Newsletter

July 21, 2007

The Complex Emotions of Loss

Monthly Performance Review

Largest Changes In Raw Numbers (21 Days)
Wednesday July 25 is opening day of the thoroughbred meet at Saratoga Race Course. Our family will be making our annual trek, meeting friends for a day in the sun (hopefully), enjoying the races, even making a buck or two. There will be no updates or notes added that day. Site data will be updated either late that evening or on Thursday. There will be several other trips during the six week meet, some however, will be on the weekend; thus not affecting this site.
The Complex Emotions of Loss

Have you ever taken a big risk and lost? In my brokerage years I saw this countless times and had a name for it "The Big Idea". You've been watching this stock for the past month and it's been going down, not by a lot, but going down nonetheless. Today that company is to report earnings and you have this strong gut feeling that the earnings will surprise the street on the positive side. In preparation for this event you buy a much larger than normal position; "The Big Idea". Unfortunately, when the actual earnings were reported, it missed analysts' expectations by quite a bit, and the crowd was watching. The price fell hard and fast. You take a large loss and you're understandably upset. You blame fate and yourself. You are now experiencing a variety of intense emotions: anger, guilt, fear, and utter disbelief. This mix of emotions is complex, but unless you learn to cope and move on, your financial loss may also have long-term emotional consequences.

You ask "Why couldn't events have gone my way? I should have been more skeptical. I shouldn't have trusted my intuition. I shouldn't have risked so much. The reasoning makes sense. You're disappointed for trusting yourself and angry at an external event for not going your way. You feel guilty for losing as if you've let yourself down. You wonder what you could have done, and you try and pretend it just didn't happen." Your feelings are a natural response to the loss. The internal dialog that underlies your emotions is also understandable. You want to undo this event you view as devastating and humiliating

How should you cope with these emotions? First, stand back and look at things logically. Right now, your emotions are getting the better of you. Some positive self-talk would work well right now. Sure, you risked more than you should have, but that doesn't make you a bad person, and it wasn't necessarily a bad idea. There are times when traders abandon their risk limits, so taking on extra risk in and of itself isn't a bad thing. Perhaps you should have thought of other factors when developing your rationale; if you had objectively looked at the evidence rather than go with an unfounded hunch. That said, seasoned traders go with hunches, so doing so isn't inappropriate. In addition, information isn't always accurate, so even if you had studied all the available information more closely, you might not have been able to anticipate what would happen with complete certainty. In the end, you should just ease up. You tried your best, showed courage by putting on a risky trade; you should pat yourself on the back for your efforts. You may have made a few mistakes, but you're only human.

Second, you need to decide what you've learned from the experience. What should you learn? It depends on experience. There isn't just one right way to trade. For this example, you may decide never to fully trust an unsubstantiated hunch again, to avoid risking more than you should considering the size of your account. Other traders may draw the opposite conclusions, depending on their market experience. Accept that hunches are right much of the time, but wrong at others. You may decide that there is absolutely nothing you could have done and hope for the best next time. The main point is that when facing a loss, traders need to do two main things: Avoid extreme emotions through monitoring and changing self-talk and quickly decide what lessons are to be learned from the experience, if any, and just move on.

You miss 100% of the shots you never take.
- - Wayne Gretzky -
Monthly Performance Review

No matter how you develop a watch list of stocks for potential purchase or sale, it's a very good idea to track all the stocks in your watch lists for performance and risk. It is only in this manner that you can over time determine the screen or the criteria that best suits your investment or trading objectives, risk tolerances, and trading style. Whether your selection criteria involves technical indicators or fundamental criteria or a combination of both; you need to keep track of how each fits your current particular criteria and performs over time. No matter your time frame. This will help you narrow your focus to those screens that seem to meet your criteria best over time. Focusing like we are attempting to do will also aid you in spotting changes taking place. All stock screens have their day and it is not every day.

The Prudent Trader watch lists are now broken into four overall categories; Growth Stock Screens; Growth plus Value Screens; Value Screens; and newly added this month a Specialty/Other category. While one month or few month's worth of data is certainly way too small to really analyze performance I think it's a worthwhile exercise and one we will continue to do on a monthly basis. Whether you're a member or not, analyze the way you develop lists. It's the only way I know of to see if you're on track. Analyze the whole list, not just the one or two you purchased or sold.

The June 23 Newsletter covered the 229 issues divided into the three categories. At that time Of the 229, 142 advanced over our one month look back while 87 did not. One month later from this list we have 80 declines and 149 advances. With the new category addition, the new screens, we had some 328 issues on our list. Of the total issues covered 210 advanced while 118 did not. Before we get into a more detailed analysis of the screens, how about some index activity for benchmarks.

The star performers over the two month period was the Nasdaq Composite and the Nasdaq-100 up twice the Dow advance and three times the S&P 500. Why does the news media always quote the Dow, and why is 14,000 so important?

Averaging the gains and losses of all the issues combined last month; a gain of 3.71%, carrying those gains forward the average gain for the two month period is 7.4%. Taking our new lists one month performance of all issues averaged, 3.4%. Overall that beats every average but one, the Nasdaq-100. Our original (two months ago list) beat every average and tied the Nasdaq-100's performance over the same time frame. Remember this is an overall average of Growth, Growth + Value, and Value stocks.

Last months big winner was RDNT (RadNet Inc.) with a one month gain of 50.91%. Now after two months RDNT retains the leadership roll with a two month gain of 76.28%. In contrast one stock everyone seems focused on is Apple. Apple places 17th on our list with a one month gain of 12.26% and 28.3% for the two month period. Not that anyone who owns Apple is disappointed, just a matter of perspective. Apple remains on our watch list and this months one month performance while certainly spectacular places 32nd on our list of one month advancers. The leader on this past months list was SPEC - Spectrum Control Inc up a handsome 32.1% for the month followed closely by RIMM Research In Motion Ltd with a 30.95% gain.

It's not a good idea to cover only the winners but the duds in the groups as well. In last month's list our big loser was TSL - Trina Solar Ltd. down about 21%. Trina Solar has recovered smartly, now up about 29% over the two month period. Perhaps looking at the duds a month later is not a bad idea. Did you say volatility was your game?

As we did last month lets break out the different categories (on average) and see how each did vs. the benchmarks. Numbers are percentage changes.

Looking at the Growth stock category; (AZZ) Azz Inc was the big winner plus 29% followed by (ACGY) Acergy S.A. Ads plus a neat 26%. On the downside the three worst for the month; FIRE-Sourcefire; ABAX - Abaxis Inc; and FMAR- First Mariner Bancorp each down about 15%. Are they the Trina Solar of next month? The Growth stock group contained 150 issues comprising three screening methods. 50 of the 150 declined this past month, three were unchanged and the rest advanced.

The Growth plus Value section also contains three different screens and there were 45 stocks listed of which 29 were profitable over the one month test. The two biggest winners in this category: JOBS - 51job Inc Ads (+14.4%) and MTL Mechel Steel Group OAO ADS (+19%). On the negative side we had MOVE - Move Inc; and JOSB - Joseph A Bank Clothiers; each down a shade under 10%.

In the Value Category, again containing three different screens there were 51 stocks listed, 29 of which advanced if even just slightly and 22 declined, with a small overall gain. The biggest winner here was VSEC Vse Corp plus 29% and WBD - Wimm Bill Dann Foods Ojsc up a handsome 26%. Worst performers: USHS - U.S. Home Systems Inc down 33% for the month. Again is this another Trina Solar? Probably not very likely.

This past month a new category was added under the heading Specialty/Other. Currently this category consists of two screens, one an analysis of ADR's and another for positive earnings revisions. This category contained 79 issues of which only 22 declined. In other words a whopping 79% of this screen advanced. SPEC - Spectrum Control Inc and RIMM - Research In Motion Ltd came from the earnings revisions screen.

To review:
Regardless of your methodology for picking stocks or trading the markets; make it a practice to put that methodology under constant review. It will lead you to a better knowledge and investing ability. As time goes on I will have even more statistics to share regarding how each screen performs under differing market conditions.

The differing categories are there for a reason. Everyone has different objective, finances, risk tolerances, time frames in which they operate and so on. Some are suitable for growth some are not. You know yourself better than anyone else, or you should. Just because one category outperforms another over a short period of time does not mean it will continue to outperform. Next month we will take another look at our lists and continue to carry each list out in time.

Could you have outperformed these categories? Could you have selected the winners and avoided the losers? By applying your skills; I think most of you could, many just seem to underestimate themselves. Don't underestimate yourself!

To access the complete lists Click Here!(Members Only). The spreadsheet is sorted by the screening method used. If you see more than one screen next to a stock; that means it qualified under both screens.
Largest Changes In Raw Numbers (21 Days)

[ Reserved for supporting members, now posted in members area ]
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.