end rally and were on the sidelines last week are going to have to play catch-up if we continue to see better-than-expected economic numbers here.

Another reason we might see buyers come off the sidelines is that the Fed has been indicating there may be more easing ahead. That’s always a plus for speculators and investors. The Fed is also going to start outlining their interest rate outlook forecasts to the public. I doubt they’re going to do anything that scares the public and markets by indicating they might start raising rates.

To the contrary, they are going to lay out long-term “feel-good” interest rate policies that will set the stage for more leverage in financial markets. That’s good in the short run, but it only adds to problems long term.

That all makes the light in the tunnel look like the light of day. So, from a short-run perspective, I’m inclined to play U.S. equity markets from the long side.

But, as has been the case, there’s always the possibility that that light is the runaway train driving Europe’s problems headlong onto our shores.

We may look like we’re decoupling, but we are not; we cannot decouple from macro events that we are inextricably interconnected with. We just can’t.

Last week, UniCredit, a big Italian lender, floated $9.53 billion in new stock. The issue was fully underwritten, meaning the underwriters (big banks) agreed to buy the entire issue and resell their shares to public investors. What happened?

Because there was virtually no interest on the part of investors, the price of the shares was 65% below where the bank’s stock was trading. Its outstanding shares promptly fell 39% to reflect the impact of the new issue discount.

That’s bad enough. But it’s nothing compared to what few people are talking about. All those underwriters are stuck sitting on the shares they took down. The ECB has said that Europe’s banks need at least another $130 billion in equity to meet minimum reserve standards under already eased Basel standards.

Who is going to underwrite these equity issues? The same banks that need the equity? The same banks that just took a huge hit on the UniCredit deal, which would be most of them that need new equity themselves?

While I’m inclined to play gingerly in U.S. markets, I’m not going to be too committed to too many positions. This is no time to be greedy.

There’s always another trade coming along – remember that. If the European situation is going to get worse, and it sure looks like it is, regardless of seeming decoupling, well, be careful… Be very careful.

Use your own sense of things. Trust yourself.

This market is beginning to look enticing, but it’s also the kind of market that can crush you overnight.

Stick to my basic rules of thumb… and make sure you’re not tied to the railroad tracks in front of any tunnel, ever.


4 Responses to These Four Lessons Mean
Everything Today

  1. Anthony Daly IRELAND says:

    Love your work Shah I am a spectaor at the moment waiting on the right moment to enter trading I have a small 10000 euro start fund and I am looking at buying sterling as it is down to 80 cent per pound ,would you say this would be a wise decision to invest in currency as I would be greatful for any ideas or direction from yourself would be greaat if you can find the time yours faithfully Anthony

  2. Tony Chalita says:

    Thank you very much for your experience and common sense, (the less common of the senses). Would you say that China and the Yuan is now days a wise play? Maybe the Yuan will appreciate naturally and not for pressures coming from all over the place? Will it start to be a player in international monetary structures and mechanisms and replace its role and VALUE forever?


  3. Daniel Parker says:

    Thank you for your four rules for trading. After looking at them make common seance. Most people would not see until they have heard it or read it. Thank you for putting them up.

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