I'm not sure it requires much additional research once the initial trade thesis has been presented, all you need is to verify the thesis. For example in 2007 I googled and found some analysis on the Florida-exposed real estate plays, from a real estate lawyer, of all people. It took me about a day to go through the accounts quickly and find out that his picks (stuff like CORS, WCI etc) had i) huge exposure to S Fla ii) high leverage; and that was all you needed to know to realise they were going to get totally screwed if the macro call (housing bust) was right. Proper 'trader analysis' focuses on 'what matters' - i.e. what is going to dominate the fortunes of the stock. Usually that is not the minutiae of the company accounts, because the inefficiency is in the market not understanding the macro. However, broad company exposure to macro is definitely something any trader can figure out by doing a little research, and riding the coat-tails of analysts. As for holding on, and conviction - doing the accounts analysis doesn't help, because you can get the macro wrong (e.g. Einhorn and Loeb in 2008), and accounts are never a 100% accurate picture (see JPM ). Conviction is somewhat tenuous even on the best trades. So, you simply have to structure trades and position management strategies that handle this uncertainty. Long-dated options are a good way to play it, so is booking some profits (or hedging with options) into extreme strength or weakness and strong crowd emotion/headline frenzy.
Good point. A classic example was AAPL over the last few years, it was continually acting stronger than the overall market, and apart from the flash crash it didn't have any bearish price action. A long AAPL/short SPY position (full or partial hedge) was even better from a risk/reward perspective. AAPL also had nice valuation. I think it was Jim Leitner who said that the best trades have a strong fundamental story, favourable price action, AND favourable valuation - those are pretty rare in my experience. Perhaps now would be an appropriate time to start talking about the best way to scan for such opportunities? This is a self-confessed weakness of mine, I always seem to have a shortage rather than a surplus of really top quality ideas where the price is also acting right. For example at the moment I'd say Zillow is fitting this pattern on fundamentals and price action (although the valuation is not favourable), and it's no surprise to see SAC in on the action. Still, it's a very volatile stock and a close trailing stop is unlikely to work well. The only time I can/will hold through adverse price action is where the value is so compelling, and the fear so rampant, that I'm more scared of missing the rebound than I am of taking a big hit. Needless to say, this can only be done on a portion of total capital, stuff you can lock up for 2-3 years and not flinch if it drops 50% because you are willing and able to buy more. In fact, averaging in over 3-6 months is probably best, unless your bottom-picking skills are superlative. This only happens in really market or stock panics though. Greece would be my candidate for the next example of this.
Michael Marcus, original Market Wizards. Fundamentals, technicals and sentiment (market tone) -- if those three are in your favor, it's like pocket aces preflop. You're not 100%, but it's about the best you'll get. Technical screeners as initial starting point to uncover interesting movements. If a stock sees significant range expansion on significant volume, for example, there is a fundamental reason why it happened. Something may have sea changed, in terms of sentiment, valuation moving forward, or underlying situational dynamics. Minervini, SMW, the "price action sandwich." Price, then fundamentals, then price again. Macro trading works this way too. Charts tell you the general positioning of the world; then you investigate interesting pockets and corners; then price action is your trigger for actual buys and sells. Pay attention to movement in the same way a predator instinctively watches movement (i.e. screen for it, make note of it); investigate the movement as a starting point for fundamental confirmation; when you get fundamental confirmation, back to price action again.
Yes, but the ones that can go psycho are often the most fun and 'interesting' - no risk, no reward I agree with your general point, but don't forget I was advocating sector baskets (as opposed to 1 or 2 stocks) also. I accept the points about shitty ETF construction, but you can solve that by creating your own ad-hoc ETF by just buying the top 5-10 stocks in the industry. The essential difference is do you drill down and pick 1 or 2 stocks, or do you just make the macro call and then pick up broad-based exposure to the sector without doing heavy research into them. What you said about the oil sector is actually a great example of what I'm talking about - going long a basket of oil stocks made actually more than buying BP, at considerably less risk. Even the smart Dan Loeb play of buying Anadarko bonds (IIRC) was arguably not so much better that it was worth the average trader's time to study, versus just buying the OIH ETF. Most traders aren't good bond analysts. Also, the single stock risk is real. Although it's rare, sometimes you do get a black swan with no realistic way to anticipate it. So if you are picking 1-3 oil stocks, you will be taking on more black swan risk than a broad basket, which inhibits the ability to be aggressive.
Better to short a basket of miners/banks. Much less risk, much less research ability required, and not much less reward to be gained. If you were saying that only ONE miner or bank was a great play, I would agree with you. But if its the sector, then play the sector. If it's the economy, play the index. Match exposure as tightly as possible with the alpha-generating theme, but no tighter. Here's how I would summarise it: Great single stock insight (e.g. AAPL the last few years, or your NLY pick): trade the single stock. Great sectoral insight (oil stocks in summer 2010): trade a sector basket (not 1-2 stocks, not an index). Great economy insight (US 2008/09; PIIGS 2010-12): trade the asset class (stock index, bond futures, currency, whatever) Great timing as well: trade the options. P.S. As for the broad index in this case - Oz has a housing bubble as well as a mining boom, and the former has been mentioned on this thread (as well as AUD shorts). If commodities/China go, so does housing, so does banks, so does the index (and currency). That's why Daal was mentioning index plays, I assume.
Comparing shorting Fannie Mae or Lehman in 2008 vs. SPY with shorting BHP or WBC in 2012 vs. EWA ... well, it's not only not in the same ballpark, it's not in the same league, it's not even in the same f-ing sport (thank you Q.T.). As for a basket, that's fine - pick the big miners or big banks in Oz and short 'em all. But - getting back to how this started - to say "Hmm, Oz is in trouble," and just blindly short EWA makes no sense.
Sure sometimes the homework can be done faster but in this particular case I'd argue the bulk of the 'edge' lies on the correct macro call that Florida RE was bust instead of the micro analysis of the companies(The most levered companies would likely go up more if the macro thesis was incorrect, they likely had a higher beta), I'm not sure it was stock picking that created the EV there The reason I was defending indexing its because I've been too many times in the position of seeing stock presentations done by investors with great track records where I didn't understand terms or things they were explaining because I'm not in that field. I started to research about it and it just took more and more of time. Sometimes you spend a full day or 2 and come to the conclusion that its too uncertain and it will require even more time to have confidence there. At this point I decided I will only take the easy plays and index the rest As you point out there is the added benefit that the drawdowns are likely to be smaller enabling one to take a larger position(Which is correct from a optimal F/math perspective due smaller worst loss)
I'd point out one more thing. When my homework in a specific stock is very quick usually I'm going to be wrong(That is, the stock will underperform the index even if I make money). This is because markets tend to be efficient with obvious stuff, using a simplistic analysis of 'hey the PE ratio is low' most of the time will get one burned, all one has to do is too look at studies done by Fama and French on stock picking, most of the top performers have returns that are not different from what you would expect from chance plus most of that ones that are not in the top, underperform the index These people that underperform the index are all familiar with popular strategies like PE ratios, etc. If I want to outsmart them in excess of my costs of trading I will have to know something unusual about the stock that they don't, most of the time this will require time, extensive research etc. Guys like Ackman are experts on this, they will do a ridiculous amount of research, going down to even obscure levels of the US tax code in order to know how it would impact EPS. Their homework is so deep it gets to the point of its effect being similar as trading on inside information, it gives them an edge. I don't have an interest(nor capital) to do this kind of research(specially when the knowledge can't be used again soon) The exception is when we are talking about mispricing due human flaws(Like BP in 2010 during the panic) in that case I usually do minimal work because I know WHY I'm outsmarting the other participants(I believe I'm less flawed than then)