Newsletter

August 4, 2007

Staying Calm Under Pressure

Investment Philosophy of Geraldine Weiss

Largest Changes In Raw Numbers (21 Days)

Staying Calm Under Pressure

Many trading days are full of chaos and stress. Especially recently! Sometimes we are in a bad mood, while at other times; the markets don't cooperate with our trading plans. Seasoned and successful traders trade in a relaxed and focused manner. They don't put unnecessary pressure on themselves. They know they needn't succeed on any single trade. They keep their eye on the big picture. They don't believe they need to be right. They don't impose their will on the market. And they don't try to predict the future behavior of the market. Instead, they objectively observe market conditions, make a detailed plan of attack, and let the market take them where it wants them to go. They stay calm and relaxed, and ready to anticipate what will happen next. Seasoned traders do not doubt or second-guess decisions. They freely enter and exit trades. This relaxed approach to trading allows them to see and take advantage of trading opportunities. Managing stressful emotions; it's absolutely essential for enduring success.

It may be desirable to stay calm and rational, but even seasoned traders have difficulty handling their emotions at times. When asked seasoned traders will confess they aren't immune to emotional ups and downs: they would be lying to you if they said that they didn't have moments when they get upset.

There are situations that are especially hard to manage. Here are a few of them I've experienced: I don't like to lose. Slippage can be infuriating. A big gap is also hard to handle. You hold a position over night and you get up the next day, and because of some news, it's worth a lot less.

How do you cope with setbacks? Take a look at your mood to see how well your coping. In those tough situations, just stop trading until you can look in the mirror and smile. If you can't look in the mirror and smile; don't trade until you can. Stress and emotions, have a powerful impact on trading performance. It's natural to feel you have to be perfect. It's natural to want to do your best. But when stressful situations make you overly emotional, you might consider standing aside until things improve.

Trading requires intense concentration and focus, but it's difficult to maintain this stance when you are overly emotional. Stay calm and in control. The better you can handle your emotions, the more profits you'll take home.
Investment Philosophy of Geraldine Weiss

She's been called "the Grande Dame of Dividends" and "the Dividend Detective." That's because Geraldine Weiss, editor of Investment Quality Trends, banks on the idea that you can spot a value stock by its high dividend yield. Her investment letter is devoted to buying blue-chip stocks whose yields are near the high of their historical ranges and selling when they drift low.

Over the last decade, however, dividends have been ignored by many growth companies, and as a result Weiss' approach has been criticized as fusty and outdated. Still, near the bottom of the bear market in 2002, according to the Hulbert Financial Digest, Investment Quality Trends was the number one performing letter on a risk-adjusted basis over the last 15 years, earning 12.4% annualized. It has placed third for the last ten years and third for the past five years. During 2002, the height of the bear market, Weiss' Lucky 13 portfolio gained 15.2%, versus a 12% drop in the S&P. Having studied business and economics at the University of California, Weiss became the first woman to start an investment advisory service, founding the Investment Quality Trends letter in 1966.

Weiss melds a conservative, blue-chip investment style with a value approach, using dividend yield as a guide to value. A high dividend yield signals out-of-favor stocks, but many such stocks are out-of-favor for good reason-they are financially troubled. Weiss' strategy attempts to weed out truly financially troubled firms by seeking out-of-favor stocks within a relatively safe sector of high-quality stocks. Weiss has outlined her approach in two books, "Dividends Don't Lie," with Janet Lowe (Longman Publishing, 1988, out of print), and her more recent "The Dividend Connection," written with son Gregory Weiss (Dearborn Financial Publishing, 1995).

If you'd like to screen for Geraldine Weiss candidates look for:
  1. Dividend increases in five of the last 12 years: A measure of good long-term performance of the company's ability to increase net earnings, reflected by a trend of increasing dividends. Weiss terms this the most reliable measure of good management.
  2. A minimum of five million shares outstanding: An assurance of liquidity, which in turn prevents manipulation of share price. Firms smaller than this may have trouble attracting institutional investors, which leads to illiquidity.
  3. Shares must be held by at least 80 institutions: Another assurance of liquidity, but Weiss views this rule as the least rigid of her criteria.
  4. Improved earnings in at least seven of the last 12 years: Another indication of a well-managed company, indicating that a company can survive the tough years and prosper in the good ones. Weiss notes that she also looks for sales increases, and profit margins that are under control.
  5. It must have paid dividends, with no interruptions, for roughly the past 25 years: Consistent dividend payments are a sign of a profitable, well-managed company; a long record also provides the historical data necessary to evaluate the range of dividend yields indicating valuation extremes. Weiss suggests that if an investor wants to relax the number of years, dividends should have been paid long enough for several cycles of overvaluation and undervaluation to be established.
  6. The stock must carry a Standard & Poor's quality ranking no lower than A-: S&P ranks the quality of stocks on a scale of A+ to C (a D indicates reorganization) based on past growth and stability of earnings and dividends; Weiss finds the rankings a useful guide to investment quality. Although stocks must have a quality ranking of A- to make the initial list, Weiss allows stocks to drop to B+ once on the list; however, if they drop to B, the stock is deleted from her blue-chip list.
Some Screeners that may help you find these stocks:
MSN Stock Screener
Yahoo Stock Screens
CNBC
AAII - This one will screen exactly according to Ms. Weiss criteria, eliminating a bit of work on your part, but it is not Free. You get what you pay for!

Once a list of blue-chip stocks is developed, Weiss suggests the purchase of these stocks based on a value approach, using historical dividend yields as a guide.

Specifically, Weiss charts a firm's dividend yield and its price over a decade or more, and looks for historical high and low dividend yield "turning points," when stock prices change direction. Weiss maintains that most stocks turn at roughly the same dividend yield each cycle; averaging these dividend yields defines the boundaries. "If a major rising price trend has ended in a 2% yield area many times, and a major declining price trend repeatedly has ended in a 5% yield area, a profile of value has been established for that stock-a 2% dividend yield identifies a historically overvalued price where the stock should be sold to preserve capital and protect profits. Conversely, when that stock is priced to yield 5%, it is historically undervalued and a good buying opportunity is at hand."

Weiss summarizes her own approach this way: "Successful investing in the stock market is not brain surgery. Anyone can be a successful investor. The secret is no secret. It is simply that you confine your selections to blue-chip stocks; you buy them when they are undervalued, and you sell them when they become overvalued. This is the well-lit path of the enlightened investor."
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Have A Great Week!

Bill
Prudent Trader.com

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.