All Posts by Jani Ziedins

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About the Author

Jani Ziedins (pronounced Ya-nee) is a full-time investor and financial analyst that has successfully traded stocks and options for nearly three decades. He has an undergraduate engineering degree from the Colorado School of Mines and two graduate business degrees from the University of Colorado Denver. His prior professional experience includes engineering at Fortune 500 companies, small business consulting, and managing investment real estate. He is now fortunate enough to trade full-time from home, affording him the luxury of spending extra time with his wife and two children.

Dec 07

Struggling to go higher on good news?

By Jani Ziedins | End of Day Analysis

End of Day Update:

The S&P500 finally broke a string of four down days and put together a respectable gain. While four down-days sounds bad, the losses were relatively modest, only giving back a portion of last week’s breakout.

Tax Reform is marching ahead, but the market is struggling to keep up. The lack of further price increases suggests the Tax Reform rally is running out of steam. We can continue creeping higher over the near-term but anything much above 2,700 seems like a stretch. If there was a lot of upside potential left in the market we would still be racing higher. Instead the breakout stalled and even dipped after the Senate approved their version of Tax Reform. Few things make me more nervous than a market that stops going up on good news.

News gets priced in quickly, that’s how markets works. Once the crowd started assuming Tax Reform was going to happen, the bulk of the upside had already been realized. If someone is still waiting to buy the headlines, they will be late to the party. At this point it looks like the actual signing of the bill will be anticlimactic and could even trigger a sell-the-news dip.

The path of least resistance is still higher and I expect the glide higher will continue over the near-term, but we are definitely approaching the end of the Tax Reform rally. Hope over tax cuts fueled the Trump rally over the last 12-months, but to keep marching higher we need to find a new standard-bearer. At this point I don’t know what it will be. Maybe blow-out earnings reports next month. But whatever it is it needs to be big to keep beating these ever higher expectations.

Switching gears to bitcoin, it shocking how high this has gone over the last few days. Last week we broke through $10k for the first time. Tonight we hit $17k. Two months ago we were under $4k. If anyone still believes this is not a bubble, clearly they don’t have any experience with bubbles. Without a doubt this thing will continue higher, but we are in the frantic part of the climb and the crash is not far away.

The problem BTC will run into is a lot of people are following this surge in price with a trailing stop. BTC passes $10k, they move their stop up to $8k. We surge past $14k and they move it up to $12k. That is actually a very sound strategy, unfortunately it doesn’t work when everyone else is doing the same thing. Without a doubt the price gains over the last few weeks are littered with countless automatic stop-losses. Once BTC starts dipping, sell orders are going to get triggered, which further pressures prices, which triggers even more sell orders. It won’t take long for a tidal wave of sell orders to overwhelm the dip buyers.

The scary part is the these things go down so much faster than they go up. $7k in gains over a week will be undone in an hour. I won’t pretend like I can call the top in BTC and this thing can easily continue past $25k and $35k over the next few days or weeks, but this rate of gains is most definitely not sustainable and it will come crashing down soon. If a person is planning on selling, get out on the way up because you will not be able to find a buyer once this thing starts going down.

Jani

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Dec 06

CMU: How much money should you keep in your trading account

By Jani Ziedins | Free CMU

Cracked.Market University

On Monday I wrote about how many stocks a trader should keep in their trading account to protect themselves from unexpected drawdown while also making the most from their best ideas. Today I will cover another portfolio question I frequently get from subscribers, how much money should they keep in their trading account. Again I start with the same disclaimer the following are just guidelines and only a licensed investment advisor can give you individual advice specific to your situation, goals, and risk tolerances.

The first thing to understand is trading is risky. You can and will lose money. But this isn’t always a bad thing. Losing trades are simply an expense of trading and is no different than the cost of inventory for a retailer. And just like a small business, the goal is to keep our revenues larger than our expenses.

Making a profit is an obvious goal, but it is more than just making money. We need to make more money than the alternative, which for most people is buy-and-hold index funds. A 20% return sounds great, but what if the S&P500 made 25%? Does that 20% still sound good?

And more than that, our goal is to make enough extra that it is worth our time. Beating an index fund by $30k sounds great, but if you traded full-time, is $30k enough to be worth your time if you could make $150k doing something else?

Trading is definitely a tricky business and for most people it makes more sense to keep it a hobby and not rely on it as their primary source of income. Trade because it is fun, not because you think you can replace your day job. Beating the market is hard enough. Beating it by enough to pay all of your living expenses is a much larger task.

As I already alluded to, there are different ways to make money in the market. The first is trading. The other is diversified, buy-and-hold investments. What does a savvy person do, trade or buy-and-hold? That’s a trick question because this isn’t an either/or question. Both is the best option for most traders.

It is hard to beat the stability and consistency of buy-and-hold investments. Even after market crashes like the dot-com bubble or the 2008 housing meltdown, the market always comes back. Sometimes it takes a while, but buy-and-hold investments have long time horizons and patient investors are always rewarded for at the end of the day.

That said, a trader can do better than buy-and-hold during sideways and down markets. The hard part is knowing precisely when the market is transitioning from up to sideways or down. But just because something is hard doesn’t mean it isn’t worth doing.

I will assume everyone reading this blog is doing so because they are interested in trading, so that means a portion of your investable funds should be allocated to a trading account. The key question is how much. This is where things get highly individualistic and many of these decision need to be made between you and a financial advisor, but here are some guidelines to think about.

Buy-and-hold is the safest and most proven way to grow rich slowly. This should be a cornerstone of everyone’s long-term investing plans. For most people this comes in the form of a 401K retirement plan. This is the slow money that you will live off of after you stop working. And because this money is so important to our financial well-being, we need to be careful with it. That means not taking unnecessary risks. For the average person, that means keeping at least 80% of your investable assets in safe, long-term, buy-and-hold investments. Something that you put away and only trade once every few years.

With a big portion of our retirement money invested safely, that means we can put the rest into more speculative investments that can produce much higher returns, but also come with greater risk. For a new investor, I would suggest allocating no more than 5% of your investable assets to trading. For more experienced traders, 20% to 25% is reasonable. But even the best traders should not speculate with a larger percentage of the money they will need later in life. While it is possible to produce larger returns in your trading account, it is also possible to crash and burn. The key to surviving the market is always protecting yourself in such a way that you can live to fight another day. That means making sure you always have plenty of money left over even if a trade fails in a spectacular way. 

The thing about the market is sometimes one strategy works better than another. In years like 2017, buy-and-hold works brilliantly because every dip bounces and any defensive sale turns out to be a mistake. But other years the market is flat or even declines. That is when our trading accounts outperform buy-and-hold investments. But the great thing about using both strategies is we benefit when either one of them are doing well.

Jani

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Dec 05

Searching for direction

By Jani Ziedins | End of Day Analysis

End of Day Update:

It’s been four trading days since my last free blog post and what a ride it’s been. Volatility has come back with a vengeance as breakouts fizzle and breakdowns rebound. The S&P500 continues hovering near all-time highs, but the market is anything but certain about what it wants to do next.

Republicans are marching toward the most significant Tax Reform in decades. At this point it is more a question of when, not if it will happen. There is a lot of agreement between the Senate and House bills and it is simply a matter of resolving those minor differences.

The reason the market has not reacted strongly to Republicans making further progress toward tax cuts is by this point most traders have started assuming this is going to happen. When the crowd believes something will happen, then it becomes priced in even if the event hasn’t occurred yet. Those who wanted to buy the Tax Reform pop have already bought and anyone waiting for the news to becomes official will be too late.

That said, the market has become increasingly volatilite over recent days. Last week we surged to record highs. Then Friday’s intraday price-action produced some epic gyrations, briefly erasing the entire week’s gains. And then Monday’s surge to record highs fizzled and reversed. The closer we get to Tax Reform, the more uncertain the market becomes about what comes next.

A big chunk of this rally has been built on hopes of Tax Reform. Now that is about to become a reality, what is the market going to hang its hat on? What do we have to look forward to? Some market pundits speculate corporate tax cuts will lead to a surge of reinvestment and hiring. That argument claims economic growth will pay for the tax cuts, but I’m suspicious. Over the last few years we have seen record amounts of corporate profits given back to shareholders in the form of dividends and stock buybacks. If these companies already have more money than they need for reinvestment, giving them even more isn’t going to change anything. Of course new dividends and stock buybacks will boost the stock market and as stock traders, that is what we care about. But as far as stimulating economic growth, I wouldn’t count on it.

At this point it seems like most of the Tax Reform upside has already been priced in. We will see a pop when the final deal is struck between the House and Senate, but we are talking about a handful of percent, not tens of percent of upside. And maybe a lot less if recent weakness devolves into a sell-the-news event. Risk is a function of height and at these record highs, the market has never been riskier. Tread carefully.

Jani

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Dec 04

CMU: How many stocks you should trade

By Jani Ziedins | Free CMU

Cracked.Market University

A question I frequently get from readers and subscribers is what percentage of their portfolio should they allocate to each trade. While only a licensed investment advisor can give a specific answer after conducting a thorough interview with each investor, I will share some of the basic concepts involved in making this decision.

Most people are familiar with the saying, “don’t put all your eggs in one basket”. If you drop that basket, then you lose all of your eggs. The same principle applies to the stock market. There are plenty of unknowns in this world and any one of them could trigger a debilitating blow to your account if all of your money was concentrated in a single stock. A management scandal or shockingly bad earnings report could devastate your savings overnight.

If you only owned a single stock and it fell 50%, then you just lost half of your savings in one blow. And worse, to recover from that 50% loss you need a 100% gain just to breakeven. In the best of times it takes multiple years to double your money. But if you were diversified and owned 10 stocks in equal amounts, if one of them fell 50%, then you only lost 5% of your total account value.  It only takes one or two good trades to bounce back from a 5% loss.

I won’t get into the statistics involved, but an account will be nearly perfectly diversified if it has between 20 and 40 independent securities, with independent being the key word. Independent means each stock is not correlated to the others in any significant way. A beverage maker, toy company, and airline are in much different industries and are largely independent from each other. On the other hand, five 3D printing companies, five airlines, or five tech companies are most definitely not independent. These companies are highly correlated because often what affects one company will affect all the others in the same industry. For example all airlines would be hurt if there was a sharp rise in oil prices.

Owning more than 40 stocks moves into the realm of diminishing returns and does almost nothing to improve diversification. All it does is add expenses and complexity to your portfolio. At this point you are better off buying an index fund and forgetting about it.

While 20 stocks provides us with nearly full diversification, there is also a cost to being diversified. If we have five stocks and one of them doubles, our account value jumps 20%. But if one of twenty stocks doubles, that is just a 5% gain. And if one of 40 stocks doubles, we only made 2.5% from that great trade. So while diversification protects us from the unknown, over-diversification diminishes our returns because our best trades get watered down.

The other issue with investing in too many stocks is each of us only have so many good ideas. Most of us can come up with three or five great trades a year. But how many of us can come up with 20 great trades? Most likely we will have three great ideas, five good ideas, and maybe eight decent ideas. The deeper we reach, the less potential each additional idea has. Most of the time we are better off-putting more money into our best ideas than investing in mediocre ideas just for the sake of diversification.

The goal for the savvy trader is finding the right balance between prudent diversification and watering down. For most investors this falls between four and eight stocks at any given time. Fewer than four and one mistake can prove costly. More than eight and the gains become too watered down. Account size is also a factor. If a person only has $10k to invest, they are better off on the lower end of the range. If a person is trading $100k, they have the resources to spread across more trades.

Almost every single traders would be better off if they held at least four stocks, but no more than eight stocks in their trading account. Putting too much of your savings in one or two stocks leaves you vulnerable to the unknown. Investing in more than eight stocks means some of your ideas are not very good and you should cut those out and add that money to your better ideas.

The above focuses on individual stocks in a trading account. The situation is different if a person is trading an index fund that is already providing a good level of diversification. Other strategies apply when deciding how much money to put in an active trading account, versus how much a prudent investor leaves in buy-and-hold investments. These are equally valuable topics I will cover in a future CMU post. Be sure to sign up for Free Email Alerts so you don’t miss those useful posts. 

Jani

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Nov 30

Easy come, easy go

By Jani Ziedins | End of Day Analysis

End of Day Update:

On Thursday the S&P500 surged higher and extended its breakout above 2,600. John McCain endorsed the Senate’s Tax Reform bill and that put traders in a buying mood. McCain’s objection derailed Healthcare Reform earlier in the year, so his support this time around is seen as a big deal. That leaves five undecided Senators remaining and Republicans need to persuade at least three more.

Of course a lot changes in a few hours. Not long after the market closed, Tax Reform took a serious hit when deficit hawks failed to get the debt triggers they are insisting on. With only two votes to spare, it doesn’t take much to put the entire bill in jeopardy. This latest wrinkle was weighing on overnight S&P500 futures, which already gave back half of Thursday’s gains. Easy come, easy go.

It will be interesting to see how the market responds to these headlines during Friday’s regular-hours trade. Even though futures are lower, the broad market has largely given Republicans a pass every time they ran into a problem. There have been several other stumbles along the way, but stocks remained stubbornly near all-time highs. As long as traders keep giving the benefit of doubt to Republicans, we shouldn’t expect too large of a reaction on Friday.

These are the type of disagreements I’ve been expecting from our politicians, but thus far the market hasn’t worried about it. If the market doesn’t care, then we don’t need to care. We are coming to the final weeks of 2017 and underweight money managers are being pressured to chase prices into year-end. Their buying combined with confident owners keeping supply tight will help the market continue drifting higher over the next few weeks. The only thing that matters is Tax Reform and the only thing that can dent this optimistic market is Tax Reform failing. Anything short of an outright failure and the market will continue with its half-full outlook.

This is definitely a buy-and-hold market and long-term investors should stick with their favorite positions. Things are a little more challenging for traders because the lack of volatility limits swing-trading opportunities. But that’s the way it goes. Sometimes buy-and-hold works better, other times trading in and out of the market is the way to go. This is why I have my money diversified between long-term investments and a trading account. One works great when the other struggles and vice-versa. That means I always have something that is working.

I’m leaving my long-term investments alone, but my trading account is sitting in cash. I could buy-and-hold in my trading account too, but that defeats the purpose of having a trading account. Instead, I’m leaving it in cash so that I am able to jump on the next trading opportunity that comes along. We can only buy the dip if we have cash. The most interesting opportunity would be if this Republican infighting spooks the market and gives us a larger tradable dip. Until then I will enjoy the drift higher while waiting for a better trade.

Jani

Nov 29

CMU: Why most people will lose money in Bitcoin

By Jani Ziedins | Free CMU

Cracked.Market University

A person would have to live under a rock if they haven’t heard Bitcoin breached the psychologically significant $10,000 barrier today. What started as a libertarian experiment a few years ago has gone mainstream. It launched as a proof of concept. Morphed into drug dealers’ favorite payment tool. And has now become the latest speculation frenzy. And what a frenzy it has been, up well over 1,000% this year alone. Everyone expects it to keep running and so far everyone has been right.

The financial media barely acknowledged Bitcoin 12-months ago. Now every financial outlet devotes significant coverage to cryptocurrencies. Given how strongly prices shot up, it isn’t a surprise everyone wants to get in. And so far everyone is getting rich. Despite plunging more than 50% half a dozen times over the last several years, it keeps coming back. Jump in any BTC forum and fanatics acknowledge and expect this volatility. But they are not worried because every dip bounces. Rather than fear the next dip, they cheer because it allows them to load up on even more BTC.

Bubbles happen all the time. Dot-com stocks, real estate, oil, gold, and even Dutch tulips. It doesn’t matter what it is, if people are making money on it, others want to get in. Humans are herd animals and we cannot help but be infected by the enthusiasm of the crowd. What starts as a good idea often spirals into a buying frenzy where greed conquers common sense. People are more worried about being left behind than what could go wrong.

While everyone is getting rich in Bitcoin, unfortunately it won’t end that way. Read accounts of any financial bubble and it always lays waste to everyone who believed in it. And sometimes it goes even further and takes out entire economies. There were a lot of dot-com millionaires in 1999, but there were very few dot-com millionaires in 2002. For every millionaire who survived the dot-com bust, there were a thousand who ended in tears. It was no different in real estate. Lots of real estate millionaires in 2006. In 2009 most of those millionaires were financially ruined. And Bitcoin will be no different. Those who are most excited about BTC’s rise will be the same ones who bear the brunt of its collapse.

The psychology that inflates bubbles is also what makes them so destructive. Right now the only mistake anyone made in BTC was selling. This goes all the way to the beginning when someone paid 10,000 Bitcoins for two pizzas. In today’s prices that is $50 million per pizza!!! And the same feelings of regret are felt by anyone who sold at $100, $500, $1,000, and $5,000. If there has been one thing anyone learned trading Bitcoin is that you never, ever sell because it always goes higher. And to this point that has been correct.

Now don’t get me wrong. I’m most definitely not calling this a top because bubbles always go so much further than anyone thinks possible. And to be honest, I thought Bitcoin was overpriced when it was $100 several years ago. While I don’t know when BTC will top, I do know a top is coming because it always comes. Maybe we peaked today, or maybe we peak at $50,000 or even $100,000. I don’t know and it really doesn’t matter how high it goes. That’s because almost no one will get out at the top and everyone who rode the ride higher, will ride it back down again. The same behavior that turned people into BTC, real estate, and tulip millionaires is the same behavior that will cause them to lose everything in the crash.

The most successful BTC investors are the ones who held through every dip and even had the courage to add more. While that approach works brilliantly on the way up, it is suicide on the way down. Those who were lucky enough to take profits near the top will be seduced into buying the dip so they can make even more money on the next bounce. Between riding prices down and reinvesting in the dips, most of the people who made money on the way up will give it all back on the way down. That’s the way every bubble ends and this one will be no different. Good luck.

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Nov 28

Looks good…….for now

By Jani Ziedins | End of Day Analysis

End of Day Update:

On Tuesday the S&P500 surged to record highs in the biggest up-day in several months. As strong as the price gains were, volume was barely average. But light trade isn’t a huge surprise since we just returned from the Thanksgiving holiday.

A big chunk of Tuesday’s enthusiasm stemmed from a Senate committee clearing the way for a vote on a revised Tax bill. Progress is encouraging and that put traders in a buying mood. These gains were especially significant since this was the first material breakout in months. Previous attempts were met with apathy and momentum fizzled within hours. This time buying lasted all day and even withstood another North Korean missile test.

Today’s gains keep this market creeping higher. As I’ve been saying for weeks, if this market was going to crumble, it would have happened by now. Confident owners are keeping supply extremely tight as they refuse to sell any negative headlines or bearish price-action. The resulting tight supply makes it easy for even modest demand to keep pushing prices higher.

Underweight money managers have been patiently waiting for a pullback that is refusing to materialize. With year-end just weeks away, many of these managers are being pressured to chase prices higher or else they risk looking foolish when they report to their investors. Their desperate buying will likely keep a bid under this market and keep pushing us higher in the final weeks of the year.

Even though the path of least resistance is clearly higher, this is still a risky place to be adding new positions. Risk is a function of height, making this the riskiest time in months to be adding new money. Confident owners are demanding premium prices and that leaves new buyers with little margin for error. Even though Tax Reform is making progress through Congress, politics is an ugly process and without a doubt there will be bumps and roadblocks along the way. These near-term gyrations will give recent buyers heartburn when prices dip under their buy-points.

2017 has most definitely been a buy-and-hold year. The largest dips barely registered more than a few percent. This lack of volatility has made it a very challenging year for traders. But that is just the way this goes. Traders do well in sideways and down years, investors do well in steady climbs higher. This is why everyone should diversify their market exposure across both short-term trading and long-term investments. One will do well when the other is struggling.

While this has been a great year for buy-and-hold, chances are volatility will return in 2018. Just when the crowd gets used to the market’s mood, it changes. Once tax reform passes, the market’s attention will shift to whatever comes next. Given all the good news that has been priced in over the last 12-months, it is inevitable we will come across something that doesn’t go as well as expected. Markets go up and markets go down, that’s what they do. The higher we go over the near-term, the closer we get to the top. Remember, markets top when the outlook is the most bullish. I’m not predicting anything imminent, but I’m certain 2018 won’t be as easy for investors as 2017.

Jani

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Nov 27

CMU: The only way to make money

By Jani Ziedins | Free CMU

Cracked.Market University

While there are many different strategies in trading, there is only one way to make money, selling our winners. As obvious as that sounds, all too often people forget this fact, especially during periods when prices have done nothing but go up.

A person feels wealthy when they own a bunch of expensive stocks. But this person doesn’t have money, they have stocks. And the quirky thing about stocks is they are only worth what someone else is willing to pay for them. Same goes for any other asset whether it is real estate, commodities, or cryptocurrencies.

If a person has 50 bitcoin, it would be easy to assume that person has half a million dollars at BTC’s current price of nearly $10k each. But that person doesn’t have half a million dollars, they have 50 bitcoins. The person only has half a million dollars if they sell their bitcoin for $10k each.

After prolonged rallies people naturally become emotionally attached to a position that has done really well. They held through several dips along the way and were rewarded for their patience when the stock rebounded even higher. This positive feedback loop encourages long-term holders to keep holding no matter what. But the thing to remember is every dip bounces……until the one that doesn’t.

Markets overshoot. That’s what they do. The hotter the stock or commodity, the larger the overshoot. That’s because people love chasing winners. They see other people making money and want to jump on the bandwagon. Who doesn’t love a good bandwagon?

What starts as a fundamentally sound investment quickly turns into pure speculation. After a while gets to a place where even the most optimistic fundamentals cannot support the current market price. But it doesn’t matter because people are no longer buying it because of the fundamentals. They are buying it because the price keeps going up. Buyers assume someone else will come along and pay even higher prices.

This happened in internet stocks, real estate, oil, 3D printing stocks, and now it is happening in cryptocurrencies. Disagree with me all you want, but people are not buying BTC because of the underlying fundamentals. They are buying it because it doubled in price this month. At some point we run out of new fools willing to pay even higher prices and that is when the house of cards collapses. But it gets worse. What started as an irrational overshoot to the upside quickly turns into an irrational overshoot to the downside. When these bubbles finally pop, prices plunge an average of 80%. That’s not speculation, that’s fact. Anyone who claims “this time is different” has not been doing this very long.

Most of us are in this to make money and the only way to do that is selling our winners. That means overcoming our attachment to our favorite positions and saying good enough is good enough. People who become irrationally attached to their favorite stocks inevitably hold too long. The dip that was supposed to bounce doesn’t bounce. But that is not a big deal because they just need to wait a little longer. A little bit later prices fell even further. But this happened before and they just need to keep waiting. Eventually prices fall so far that fear, regret, and hope are driving a person’s trading decisions. Actually “decision” is the wrong word, it would be more accurate to call it “indecision”.

Remember, we’re in this to make money, not own stocks. We only make money when we sell our best positions. Don’t make the rookie mistake of holding too long. While some people will make staggering profits on AMZN and BTC, even more will watch eye-popping gains devolve into heartbreaking losses. The only way to avoid becoming one of those people is to sell your favorite positions.

Jani

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Don’t miss future posts:
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