The Hindu Business Line : Market is a moving target, as in football

All work and no play makes Jack a dull boy. Ditto with all trading and no fun. Which is why it is relevant to read A Playbook for Stock Market Success from Bloomberg (www.bloomberg.com): Tom Dorsey's Trading Tips by Thomas J. Dorsey and the DWA Analysts.

The `play' begins right from the blurb, thus: "In football, whether you're planning a run or a pass, you must develop the right stance. Similarly, if your portfolio doesn't have the right footing, you're less likely to beat the market."

Play #1, however, is musical: "Playing the piano with two hands is better than playing it with only one." Likewise, you should combine technical with fundamental analysis, advise the authors. "Let the fundamental analyst help determine what you buy. But let the technical analyst determine when you buy that particular stock."

On a musical note

Learn to use, therefore, point and figure charts, a methodology that has been around for more than a century. Demand and supply show on the charts as Xs and Os, in alternate columns. "Charting by hand will allow you to see reversals take place. It will let you see patterns develop and give you the opportunity to act quickly on those patterns."

The chapter on `market psychology' begins on a football ground: "When the football team steps on the field Sunday afternoon, all the players must come with a positive mental attitude, believing they are going to win."

Exude confidence, exhort the authors, because that's the key to success in sports, life and investing. "The only way to gain confidence is to be prepared to control your negative thoughts."

For this, first, find a discipline - "a methodology that you believe in, one that meets your risk characteristics and financial goals". Approach investment like athletes. For example, how does a basketball coach develop plays? Based on the players' talent levels and skills. "He teaches those plays every day until the team can run them in their sleep. Just because they lose a game doesn't mean they start the next practice with a new set of plays. Consistently playing your game over time simply leads to more wins than attempting new plays every week."

Common mistakes

Eight common investor mistakes to avoid include: Falling in love with a position; buying right but forgetting to sell right; no game-plan for investing; taking small gains but not being willing to take small losses; acting on poor advice and hype; and getting emotional.

On the last one, the authors' counsel is to remember that emotion can be your worst enemy. "Try to stay objective." When looking at the chart, cover up the name of the stock, they say. That way, you can make your decision on what the chart is telling you, taking emotion out of knowing the name of the stock!

Being arrogant is the first of `ten ways to sabotage your portfolio'. The market teaches humility, teach the authors. "As soon as you believe you know why the market acts, you will be proven wrong... You must be able to admit defeat and preserve enough capital to fight again."

How about holding on to losing stocks with the fond hope that they would come back? Just another sabotage technique, because "hope is eternal, but your portfolio is not."

Shouldn't we pursue perfection? No, please don't. Stop believing that there is a better system out there, and that you need to find it. "Using a new system to invest each week will not get you to your goal. You will become good at nothing and moderate to bad at everything."

Also, there is nothing like a perfect trade. "If you only buy stocks that have all positive attributes you will maintain a portfolio of cash." Instead, "Look for the big ones like relative strength, trend, and signal... You are better off being approximately right than precisely wrong."

Market is a moving target, please note. It doesn't wait around for you to catch up, so better practise. As football coach Vince Lombardi says, what you need to do is to react instinctively. "Dictionary is the only place that success comes before work. Hard work is the price we must pay for success. I think you can accomplish anything if you're willing to pay the price," is a quote of his on www.brainyquote.com.

To hone your instincts, the authors advise the practice of looking at different chart patterns, and analysing what happened afterwards.

Among the many tips in a chapter on stock selection is this: "Good stocks stand out in market declines." Look for the silver lining. "If you see a stock moving sideways during a market decline, it suggests there is enough demand for that stock to offset all of the supply."

Play #47 explains the mathematics of losses. Limit losses, and let your winning positions run, insist the authors. "Most people do the exact opposite - they let their losses run and are trigger-happy to take the gains."

Edge-of-the-seat read for the football season.

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