One of our regular readers sent in a question today expressing their frustration about the market and their volatile yet impressive performance on the year. The are currently up about 2%.

 

There closing line pretty much sums it up, "I don't mind losing money if it is my fault.  But just because the Greeks can't pay their bills that makes the whole world go down!  Oh the French lent them too much money and if the French go down the Germans go down.  If Europe goes down then China does down.  Oh and if China implodes then Bob's New York Reit will implode????????  HUH"

 

Like a lot of folk this is a scary time to be in the market. I hope you appreciate my answer to Bob. I really hope you like it because its late, I'm tired and it's all you get.

 

Bob;

 

Oh this is going to be good fodder for the blog.

 

You remind me of myself about the mid to late 90s.  I was trading off of headlines and "tips" and was not really into "finance and accounting".  I really enjoyed marketing and sales and that was my job.  Since my father's demise and some important business transactions, I discovered the role that accounting and finance play in the overall underlying value of the market.  Unfortunately, that and that alone does not insure success. 

 

The volatility you refer to is not solely attributable to Greece and the Euro debt issues.  There are hundreds of issues driving market volatility.  Today, it was consumer sentiment, relative positive earnings news, the aftermath of the Iranian Plot to take out a Saudi delegate to the US, US Inventories took a slight unexpected spike, Russia curtailing agricultural exports, and the list goes on and on.  Each of those news pieces influences how retail traders and institutional traders play the game.  Their decisions drive the algorithms that the HFT (High Frequency Trading) platforms use to facilitate fund management. 

 

The point is, if it weren't Greece, there would be another catalyst to drive volatility.  The VIX, the true measurement of volatility is actually creeping down below 30 today.  It is down almost 40% for the last 3 weeks.  It is well below its 50 day moving average and just above its 100 day average.

 

None of this is making you feel better because you are still getting knocked around by Mr. Market.  Your dollar changes in the portfolio really don't tell me much about performance as I do not know and do not want to know the size of your portfolio. (They subsequently sent me the %)  As you know we like to deal with percentage realized gain (or losses) and percentage unrealized gain (or losses).  We could tell you right now we are up $3,178 dollar and that might be impressive, but if our portfolio is The Bill and Melinda Gates Foundation, it would be pitiful performance.

 

So on top of measuring your performance as a percentage here is some ADVICE.  Yes I am going out on a limb here and I know at least one reader is going to run to her husband (one of my trusted legal counselors) and say. "He's asking for it now, he is giving advice."

 

Ok, have a set of rules to invest by.  We don't care what they are, but have a set of rules.  There are many decent trading disciplines out there or you can come up with your own.  We have several, but for each bucket of investments (Options, Stocks, Commodities), we have a set of rules we try to follow.  These disciplines take a lot of the emotion out of the equation.

 

Here are some of our basic rules:

 

Only buy what you know.

 

Know when to get in and when to get out before your buy. (We use 8% down and 5 times our annual portfolio goal as the out.)

 

Know what kind of return your portfolio is hunting for.

 

Know where the market is and what direction it is going before you trade.

 

Know who is running your core investment companies.

 

Know who owns your core investment companies.

 

DO NOT BUY off of headlines.

 

DO NOT BUY without doing the homework.

 

DO KNOW you will lose money.

 

Manage your losses and the gains will take care of themselves.

 

Clever Investors always lose.

 

Read a new Book about investing or economics every quarter.

 

Have some kind of a routine.  This is hard for anyone (including me) who have a full time job.  Having a routine keeps you focused on what you think is important.  In our ideal world on an ideal day, our routine would look something like this:

 

Read the IBD Big Picture column before the market opens.

 

Check overnight news on each of the core holdings and option positions.

 

Read the Money Investment section of The Journal before the market opens.

 

Check all positions in the first hour of trading (Unless there was compelling news that required a pre-market trade)

 

Pick one core holding and do the monthly homework. (Review news using FINVIZ, SEC Filings, Stocktwits, Backyard Google Searches, The premium content on Morningstar).

 

Pick on stock on the Watch Closely List and do the same homework.

 

Follow any relevant Economic news for the week or the day.

 

Go back 3 months and do a forensic on any trades for that day.

 

Track all of the above in a beautifully written blog.

 

Have the Pear Salad at Hannah's for lunch.  (Couldn't resist.)

 

Read the balance of the IBD and the Journal

 

Read at least one investment/econ newsletter

 

Track the last 30 minutes of the market for any surprises.

 

Based upon the days trading, adjust any and all stops as needed.

 

Look for the next 10 day earnings announcements for short term stock or option plays.

 

Follow Asian Market openings.

 

Follow European market openings.

 

Start all over again.

 

By having this discipline in place, you keep your expectations in place, your disappointment to an acceptable level, and you can enjoy reading about all the frustrations other investors have.