All posts by: Shaun Cullinane

Today, I’ll present two simple trend-following strategies that new and experienced traders can use right away. I explain two easy methods for trend trading along with my top tips for profiting from these strategies.  I show you how to filter down a long list of potentially good setups into the ones that are most likely to succeed.

 

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Section 1: How to Setup Your Chart

  • Choose timeframe
  • Bar chart with OHLC (open-high-low-close)
  • How to read a bar chart
  • Green OHLC bar

Section 2: A Basic Pullback Strategy

  • How to spot a trend
  • Uptrend

    Uptrend: Moving averages in alignment

  • Trend persistency
  • Wait for a pullback
  • Trade entry
  • Why it works
  • How to select the best setups

Section 3: Moving Average Pullback Strategy

  • What is a moving average?
  • Which moving averages to select
  • Daylight
  • Trade entry
  • Moving average pullback example

Section 4: Trade Management Basics

  • Protective stops
  • Trailing stops
  • Taking profits

 


Resources

The Layman’s Guide to Trading Stocks, by Dave Landry

 

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Most 401(k) plans contain a variety of fund choices, so it can be hard to decide which ones to put your money into.  In this episode, I explain the best way to evaluate funds, separating the winners from the losers.  I also give my recommended asset allocations for the remainder of 2017, based on where we stand as of May.

 

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Section 1: Stock Funds

  • Domestic vs. international
  • Market cap (small/mid, or large)
  • Growth vs. value
  • Active vs. passive
  • Expense ratios

Section 2: Bond Funds & Fixed Income

  • Treasury bond funds
  • Corporate bond funds
  • Mixed bond funds
  • Bond fund duration: long-term, intermediate-term, short-term
  • Active vs. passive
  • Stable value funds
  • Money market funds

Section 3: Target Date Funds

  • How they work
  • Dangerously simple, and simply dangerous

Section 4: Alternative Funds

  • Commodities
  • Real estate
  • “Real value” funds
  • Should you invest in these?  When?

Section 5: My Target Long-Term Asset Allocation



Resources

401(k) statistics from the ICI

 

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Newsflash: If a financial advisor or fund manager brags to you about “beating the market”, it’s NOT what you want to be hearing right now!  In this episode, I debunk the popular myth that you should be trying to “beat the market” when times are good.  I also lay out the questions you must ask instead when evaluating a mutual fund or investment manager.  Don’t get caught chasing high-beta strategies after one of the longest bull markets in history has already unfolded.  Investing and trading are contests of endurance, not of raw speed.

 

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(CC image by trailersoftheeastcoast on Flickr)

 


Section 1: Today’s Market in Historical Context

  • There are bull markets, bear markets, and range-bound markets
  • Long-term chart of the S&P 500


Section 2: The Unpleasant Truth: How Mutual Funds and Managers Beat their Benchmarks

  • Cherry-picking returns
  • Sketchy math
  • “Marking the close” – see Resources section below
  • Leverage
  • High-beta stocks
  • Illiquid portfolios
  • Lack of diversification
  • Asymmetric risk profiles
  • Very few: superior management
  • Focus on how they did during the more challenging years in the market
  • Size of fund: rapid growth can limit future opportunities

Section 3: The Questions to Ask Instead


Section 4: The Real Way to Beat the Market Over the Long-Term


Resources

Study: Mutual Fund Managers “Mark the Close” to Manipulate Quoted Returns

Mutual Funds & Performance Manipulation

 

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Keep a Defensive Stance, and Be Selective


Today, I’m releasing new asset allocation targets for long-term oriented investors of all ages, as well as active traders.    Remember, these are aimed at a general audience and are not personalized recommendations for any single investor.  Consider your own personal goals and risk tolerance when making your final selections.

I’ve made two updates recently.  First, I added a brand new asset class: Cryptocurrency.

Bitcoin, Ethidium, Litecoin, and other cryptocurrencies are exploding in popularity in 2017.  This is only the beginning of a long-term trend though.  We’ll see these digital currencies fully enter the mainstream over the coming decades.  For now, I’m suggesting only a small allocation, close to 1% of total assets.

Make sure to spread this allocation across a bunch of different digital currencies: at least 10 different ones, the more the better.  Keep the most in Bitcoin for its (relative) stability and wider acceptance, but include some investments in smaller ones too (known as “altcoin”).  The majority of “altcoins” will ultimately become worthless, I believe, due to their ease of creation – but you are looking to invest in a basket of many of them, so you end up with at least one that explodes in value (20x, 50x, or more) and dwarfs the losses in the ones that don’t pan out.  Altogether, don’t put any more than 2% of your assets into this area unless you carefully research it and you know what you are doing – don’t gamble with your money.  If you are closer to retirement or just a conservative investor, you might want to buy a tiny amount of Bitcoin (less than 0.5% of assets), let it sit, and just leave it at that.

Cryptocurrency carries many of the same benefits as precious metals (PMs), such as anonymity and preservation of purchasing power over the long-term.  Yet there are key differences, the most significant being the high degree of volatility in digital currency.  It’s still a very new market, therefore we can expect high volatility to continue but also tremendous potential for growth.  Wait for a bit of a pullback before investing, but don’t get FOMO (Fear of Missing Out).  It’s not too late to jump on board: cryptocurrency is the real deal and a legitimate asset class already.

For more information on cryptocurrency, check out Coinbase, where you can set up a digital wallet and make an investment, and Let’s Talk Bitcoin, where you’ll find links to a variety of podcasts and blogs about the subject.

The second update I made was to increase the allocation to real estate by a few percentage points.  Many investors will already have this much exposure to real estate through equity in their personal residence.  For those that don’t, REITs will get you there.  Listen to my introductory podcast on REITs to learn about this exciting asset class.  I also recently published a video on one of my favorite picks.  I’m careful to choose REITs that I think are most likely to maintain or grow their share price over the long term while paying a good dividend yield.  Stay away from most REITs in the health care, office building, and retail areas.

OK – now for the asset allocations.

If you’re a long-term oriented investor, making adjustments to your portfolio only a couple times each year, these are the baseline targets:


If you are an active trader, consider these allocations instead.  They’re based upon the long-term targets, but adjusted for my latest intermediate-term market outlook (6-18 month horizon).  These change much more frequently, as chart patterns emerge and develop.


You read that right: 0% to equities.  This is not the time to be reaching for dividend yield or jumping onto a trendy growth stock.  You can still keep some stocks in your portfolio, but put on some tactical short positions in the weakest areas of the market so that you’re market-neutral overall.  You might also consider preferred stock for the greater protection it provides, over common stock, but remain cautious because preferred stock will drop if we see a big downturn in the market.

Wealth-building is a marathon, not a sprint.  Staying defensive in a market like this one will keep your portfolio intact.  A big cash reserve will position you to leap on bargain prices when we see them.

Going forward, members of our community platform will receive updated asset allocations at least one week ahead of when I release them to the public blog.  Members will also get detailed sector-by-sector breakdowns within several of these asset classes (e.g. retail stocks vs. utilities, consumer staples, etc.).  Membership starts at only $5/month for the Bronze level.


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Volatility is such a vital concept, but it’s commonly misunderstood.  You can’t trade for a living without knowing volatility inside and out.  In this episode, I introduce some powerful strategies to harness volatility for profit, but not before laying out the foundations such as: how to measure historical volatility, the difference between historical and expected future volatility (e.g. the VIX), and the reasons why markets often misprice volatility.

 

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Section 1: Historical Volatility


Section 2: Future Volatility

  • All about the VIX (the “fear index”) – definition, how it’s traded, limitations
  • Factors that impact the market’s expectation of volatility for a stock or an index
  • Mean-reversion
  • Volatility risk premium

Section 3: Volatility & Options (Calls and Puts)

  • Expected volatility across different strike prices and expiration dates
  • Impact of volatility on option pricing
  • Vega: one of the Greek letters used by options traders

Section 4: Using the VIX as a Portfolio Hedge

  • Definition of a hedge
  • VIX ETFs or ETNs
  • Buying or selling VIX options
  • Better methods for hedging your assets against volatility, if that’s your goal

Section 5: How to Trade Volatility Without Going Broke

  • Stop trading VIX ETFs and ETNs!  Just stop!
  • Writing OTM options has been called “picking up nickels in front of a steamroller” by those who don’t know the correct way to do it
  • Study the examples of those who failed: Karen the Supertrader, Vic Niederhoffer (see Resources section below)
  • Set reasonable goals
  • Write close-to-the-money, at-the-money or in-the-money options instead of deep OTM
  • Layer fundamental analysis on top of technical analysis
  • Multiple layers of technical analysis, such as intermarket analysis to find confirmation or divergence
  • No “autopilot”!! – Manage positions carefully throughout their lifespan
  • Three simple trading strategies based on volatility
  • Complex strategy, but not really so hard to learn: The Options Ladder – stay tuned, more details coming in the future!

Resources

Karen the Supertrader: series of interviews on TastyTrade

Karen the Supertrader – SEC fraud accusations

New Yorker article on Vic Niederhoffer, from 2007

 

Difference between the VIX and 30-day historical volatility of the S&P 500

 

Technical note: The 18% historical volatility (to be precise, 18.6%) I cited for the S&P 500 was based on a 252-trading-day lookback period.  When I use a 21-trading-day lookback period instead, I get 16.6%.  The 21-trading-day lookback period is more appropriate when drawing comparisons against the VIX because the VIX is the implied volatility 30 days (21 trading days) into the future.  I used the 21-trading-day lookback period in the chart of volatility risk premium above.

 

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An Income Opportunity for the Long-Term


Check out the video above, which is from my live stream for traders and active investors, to learn why I like this company and non-traditional REITs in general.

If you’ve followed the live stream lately, you know I’m bearish on the stock market.  Most stocks are priced at lofty valuations right now, and it’s likely we’ll see a hard landing as deflationary pressures resume.  Therefore, I’m currently net short the market.  I’ve sold short more stocks than I own.

Despite the bearish forecast, I’m still on the hunt for long-term portfolio holdings that can give me a reliable yield.  Real estate investment trusts (REITs), with the exception of certain commercial REITs (retail and office buildings), will outperform the market going forward.  I also feel I’m personally underinvested in real estate.  I recently found a company in this space that I liked enough to take a position in: Iron Mountain REIT (IRM).

You may have seen Iron Mountain trucks driving around your town, or their secure storage bins in your office.  This company is in the business of storing, protecting, and managing records, both physical and electronic, for their business clients.  Iron Mountain owns or leases space in over 1,400 facilities across the globe.  They lease this space out to other businesses for storage of their data and records.  They also provide information management services to diversify their revenue base beyond simply lease payments.  What’s more, they’ve picked up some fine art storage facilities to meet the specialized needs of art investors and wealthy individuals.

Document retention is a secure business with good prospects for growth as well.  Companies are required to maintain physical and/or electronic records by law.  Not to mention, it’s a vital part of any firm’s disaster recovery and contingency planning.

This company is more like a traditional stock than a REIT, but it adopted a REIT structure in 2014.  Therefore, it must pay at least 90% of its taxable earnings back to investors as a dividend.  This is great news for investors seeking income.  The dividend yield on IRM is currently 6.2%.

Whenever you see a yield over 5%, you’ve got to do extra diligence to figure out why the yield is high.  In other words, why is the price low when compared against the dividend?  In the case of IRM, I think it is simply because of the company’s high debt levels.  They’ve issued a substantial amount of debt in the last year to finance their international expansion.

I usually avoid highly indebted companies, but I’m not worried about this one because:

  • They acquired another company, Recall Holdings, in 2016.  Recall has a similar business to Iron Mountain, but in Australia.  The integration costs hit earnings in the last several quarters, but Recall will provide significant cost savings for Iron Mountain.
  • Along these same lines, Iron Mountain has been financing international expansion.  This expansion has diversified Iron Mountain’s revenue base, enhancing the stability of the company’s total revenue and net income.
  • The company’s debt is at reasonable rates and its maturities are mostly after 2020, so there is limited risk associated with rolling over the debt at maturity in the event of a near-term credit crunch.
  • A significant portion of the debt is denominated in currencies other than the US dollar.  This reduces the company’s exposure to foreign exchange risk.  If they had financed overseas growth with US dollar-denominated debt, we’d have to worry about a rising dollar making those interest payments more expensive.  Not an issue here.
  • They recently hiked the dividend from 48 cents per share to 55 cents per share, which is a huge increase.  Management would not have done this if they were not highly confident the dividend could be maintained at this level, or grown further.

As long as they don’t start to over-reach in their acquisitions of other companies, Iron Mountain should be exactly the kind of long-term holding I’ve been hunting for.

As with any investment, make sure to review the company’s annual report and other SEC filings to get a good understanding of the company before investing.  Pay particular attention to the disclosures of potential risks in those filings.  You can find investor info for Iron Mountain REIT here.  Just because this company is right for me right now doesn’t mean it is necessarily right for you.

As I disclosed above, I own shares of IRM as of the publishing of this post.  View other important disclaimers on this page.


The Torpedo Trading Live Stream

Watch more live streams like this at https://www.twitch.tv/torpedotrading and interact with me in real-time.  Follow the channel, and you can receive notifications when I go live.

If you miss a stream, highlight clips like this one can be found at my YouTube channel.

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This week’s trade of the week comes to you from Tuesday’s live trading stream on Twitch:

 

I recommend sector trading as a great place to begin when implementing active trading strategies for the first time.  Researching individual stocks, as you always should before placing a trade, requires browsing through the annual statement, financials, and other investor resources of that company.  It’s extra work, which many traders simply don’t have time for.  Why not start trading sector ETFs instead?

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Trading should not be a solo venture, even if it sometimes feels that way.  In this episode, I present a framework for holding a fun and productive meetup or online trading session with other investors.  It’s important to discuss the markets with other people so you get to hear other ideas and have your own views challenged.  It makes you a better trader.

 

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(CC image by micahvandegrift on Flickr)


Section 1: A General Meeting or Progress Report

  • Check-in with a couple friends or a small group, at least once per month
  • Start with macro trends, the big-picture view
  • One main topic per meeting: 15-minute discussion
  • Discuss your favorite investment ideas: no more than 5 minutes per person plus 5 minutes discussion time
  • Share results (profit/loss) as much as you’re able: builds accountability
  • Each participant should set a personal goal to reach before the next meeting
  • Suggest topic ideas for the next meeting

 Section 2: An Investment Club

  • Many different structures; members usually pool funds or agree to invest separately in the same things
  • More formal structure than other groups would have; more pre-planning involved
  • Longer meeting: aim for 3 hours or more
  • Always start with macro trends; choose one member to present for 5 minutes, can open up to discussion
  • Open the floor to discussion about any of the club’s current investments
  • Any member can propose a new investment idea to the group, giving a presentation of up to 20 minutes then allowing 30 minutes for discussion and vote
  • Designate a treasurer to report profit/loss if funds are pooled

Section 3: A Working Session: Trading Live

  • In-person or virtual
    • In-person: what to look for in a meeting site – Rent out a meeting room or use one at your local library
    • Virtual: Premium services provide full screen-sharing & collaboration tools; otherwise use Discord, Skype, Google Hangouts for just the basic chat & voice capabilities
  • Spend at least half the trading day observing other traders, rather than trading yourself
  • Start before the open: pre-market setup & discussion
  • End after the close: pick one trade to share with all; summarize lessons learned


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An Income Opportunity for the Long-Term


Check out the video above, which is from my live stream for traders and active investors, to learn why I like this company and residential real estate in general.

If you’ve followed the live stream lately, you know I’m bearish on the stock market.  Most stocks are priced at lofty valuations right now, and it’s likely we’ll see a hard landing as deflationary pressures resume.  Therefore, I’m currently net short the market.  I’ve sold short more stocks than I own.

Despite the bearish forecast, I’m still on the hunt for long-term portfolio holdings that can give me a reliable yield.  Residential real estate is an area that should hold up much better than most commercial real estate (especially retail and office buildings) going forward.  I also feel I’m personally underinvested in residential real estate.  I recently found a company in this space that I liked enough to take a position in: Bluerock Residential REIT (BRG).

This company owns interests in many apartment complexes, most of which are in the southeastern United States.  They also own a bunch of developments that are currently under construction.  Their target areas for investments are premium locations in and around “second-tier cities”: those that are smaller than New York, Los Angeles, etc. but big enough that they are attracting substantial corporate investment and/or residential demand.  We’re talking Austin, Houston, Charlotte, Atlanta, and Orlando, for instance.

The company is structured as a real estate investment trust, or REIT.  Find out more about investing in REITs on this episode of my free investing podcast.

They’ve got several series of preferred stock with different yields and terms attached to them.  I actually chose to invest in the common stock though.  The common stock pays a yield of 9.2%, whereas the preferreds are in the 7%-8% range and two of the three series are priced at a premium over par.

Whenever you see a yield over 5%, you’ve got to do extra diligence to figure out why the yield is so high.  In the case of BRG, I think there are two reasons:

  • They plan to internalize their management in 2017, which may involve an up-front payment.  The managers are currently employed by Bluerock, not by the REIT itself.
  • The recent trend in earnings hasn’t been stellar, but I see this as largely a byproduct of rapid growth.

Upon reviewing the financials, I believe that the majority of the dividend is secure going forward.  Maintaining the dividend is a stated priority of the management team.  Although a slight reduction is possible (along with a temporary disruption in the quarter during which they internalize management), I think they are well-positioned overall to deliver on their goal of maintaining the full dividend.  If you’re more concerned about this than I am, consider buying the preferreds instead.  Preferred stockholders have to be paid before common stockholders, plus the preferred dividends accumulate forward if they are not paid.

As with any investment, make sure to review the company’s annual report and other SEC filings to get a good understanding of the company before investing.  Pay particular attention to the disclosures of potential risks in those filings.  You can find investor info for Bluerock Residential REIT here.  Just because this company is right for me right now doesn’t mean it is necessarily right for you.

As I disclosed above, I own shares of BRG as of the publishing of this post.  View other important disclaimers on this page.


The Torpedo Trading Live Stream

Watch more live streams like this at https://www.twitch.tv/torpedotrading.  Follow the channel, and you can receive notifications when I go live.

If you miss a stream, highlight clips like this one can be found at my YouTube channel.

 

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If you’re totally new to self-directed investing, or you’re expanding beyond basic retirement accounts, now may be a good time to open a new account.  Here’s what you need to know to get started, including: where to go, how much to deposit, position sizing, and some investment ideas.

 

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Section 1: The Brokers I Currently Recommend


Section 2: Opening an Account


Section 3: Trading Ideas


Resources

Intro music by audionautix.com

 

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