Newsletter

May 19, 2007

Staying Calm Through the Ups and Downs

Market & Sector Review
The Wisdom of John Neff

Largest Changes In Raw Numbers (21 Days)

This Week's Economic Reports

Staying Calm Through the Ups and Downs

Many traders ride an emotional rollercoaster, feeling euphoric after a win, and contrarily an overwhelming disappointment after a loss. Professional traders, stay calm and relaxed even after a series of losses. They don't let the natural ups and downs of trading impact their emotions.

Ideally, you must stay rational and unemotional, but even a seasoned trader can fall prey to emotional ups and downs occasionally. It's human nature to question your methods once in awhile. At the other extreme, it's also natural to become euphoric and feel invincible; however be cautious as you can easily become overconfident, and that can lead to trouble. You may become tempted to take unnecessary risks, and start to think you no longer have to do any more research to find and figure out new ways to extract money from markets.

Many traders are especially prone to experiencing an emotional rollercoaster. They may not use proper risk management. They may be risking too much capital on a single trade. When they take big risks, they are likely to feel overly ecstatic when they win big, but become depressed when large amounts of trading capital are wiped out after a big loss. Through proper risk management, however, relatively little is lost on a losing trade, and that helps minimize the sense of disappointment after a loss. It's easier to stay evenhanded in terms of your emotions when your equity curve is smooth, rather than jagged due to extreme losses. Trading is a business. As a business professional, it's essential to maintain objectivity. The more objective you are, the easier it will be to creatively analyze market action and trade opportunities as they present themselves.

How does a seasoned trader control his emotions? He realizes that his trading performance moves in cycles. Sometimes he is profitable and sometimes he is not. Gaining awareness of this fact helps control his emotions. Try and realize that if you have a big winning period that you shouldn't get overly excited because, most likely, you'll have a flat or losing period just around the corner. No style of trading makes money all the time. The odds are that after you have a big winning period, you'll go through a period of losing money shortly thereafter.
"The task of beating the market is not difficult, it is the job of beating ourselves that proves overwhelming."
- Martin Pring -
Market & Sector Review
The Wisdom of John Neff

A screening method based upon the information provided in "John Neff on Investing", is now part of our on-site watch list under the heading Value Stocks.

For those of you unfamiliar with John Neff; he was portfolio manager for Vanguard's Windsor and Gemini II Funds for thirty-one years. He beat the market twenty-two times, through every imaginable stock market climate, while posting a 57- fold increase in an initial stake. He remains one of the most respected, successful, and experienced investors of the 20th Century. Having run the Vanguard Windsor Fund from June of 1964 to December of 1995, he generated a Compound Annual Growth Rate, for his investors of 14.8%. That would have turned an initial $10,000 investment into around $587,000 as compared to only $250,000 for the S&P 500. When Windsor closed its doors to new investors in 1986, it was the largest mutual fund in the United States. He is now retired from mutual fund management, but participates in Barron's annual Roundtable. He is the author of "John Neff on Investing".

According to his own book; John Neff was perhaps the ultimate contrarian and a classic value investor. He demanded that his stocks generate current income through large cash dividends. This, he felt provided a cushion against market volatility and gave the investor a sense of growth while waiting for Wall Street to recognize the companies true value. He sought companies with low price to earnings ratios and high dividend yields resulting in a portfolio with an average PE 1/3 below the market, while averaging 2% more on yield. In addition to low PE ratio's he looked for a sound balance sheet, satisfactory cash flow, an above-average return on equity, able management, the prospect of continued growth, an attractive product or service, and a strong market in which to operate.

Sector and Industry Weightings
 John Neff's Vanguard Windsor Fund was extremely well diversified, typically holding positions that were 1% of assets. Neff would weight the assets he managed heavily in favor of those areas of the market he thought offered the most value for the money. If, for example, he believed the property and casualty insurance industry was headed for a recovery after a cyclical downturn, he may only take a 1% position in an individual underwriter but he may acquire positions in twenty different stocks, exposed to that sector of the economy.

Dull and Out of Favor Stocks
 Glancing over a portfolio managed by John Neff, you might be surprised to find a list of stocks that are very likely to be highly despised on Wall Street at the time. This disciplined value and contrarian approach often meant moving into portions of the market for which investors had developed a fear, and loathing.

Applying the John Neff Approach to Your Own Portfolio
  • Low Price to Earnings Ratio
  • High Returns on Equity
  • Management with Disciplined Capital Allocation that Returns Excess Funds to Shareholders
  • Above Average Dividend Yield
  • Out of Favor Industries and Sectors that You Believe Will Turnaround
  • Viable Product or Service with Promise
Because everyone is different, having different goals, objectives, styles, and risk tolerances, our on site stock screens will be divided into four categories: Growth, Growth plus Value; Value; and an Other Category. The screens will contain stocks fitting the criteria I have been and will continue to write about. Screens based on the work of John Neff are now included in the Value section.

If a value and contrarian approach suits your style; this plus our other value screens may be just what you need to be successful.
Largest Changes In Raw Numbers (21 Days)

[ Reserved for supporting members, now posted in members area ]
This Week's Economic Reports

Have A Great Week!

Bill

Disclaimer: Trading in securities, of any type, may not be suitable for all individuals. The contents of this newsletter are not a solicitation to buy or sell securities. The opinions expressed are solely that of the author. You must do your own research, contact your own financial advisor for suitability of any investments. Data gathered is from sources believed to be reliable, but NO guarantee as to their accuracy is made.