The Tycoon Report

Do You Have an Investing Playbook?

Wednesday, September 26, 2007 | Dylan Jovine

Note from Dylan Jovine: As per my request last week, many of you submitted questions to me, asking about investing.  I went to the website and wrote each and every single one of them down and have started answering them one at a time.  In an effort to keep the entire process organized, I plan to issue answers to all of you in the coming weeks - so please be patient.  I'm spending an hour each day going through the questions and answering them.

The second thing I asked for last week was for our readers to post articles on The Tycoon Report website.  With respect to that request, today I wanted to share one article with you that really caught my attention.  It was written by Tycoon Report reader Alex Hahn from Germany, and it offers every investor some valuable lessons on creating an investing "PLAYBOOK."

I look forward to writing in next week's issue of The Tycoon Report, and I encourage you all again to share your personal investing experiences on our website.  The more we share with each other the more we learn from each other.

Who knows?  YOU may share a story that saves a fellow Tycoon Report reader money on an actual trade!

Rome Wasn't Built in a Day
by Alex Hahn

It must have been one of these cold, dark and rainy days in November 2002 when I first realized the importance of knowing how to invest one’s money.

Back then, I had just graduated from high school and was drafted directly afterwards.  (A little explanation:  I live in Germany, and we have a draft system here for male citizens.)

Although I do not know the precise date any more, I remember every detail like it was yesterday.  I was sitting in my small room in the barracks – the medical officer had ordered me to stay inside because I was recovering from an injury - while most of my comrades were outside in the foggy Hunsrueck Mountains in the southwest of Germany.  They were there conducting arduous military exercises in the cold, while the sound of the pouring rain was being cut sharply by the yells of our drill instructors.

For many Germans who choose to serve (there is a community service alternative), the time in the military is a phase of transition from school into “real life” – so it was for me.  This particular evening, I had received a call from my parents informing me that from now on, it would be my responsibility to manage my savings.  Granted, I was not born with a silver spoon in my mouth at all (in fact, very far from it), and the savings were modest (measured by objective standards), but it was important for me to know that the funds were in the best place possible because they came from the heart.  After all, hard work and strong discipline had been exercised for several years by my parents (especially my mother) to save that amount.

This was a new situation I was in, and it made me think: Where do I get zero risk and the most yield?  (A typical approach for many Germans – the financial markets are still considered a casino by many.)  Why do interest rates rise and fall?  Am I better off to put money into a savings account when interest rates rise?

However, I did not know much about the financial markets and inflation back then.  To be more precise, I hated them.  To me, everything related to stocks, funds, banks, etc. necessarily meant dealing with arrogant and narcissistic airheads who wear suits and talk nonsense but pretend to know it all.  (Of course, that was my limited thinking back then.)  Shortly before, I had heard stories about friends whose trust was brutally abused by some brokers to generate commissions, and eventually, these friends had lost most of their money; of course, that was not an option worth considering.  Especially since the advice my friends received was, “You must average that one down now,” or “Time for a little replacement in your portfolio.  Now we will strike back at the markets,”  Just the poor-quality rhetorics managed to keep me away from gentlemen like these.

Three years later and 30 miles north of the Twin Cities, MN, USA:

Times had changed, and my military service was over.  I had enrolled in university, was working towards my master’s degrees and about to become an educator.  In order to gain some practical teaching experience, I volunteered to participate in a cultural exchange program with the United States, which eventually led to an assignment in a small rural community.  It was again in November when I received an e-mail from my bank in Germany, telling me that my money was about to be released and could be re-invested.

The only difference: This time I wanted more.  Much more.

Coincidence or destiny – I happened to stumble over an American investment advisory newsletter.  (No, I am not talking about The Tycoon Report or any other Tycoon products yet.)  It was written by a guy who was strong in terms of rhetorics and fundamental analysis.  What impressed me back then was that he did things his own way and delivered quite some critical commentary on the Wall Street system.  However, his annual performance was modest and clearly below average; he had big timing problems with his recommendations.  Nevertheless, I trusted this guy and thought I would put my luck to the test. 

What did I do?  Basically, greed was ruling my decision-making, and I wanted to “make up” for what had been withheld from me for all those years.  “Time to get your piece of the pie, Alex, and become a rich jerk.”  So I cherry-picked and bought the stocks that had had the best performance during the past year.  I wanted to own them, plus I did not care about buy limits or any “grandpa stuff” like that.  I mean obviously those stocks were super fast rockets, and the publisher had been so damn right on them.  They had to go up, hadn’t they?  Why was the guy so cautious?  It was time for my ride, a pretty fast and profitable one – at least, that is what I thought ...

Of course I – rightfully – got my butt kicked in a painful way by Mr. Market, who obviously had decided to show me from the start that he had no obligation to feed me for free.  Ouch.

It did not take me long to understand that analyzing what went wrong was a necessity if I wanted to continue in the markets, so I sold all my shares at a high loss.  (Two weeks later, they ALL skyrocketed, by the way ... So much for timing.)

I came to the following conclusions:

1) Never, ever chase a stock.

2) Do not think the market has to feed you.  You take advantage of what it gives to you; it is impossible to “rob” the market.

3) Mr. Market does what he wants.  It is hubris to think you can control him or forecast him successfully on a constant basis.

4) Only invest as much as you can afford to lose.  Things CAN go really bad.

5) Look at the risks first.  What can go wrong?  Something will.  No matter how good the preparation and the research is.

6) If you follow a complete-portfolio-strategy, do NOT cherry-pick.


Phase II: “Now it’s all gonna be different.”

Some months later, I decided to return to the markets – in April 2006.  (Yeah, I know, great timing ... ;-) ) 

Since I had lost quite a lot of money the last time, I wanted to try “high explosives” this time and went into emerging market small caps on a highly-leveraged basis.  The gains started piling up, but then Mr. Market seemed to have discovered that I returned and was indulging myself in a new style of incredible idiocy, so he kicked me out again – by letting off a market correction.  Again, my investments (luckily, not that much money – compared to my first loss) were hammered into the ground without any sign of mercy.  In retrospect, I feel like a little kid who broke into a bulldozer at night to have a joy-ride in the over-drive mode.  The only difference was that I was not just driving around, but I was bulldozing my portfolio, and there was no joy at all included ...

And it got worse:

I was desperate, and even more ashamed when asked by my parents to report on what I had done with the savings.  They were shocked, disappointed, lost trust in me, and I have to admit they were totally right.

Although my intentions had only been the best, I deserved everything I received.  My idea had been to make monster profits and show my parents that their money was in good hands.  After all, the editor had done it for the entire last year, so why not this time with me as a part of it?  Naive thinking of a youngster ...

The result: People started doubting me, especially my parents.  They questioned my mental sanity and regretted deeply that they had passed the savings on to me.  Seeing this disappointment every day – I will never forget that.  It was a humiliating time.  I could hardly look into the mirror.  The damage to my reputation was huge, and I had disappointed strongly.  Of course, I just wanted to undo everything and to go back in time, but sometimes, the best escape from a situation is running forward.  (A good rule, too, by the way: Never look back and cry about the past or indulge yourself in your past success.  Always look ahead.)  After all, I still had this deep feeling inside me which told me that the stock market works IF you know how to work it!  My parents called it compulsive gambling; I called it confidence.  Of course, I had to ignore the people who looked at me every day with their sorry faces, the people who talked behind my back and the people who laughed about me and ridiculed me.

It was hard, but I tried to forget about all that, and I sat down for another painful analysis which led me to the following results:

1) You need a VERY big bank account if you want to make every mistake by yourself.  Learn from others, constantly educate yourself and NEVER make the same mistake twice.  By trial and error without guidance or a firm system in place, you get wiped out sooner or later (especially if they use leveraging against you.  Oh boy.)

2) You cannot just follow the masses.  You need to be ahead of them and at the right spot at the right time to make money.  (I may quote Teeka Tiwari here because he just says it best:  LET THE GAME COME TO YOU.  Actually, I have had a sign with that sentence next to my computer for some months.  Now, I do not need it any more, luckily.)

3) Buy stocks when nobody likes them.  Sell when people get crazy about buying.

4) Too much media kills any objective thinking.

5) You need to have a system or a strategy to guide you and to keep to CONSTANTLY when operating in the financial markets.

However, all these logical ideas did not exactly tell me HOW to do it, so I decided to search for educational material on the web and luckily I FOUND it with The Tycoon Report.  (This was about 12 months ago.)

Since then, my learning curve went absolutely ballistic.  It all started with one article that I read on a Friday quite some months ago, when Teeka Tiwari mentioned a system called Point&Figure in one of his writings.  I had never heard about it before, so I spent some hours on research and ended up buying a book on the topic.  This just changed it all.  With a theoretical understanding in mind, I signed up for Point & Profit, Teeka’s great trading service, and wanted to see how a real professional investor uses that system.  My membership cost me a lot of money (relative to what was left of my portfolio), but I learned many invaluable lessons.  Some months later, I canceled my membership and wanted to try things on my own.  Guess what happened?

I FAILED.  For a third time.  But this time, I had been smarter and only had done paper trading.  Here is what I have learned:

1) Never trade for revenge.  You’ll kill yourself financially.

2) Superficial knowledge is not enough.  If you want to learn a good concept, learn it entirely and make sure you understand every necessary part of it before trying to apply it to real money.

3) Be patient and do not pull the trigger because “it feels right” or “this time it feels different.”

4) Try to forget about fear and greed and replace these emotions with a system which has proven itself successful and can guide you.  There is no room for panic in a serious trading approach. 

If you know what you are doing and know that your system eventually works, your fears will be taken away and you will learn to trust your decisions even if they seem to be against all the "wisdom" that is communicated in the media.  Trust in your own decision-making.  You cannot be right on every trade, but you don’t have to be if your system works.

Again, I had to go back to the books to continue my education.  Now, I had enough and was deeply fed up with failing.  This time, I was sure to get it all right.  “Time to rock-and-roll, Alex ...”

Here is what I did:

I wrote my personal “playbook” just for myself on every potential market situation I could think of and every trading instrument I could get access to (options, warrants, contracts for difference, stocks, bonds, etc.).  I created rules over rules for my own portfolio.  This book contains objective criteria that tell me when to enter a trade and when to get out.  It includes a fixed set of trading scenarios for the use of highly leveraged derivatives.  I have a diary for every trade I do in which I enter my emotional state when deciding to make a transaction and much more.  If I am angry or sad, I do NOT trade.  No matter how good the situation appears to be.

This time everything worked.  And it is still working, big time.  My success rate went through the roof, and I am very profitable for the first time ever.  It will take until I have regained all my initial losses and all the trust I ruined, but the last six months have brought me forward very rapidly.  Of course, there is still a lot to learn (and will always be), but I now understand why my initial confidence was right.  You CAN operate the stock market and be successful and you do NOT need a PhD from an expensive university.

My understanding is that learning how to invest and trade is a life-long task.  The matter is not who is the fastest, strongest or smartest (think of the collapse of Long Term Capital Management, which was run by Nobel Prize winners), but to make sure that in everything you do and every decision you make, you give the best you can.  Aim for top quality, constantly.  Never settle with what you have achieved.  Your performance at the end of the year is the sum of the quality of your individual decisions.  If you keep working on yourself, you will eventually succeed.  There will be ups and downs, but at the end, you will break through.

For me, it is helpful to remember that failure always starts in your mind before it becomes reality.  If you master your thinking and your emotions, nothing can stop you.  Everything you need you can learn right here and use this website as a basis.

Learning might sometimes be a longer process, but after all, Rome was not built in a day.

The Tycoon Report really made a big difference in my life, and I am sure it can make one in yours, as well.  I made a 180 degree turn and could not be stopped since then.  And a feeling deep inside me tells me that this is just the beginning ... I just turned 25, so there is still plenty of time for this to run.

Best luck to all of you and a BIG THANK you to all the editors of The Tycoon Report.

Alexander Hahn

Germany




Dylan Jovine
Contributing Editor
The Tycoon Report