This Week’s Battle Plan

The Neurotic Charity Fund

Unless you didn’t call this market bottom you are a loser. Because
EVERYONE else did. I know. I saw them on TV and read about them on web
sites. But before you feel sorry for yourself, you can have some
comfort in knowing that most of these people suffer from psychological
disorders. Disorders with their egos. Disorders that cause
distortions. And disorders that arise from defense mechanisms in
adults with arrested emotional development who have a public forum to
show their neurosis off. And more importantly, it goes into the fact
that if you listen to these ego-maniac clowns (I would call them assholes
but I promised not to use profanity in this column), you really think
that you are the only person in this game that really has no
clue. Everyone has it figured out, everyone has the mint to print
money…except you.

Before I go on, I will tell you I don’t feel this way because I lost
money this week. My accounts at the end of the week were higher than
where they started (more on this later). I feel this way because after
a 2 1/2 year bear market, a bear market that has hurt a lot of people,
these assho…err, clowns, still go on TV (and in print) and
behave as if they are the only ones who have this game figured
out.

The Mentally Challenged

Let’s look at the three groups of “professionals” that
should keep the American Psychiatric Association busy for years:

1. The “I picked The Bottom” chest pounding
professionals.

Read Don Miller’s piece from Wednesday. Don is a very focused, but low-key
gentleman. Not much upsets him. But, he erupted on Wednesday (click
here to read). He was on the warpath. If Don is pissed off, then
something is wrong. Why? Because of all the revisionist history going
on from mentally ill claiming they picked the bottom. My first
question is “Who the hell cares?” I picked the bottom too! I
had CVR buy signals on the day we bottomed. I’m a genius! I’m the
greatest amongst great! Oh yeah, I forgot. I was also on national TV
in May picking the bottom. But, you see, “I was a bit early”
(sound familiar?) And, had I forgotten to put in that somewhat
important order called a stop, I’d be typing this piece on a
used computer at the library because the computers at work would have
been repossessed.

If you picked the bottom, congratulations. But no one cares! The
market has been going down for 2 1/2 years! It’s oversold! Bottoms
happen from oversold conditions, not overbought conditions. Any idiot
can keep calling a bottom all the way down until they get it right.
Who cares!!! Enough!

But wait, I have a great idea. These guys are now rich. They
must be. They called the bottom. They must have have made millions. No,
billions! Lets get them to donate a portion of the money to
charity. Every time these chosen few go on TV or write a column that
states they picked the bottom (or top), they should be forced to
contribute to the Neurotic Charity Fund. 90% of the proceeds go
to charity. What a great idea!  Let’s compile the names and home
phone numbers of all these “successful bottom pickers” and
have them give their winnings to the many charitable organizations in
this country. These guys made so much money over the past week, I
suspect that all illnesses and poverty will be cured immediately!
Share the wealth with a good cause, guys. I’m sure you now have
billions. You’re blessed. Share those blessings today, guys (why do I
have a feeling we’ll probably collect about $61.42?).

2. CEOs. It’s amazing. This game is played out every quarter.
Beat the quarter and it’s “because of the focus to the bottom
line, our oneness with our customers, our ability to execute like
Patton’s Third Army, our global leadership, our genius.”

Then, these same guys miss the numbers. And when they do, it’s
not their fault. What do they say? It’s the slowdown in consumer
spending, the recession in Europe, job uncertainty, this uncertainty
and that uncertainty that has led buyers not to buy anything, and so
on and so on. For these guys, it’s never their fault. They take
all the credit when things are good. And, displace all the blame to
macro-economic events when they miss the numbers. A nice defense
mechanism to protect their ego (and job).

So, I have a solution for this, too. Each time they outperform Patton’s
Army and need to brag about it, they get audited from an outside
source. And if the results are as they state, if in fact they really
are Jack Welch II, they get to keep their bonuses and perks. But, if
economic or industry factors helped performance in any way whatsoever,
they have to relinquish 10X their salaries and bonuses, again to the neurotic
charity fund. Do you think that might change the nature of their
appearance on CNBC? Do you think we’ll again collect more than $61.42
for our charity?

3. And finally, the Analysts. First, I can never remember a
period that they have missed the numbers on so many companies. But
that doesn’t matter. They ALWAYS have next quarter to do it again. And
the next quarter after that and the next quarter after that. These
guys are more wrong than any other profession in mankind but it never
seems to matter. All price movement this week and next week is keying
off their “GUESSING” of what a company should earn. And,
when they are wrong, like the CEOs, it’s not their fault. It’s the
fault of the company, it’s the fault of the economy, it’s the fault
that my the dog ate my homework. And, then, after they make their
excuses, they unashamedly give you their guess for next
quarter! And incredibly, people’s money gets put at stake based
upon these guesses. Why not just go the race track and buy one
of those tip sheets that they sell as you enter the track? Those
perform better than the analyst’s nonsense. It couldn’t possibly
perform worse!

Shall we clean up this industry too? How’s this for an idea…for
every penny these GUESSERS are wrong with their estimates, they too
get to contribute to a charity (that’s right, the Neurotic Charity
Fund). Let’s say $100,000 for every penny they are off. And, out
of fairness, we’ll give them a $100,000 bonus for every GUESS they get
right. My guess is the industry would be cleaned up (a nice word for
“eliminated”) in about a week.

Let’s do a reality check here. If there was ever a reason not
to watch and listen to these guys, this week was it. The bragging, the
chest pounding, the defense mechanisms, the guessing…was pathetic.
Little kids trying to show the teacher they are better and smarter
than the other little kids. And, it’s not something that just arose
today. It’s been around for decades. It’s just more apparent today as
financial markets reporting has became a big sport. And the
journalists need to find these children in order for the game to go
on. The bottom line is these people lose more money for people than
they make. There are many, many ways to prosper from the
markets. Following those who suffer from arrested emotional
development and delusional behavior is not one of them.

Where do you turn to? Yourself. Learn to do it yourself. And learn to
do it from other traders who have done it. One of those traders is
someone who has made hundreds of millions of dollars from trading.
Yet, I suspect you have never heard of him. Who is he?

Stevie Cohen

You trade your theory, and let the market tell you whether you are
right or not…I estimate that nearly 100% of my gains come from 5% of
the trades, and roughly 55% of my trades are winners.

The man who stated this has made hundreds and hundreds of millions of
dollars from trading his hedge fund. And he’s only in his mid-40’s.
His name is Stevie Cohen, and he runs a $2 billion fund. A fund that
was less than $50 million only a few short years ago.

First, I will tell you I do not know Stevie Cohen. Very few people do.
He’s ultra-secretive. I do know that he and his many many
traders are hyperactive short-term traders. And their performance is
nothing short of extraordinary. A few years back they did 80% for the
year. That was AFTER taking a 50% incentive fee. And supposedly this
type of performance has been going on for years. And even though few
know what strategies they trade, I believe it is secondary to how
he trades. And that information can be gleaned from the above
quote. Let’s break it down:

First, he’s correct only a bit more than half the time. For
those of you who think one can only be successful if you have a system
that is right a minimum of 70% of the time, the above fact should put
that argument to rest.

Second, and even more importantly, nearly all his gains come from
5% of his trades. Or, stated another way, his gains come from 1 in
20 trades. That means 19 out of 20 trades add up to nothing (at best).

I’ve stated before both in this column and in my course that the
best traders I know, make a little, lose a little, over and over again
and then have a few trades that make a lot. This is further proved
from the above quote.

There are a few things you need to do to perform this way:

1. Use consistently tight disciplined stops that
insure you lose only a small amount when you are wrong. If the
losses are too great, they will eat into the 5% of the winners that
are significant. Tight stops will prevent this.

2. Have a strategy that can produce significant outsized
gains. You must be able to hit home runs a few times a month in
order to achieve such incredible results.

3. Have money management techniques in place that
allow you to capture the bigger gains. This means not locking in
small gains too quickly before they turn into the large gains.

This is the best way to succeed at trading. This week I had a number
of trades. Most of them made a little or lost a little. They added up
to nothing. My gains came because I was short Sears
(
S |
Quote |
Chart |
News |
PowerRating) before it
collapsed. The strategy I used tends to find these type of moves. I
keep tight stops on it when it’s wrong, and I have money management
techniques in place that lets me be there if the move is coming. I’m
doing what I’ve learned from others. Lots of small gains and lots of
small losses and a few big gains. This is what most winning weeks
look like! Stevie Cohen gets his big gains (and 100% of his
hundreds of millions of dollars of profits) from 5% of his trades.
Everything else adds up to a churn. Grinding time on a lot of trades
until the big gain comes. Make a little, lose a little on 19 trades,
and the 20th trade turns into the significant gain. That’s the way
to properly trade, and there is no better person to learn it from
than someone like Stevie Cohen who is making a fortune doing it!

Look at your trading, and see if you are following the trade
management techniques mentioned here. If you are not, then it
may be time to apply this philosophy of trade management to your
trading. It works for Cohen and his hedge fund, it works for many,
many other traders I know who are successful, and it can work for you.

Finale

Compare Cohen’s quote to the quotes of the mentally challenged you see
on TV every day. Stevie Cohen lives in one world. The contributors to
the Neurotic Charity Fund live in another.

Cohen’s world is real. Live in Cohen’s world.