Searching for Rhythm

  • Posted by
  • on July 30th, 2011

I love discovering new music.  It’s one of the reasons I embraced Pandora’s service when it came out…a music genome project, perfect.  With a constant pruning of likes and dislikes, I was exposed to artists like Jack Johnson and Mumford & Sons and Arctic Monkeys that I now consider favorites.  Without it, this now 40(ouch!) year old who spends every waking hour with his stocks or his kids would be stuck hearing the same Pearl Jam and Stevie Ray Vaughan classics.

But sometimes a little familiarity is nice.  On the annual trek to my hometown in Western NY, I found that rare one hour window when the kids were happily entertained in the back seat without the use of the overhead DVD.  I had control of the radio!  Plotting ahead, I used the fader to push the volume to front only, and kept it low enough so as not to break up the backseat peace with a “I wanna hear my music!” shriek.  At that low level, new music is out but cruising along with $SIRI spitting out a CCR classic is great…if you already know the tune.

As always, my mind wandered to stocks and I realized the parallels with trading.  There could be a wonderful new song that I might love in a different context, but right now I need something familiar.  Something with three chords and memorable lyrics.  Give me a recognizable riff and I can hear it from there regardless of volume.

A trading lesson, right?  That scanner I’ve built can find great new stocks.  But can I trade that one for profit with no existing memory of how it trades?  What levels have been respected of late?  How often it diverges from market action and how often it jumps along for the ride?  Whether it leads or lags?  One of those “a-ha” moments arrived in the mountains of West Virginia.

When I got back to my computer, I started hacking my list.  I was never going to trade half of these stocks anyway, why track them?  How many do I need to achieve that balance between overly attached and dispassionate analysis.  And how many can I know intimately enough to attack when properly set up?  Dunbar’s number says 150 friends.  My Twitter followings stay under 300 because I’d rather catch an insight from someone I know even though I’m surely missing great stuff outside my list.  No real risk there… just like these great new follows, if a stock outside my list pops up enough I’ll eventually start following it as well.

Steve Spencer of SMB Capital threw a comment out to Howard Lindzon recently that he’s only seen one loser from him in a year.  You know why?  He trades what he knows, and primarily what he already owns.  This focus can lead to trouble in undisciplined hands, but leads to a competitive advantage when used properly.  In Robert Sinn’s great piece about screen time, he mentioned how Ron Roll has seen every tick in $AMZN for the last 5 years…he wrote a great chapter in StockTwits Edge on this very subject.  Regardless of any pattern I perceive, would I really want to put money to work against a trading insider on that one?

The calm that has come to my work since shrinking my list has been amazing.  I still have a wide variety of sectors represented, but my stalking work is SO much easier since I actually know these stocks well.  I’ve lost nothing  in the way of opportunity…3 confident entries is WAY better than 2 confident and 2 so-so entries anyway.  After expanding from 1 stock to 10 to tracking 100 then nearly 1000, I had already started the process in recent months to get back under 700.  But I must say this last hack towards 400 has been the best move I’ve made in years; deliberate practice just got doubled on a per stock basis. Removing stocks that lack the trendiness and volatility I desire removes clutter and allows me to “know” the remaining candidates that much better…like that old 3 chord classic.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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