PERFORMANCE ANNOUNCEMENT
As Of: March 8, 2006
A TIME TO TRADE
Use volatility to advantage.
There is one message that the stock market seems to be sending quite clearly: This is a market for intelligent trading and risk management. We have seen the technology sector (especially semiconductors) rally and then fade. We have witnessed the oil and energy stocks rally and fall back numerous times. In the first three months of this year gold has risen to above $570 per ounce and then dropped back below $545. The Dow Jones Industrial Index has broken above 11,000 several times, only to fall back again. The Dow Jones Index has had more than a 10% swing over the past year, yet many people who have sat on a static portfolio have little or no profits to show for the money they have at risk. Clearly, this is a market that requires active trading.
Of course it is possible to trade too much and suffer the negative consequences of increased costs as well as being a victim of random volatility. The trick is to find the right balance between profit potential and risk management. One of the signals I use to decide when to sell a position is the "Don't be a pig" concept. When I purchase a stock, I have an objective in mind. For example, if I think the stock might go up 20% over the next 18 months, and it goes up 20% in one month, should I continue to hold it, or am I being a pig to expect it to go up more?
I could point to numerous examples, but let's take Texas Instruments as a typical case. I purchased Texas Instruments in my own personal account in January, 2005 at $23.41 per share because I thought it could go to $30 (a 28% potential profit). In six months, TXN went above $32 (a 37% profit). I sold the stock at $32.29 because I had exceeded my target and I could only say I was being a pig to expect more from the position. Of course the stock continued on up to $34.68 on October 3, 2005; but I didn't care because my money was redeployed in another stock where I thought the risk reward ratio was more favorable. By October 27th, TXN had dropped more than 20% to $27.47. By January 9, 2006, it was back up at $33.72. On February first it had fallen to $28.72. It revisited $32.90 in March, but as I write this, it is lower than the price I sold it at. The person who did not sell when I sold, wasted the last eight months. Their money could have been working elsewhere. For example, they could have bought Glamis Gold in July and made over 80% in the next six months, or they could have traded in and out of Texas Instruments two or three times. (Please note: I am not recommending buying or selling Texas Instruments or Glamis Gold, these are only historical examples.) In the year 2005, when the Dow Jones Index was virtually flat, people who realized high returns typically traded their way to profits.
Trading is not suitable for everyone. Multi-generational trusts that have long term objectives may be willing to ride through short term dips to maintain a position for long term gains. Tax considerations and trading costs may also drive the decision. But profit motive is not the only reason for trading. Risk management through the protection of profits is also an important reason not to be a pig. Bottom line: This is not a market for complacency. Have a plan and be pro-active.