GETTING BETTERAT SELLING

Silicon Valley Chapter of AAIISeptember 10, 2011

Don CassidyPresident, Retirement Investing Institute

Don @ R-i-I .org

Sell HERE !

Thank you for coming

today!

Questions ?

DISCLAIMERNeither the speaker nor the Retirement Investing Institute provides individualized investment advice. Neither is licensed as a Registered Investment Advisor. No investment products are offered for sale. Any individual securities (including stocks, mutual funds, or ETFs) mentioned are strictly examples and do not imply investment or trading recommendations. Investors should do their own homework before selling or buying any security.

It’s the money you could be saving with better selling !

WHY DO WE BUY STOCKS?• We Buy to SELL !!

• Think Like a Shop-Keeper

• Don’t Think Like a Collector !

• … But it’s Difficult: 180-degree reversal !

“95% of this game is 50%

mental.”

-Yogi

WHAT DO I BELIEVE ?

By permission: Vitaliy Katsenelson (author of Active Value Investing � 2008 )

How the Market Spends TimeSince 1885, the U.S. stock market

has spent

* 32% of the time in BEAR Markets* 44% RECOVERING from those bears* 24% in new high ground

Source: Abacus Financial Planning,Cleveland. Info as of mid-2010.

“THE NEW NORMAL”• Implies the old normal

is outdated

• Implies a thorough portfolio re-exam

• Strongly implies we must be able to sell dispassionately !

PATH TODAY

1.Diagnosis

2.Treatment

ROAD MAP• Understanding Ourselves

and Surroundings

• Naming & Battling the Barriers to Action

• Viewing the Market in Crowd Terms• Becoming Contrarians

• Listing Some Good-Selling Rules

SUBTLE CONDITIONING( TO DO NOTHING )

Watching TV and Reading Newspapers

Baseball ScoresWeather Reports

Political NewsCrime News

z-z-z-zand …

Market Results

PROBLEM, and STAKES• Thomas Friedman in The World is Flat:• p21. “Change is hard. Change is hardest on

those caught by surprise. Change is hardest on those who also have difficulty changing.But change is natural; change is not new.”

• p378. “The weak will fall further behind faster. The traditional will feel the force of change more profoundly. The new will get turned into old quicker.”

CRITICALITY OF SELLING WELL

“If you avoid the big down cycle, you don’t have to hit it out of the park on the way up.”

-money manager Pat Adams, PVG Asset Management

(which means taking less risk to hit home runs to catch up!)

INVESTING IS LIKE COACHING

• Don’t Go Into the Game Unprepared!

• Watch Game Films for Opponent’s Tendencies

• Focus on Correcting Our Own Weaknesses

• ANALYZE BEFORE STEPPING ONTO THE FIELD !• OUR NEED IS MOST ACUTE re SELLING

WAYS TO BE ONLY HALF PREPARED

1. Think 100% Fundamentals and Ignore Technical Analysis & Psychology

2. Focus Attention on What to BUY, withNo Special Attention on Selling Skillsquestion: where’s your greatest exposure?

3. View “HOLD” as a Default (it SHOULD be a DECISION!).

“Hey, great! I can’t wait to see how my Enron, AIG, & GM stocks are doing.”

PEOPLE HAVE AN AWFUL TIME LETTING GO

GM: what does it take to make some people sell ??

(BigCharts.com chart thru day before filing Ch.-11)

OFFICIAL WORD ??

June 1: Actual Chap.-11 Filing

Selling’s Pain MeterHIGH

Sell @ Loss Finality Ends HopeProves Us a “Failure”Quantifies Official Loss Verdict

Hold @ Loss Retains Hope; Delays Pain; Shields Ego

Sell @ Gain “Realization Utility” – Prof. Barberis @ YaleProves Brilliance – BUT Pay Taxes!

Hold @ Gain Endowment Effect; Strokes Ego;Keeps an Known Friend Close at HandPostpones Taxes; “I’m a Good L-T Investor”

LOW

MAJOR FOCUSES FOR SELLING

• NOT primarily fundamentals– But don’t ignore them!

• Heavy emphasis on psychology– The crowd’s, and our own as well !

• Watch for extreme moves in price– these ARE unsustainable

• Be careful of “religion stocks” ! • Volume extremes = useful immediate signal • Selling IS a reversible decision !!

SELLING INHIBITORS• Media / Academic Propaganda• Lifetime-Decision Mindset• Endowment Effect• Reinforcement; Cognitive Dissonance• Requires Reversal of ‘Invested’ Position• Giving Up Hope for Better; Perfectionism• Avoiding Closure; Underperformance

when under stress• Implies New Stressful Decision• Taking a Loss Injures our Precious Ego

“PERFECTIONISM”

Sometimes weare a little toodemanding ofour ownperformance !

THE FOLLY (!) OF “BUY & HOLD”

• SOUNDS prudent–Good marketing device

• Sucks you in–But they earn a living by

having you NOT hold !• Makes you overly forgiving• Makes you PASSIVE !• WORKS … IF MARKETS GO

IN ONLY ONE DIRECTION !

PLEASE DO NOTINHALE

• Efficient-Market Hypothesis– The irony of B-schools

• Random Walk

• ‘Expenses & Taxes are #1 Issue’– This assumes the above !

>>Ask them, “Buy & hold WHAT??”

WHAT “Efficient Market” ??

MANAGING MONEY IS LIKE MANAGING A

BUSINESSWhichFactorsShould GetYour GreatestAttention?

WHICH IS MOST VARIABLE ?

PriceValue

TaxesComm’s & Expenses

>> Media, Academics Mis-focus the Public !

Looking in All the Wrong Places !

ERROR OF FOCUSING ON TAXES AND EXPENSES…

• Implicit Assumption = Randomness and Helplessness

• Therefore ALL Analytical Tools are Useless( NOT !!)

• If YOU Believe THAT, no need for effort.• No need for AAII !• Give up, index; go fishing!

LAWS OF MARKET GRAVITY

What Goes Up Probably Comes Down !“In the long run, stocks will fluctuate.”

What Went Up MOST and MOST RECENTLY will come down the hardest !

What’s Gone Up May Not DESERVE to Stay Up.

HOPE IS NOT A USEFUL INVESTMENT (or trading)

STRATEGY !!

• Hope is designed to shield the ego

• It often damages wealth in the process

• At best, hope prevents consideringpotentially better opportunities

THINK CROWDS: Stock Enters R2K(Source: BigCharts.com)

*

“Underwear Bomber” Effect**

Events Drive Crowd Activity* * *

WHAT DID YOU FEEL LIKE ?* * * * * * -

WHAT SHOULD YOU HAVE DONE ?* * * * * * -

KEY MIND-SETS• Think in Terms of CROWDS’ behavior• Avoid Joining any Large, Noisy Crowd

• Be Especially Mindful of Recent Reinforcement – Runs– Sharpness of Trend– Media Drum-beat

IMPORTANT IMPLICATION…

Successful investing ALWAYS requires doing what feels UNCOMFORTABLE at the time.

BECAUSE…Certainty comes late and so is usually 100% wrong!

And NOW…

UNLOAD THE BAGGAGE !Many decisions HAVE major costs

for making errors… wrong college, wrong mate, wrong house, wrong car, wrong job

Investing (and trading) has LOW $$ costs forescaping – but heavy emotional baggage/cost

Our egos get involved because keeping score is a frequent ritual with investments.

NEED TO KNOW WHAT ‘MARKET TIME’ IT IS

• 3 Phases:– Denial (disbelief)– Migration– Panic (capitulation)

Todd Harrison, www. Minyanville. com

MUST LEARN TO LEAN AGAINSTDOMINANT EMOTIONS

HOPING FOR SOME HELP WITH SELLING ??

( better plan to D-I-Y ! )

NEVER Wait for Brokers !

• Their ‘Buy Bias’• Training is in Product Pushing• Most CANNOT Use the S Word• If / When They Ever DO, it is WAY Late!• Know the Code Words

And ESPECIALLY IGNORE BUY ADVICE ON FINANCIAL-TALK RADIO & TV !

“CONSIDER THE SOURCE !”

NOTE AND USE PUBLICLY AVAILABLE INPUTS

TO KNOW IF TIME TO SELL• Personal Diffusion Index• Counting the chips• Having too much fun??• Conversations/parties (celebration)• Market headlines on non-business pages• ICI mutual-funds’ flows data (ICI.org)• Cartoons, movies; TV humor and ads (!)• The VIX Index

Watch the VIX !* *

EQUITY MUTUAL FUNDS’NET FLOWS, 1994-2008

www. ICI. org: WATCH FLOWS(even BOND-fund investors get it backwards!)

New Yorker Cartoon Count

Bullish Percent and Total Number

1995: 100% (1)1996: 63% (8)1997: 50% (14)1998: 46% (13)1999: 70% (33)

New Yorker Cartoon Count, cont’d.

Bullish Percent and Total Number

1997: 50% (14)1998: 46% (13)1999: 70% (33)2002: 0% (25)2003: 0% (7)

New Yorker, First Week March-09

“The Dreams of Avarice are Coming Back.”

-The New Yorker, March 2010

Crowd Screaming Loudly? Give It What It’s Demanding

• Stocks? Give it some of yours !• (Cash? Give it some of yours !)

2 BRIEF FORMATIONSCrescendos & Spikes

BRIEF Joy in Joy’s Mudville.*******

GOOD NEWS CREATES A CROWD(Spike in Ross Stores)

*

Source: BigCharts.com

“Internet-Compression Effect”

|>> Time << Price

Volatility |

HIGHER PRICES REQUIRE NEW BUYERS

So… When thinking H vs. S, figure out who the new buyers

might be, and what their motivation would be.

“TIMING THE MARKET” ??

• TIMING = attempting to ANTICIPATE market or individual-stock up or down moves

• PRICING or HARVESTING = taking advantage of unusual recent moves that appear potentially unsustainable.

• (Farmers do!)

RULE OF 3-4-5-6

Markets are overextended, based on historical odds, after rising consecutively for

3 years4 months

5 weeks6 days

“In Just Another …”

HOPE IS NOT A USEFUL STRATEGY !

AN IMPORTANT SELF-TEST:Are you TRULY able to

Sell as readily as you Buy ?( Keep working at it ! )

NOTHING IS FOREVER• Don’t Need to Agonize/Obsess re Buys

– This is NOT a marriage or career choice !

• Act on Themes• Keep Themes Constantly Under Review• Get Your Ego Out of the Way!• Set Stops (but NOT at IBD’s 8%)• Set Sell Targets When You Buy; Try NOT to Raise!• When Bad Things Happen, Recovery May Never Occur (!)

(GM, WaMu, Enron, Beth Steel, ETC ETC !)

BIG-PICTURE SELLING RULES(sorry, no mathematical formulas!)

• Sell when you’re having lots of fun• Sell when tempted to count the chips

• Sell when market is on an extended run (up)

• Use ‘Rule of 110’ to make yourself sell high

• Sell when S&P 500 ~ 20% above its 200-day M A

S&P 500 vs. 200-day M A

SELL ON A DOWNSIDE ‘ENGULFING’ PATTERN !

* * *

MORE RECENTLY …Sears – Where America Shopped

* *

BIG-PICTURE SELLING RULES

• Sell when VIX index is @ lowest in several months

• Sell when stock funds’ net inflows (www. ici. org )have been strong (NOT a current problem!)

• Sell 60-90 minutes after gap-up openings

• Sell when fund managers are quoted in capitulation

• Sell when market doesn’t rally ongood news (buyers’ powder is all spent!)

• Sell when any news surprises are most likely not favorable (‘Goldilocks market’)

AFTERMATH OF UP-GAPa.k.a. bullish volume spike

• Everyone already KNOWS the Good News• Who is Left to Take Out the Late Buyers??

AFTERMATH OF DOWN-GAP(Think “lazy L”)

* * .

• Humans’ Memories of Pain are Sticky• Fear is Stronger than Greed

SINGLE-STOCK ( & ETF ) RULES• Sell when you fall in love with a stock

• Sell when you feel really smart (have all winners?)

• Sell when stock is on a multiple-day run

• Sell on volume crescendos• Sell on volume spikes

• Sell on engulfing-reversal days after a rise

• BULLETIN: YOU CAN BUY BACK AGAIN !

SINGLE-STOCK ( & ETF) RULES

• Sell 60-90 minutes after gap-up openings• Sell on good earnings news (!)

• Sell when stock is far above its 20-day moving average (each stock is different!)

• Sell when stock doesn’t rally on good news• Sell when EITHER the fundamentals OR

technical analysis speaks caution• Sell if others in industry have rolled over

THE ACID-TEST QUESTIONWOULD

YOUBUY

ITTODAYTODAY ?

No?: You’re Playing ‘Greater Fool’

! Holding IS Buying !

WINNINGTHE GAME

• Often Means NOT Making Killer Mistakes

• Remember the 3 Market Phases– Denial /Disbelief– Migration– Panic

• Don’t Join the Crowd !

• OBEY the Rule of 110

SELLING IS NOT 100% ABOUT…• Fundamentals

– P/E ratios, yields, PEG, Price/Sales• Whether You Have a Gain or a Loss• Avoiding taxes• Avoiding Commissions• Keeping Your Turnover Ratio Low• Loyalty (stocks have no feelings!)• Irreversible Life Choices

• SELLING IS ABOUT LOCKING IN GAINS !!

SUGGESTED READING

• Blue Ocean Strategies Kim & Mauborgne• The World is Flat T. Friedman• Inside the Investor’s Brain R. Peterson• More than You Know M. Mauboussin• The Paradox of Choice B. Schwartz• The WSJ Guide to the End of

Wall Street as We Know It D. Kansas• Active Value Investing V. Katsenelson• When to Sell J & R Mamis• The Brainwashing of the S. Selengut

American Investor

• It’s When You Sell that Counts! D. Cassidy• Trading on Volume D. Cassidy

MORE GOOD READING…

www. R-i-i. orgClick on ‘Good Books’

ClassicsMarket HistoryTechnical AnalysisMarket PsychologySelling & Contrary OpinionBond & Income InvestingOther Topics

Thanks for Taking Your Time to Think With Me !

Don Cassidy

“It’s When You SELL That Counts !”(Global Publishing)

Don @ R-i-i. org

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Questions ?