The Trend Following Anthem… by Ed Seykota

This video has been making the email rounds today. It’s funny and right on topic for us trend followers. Ed Seykota is no lightweight trend follower:

Case Study – Broken Trends…First Marblehead (FMD)

First Marblehead (FMD, Wallstrip) has become a trainwreck. It did not take long. Take a look at the last few months .

A better symbol than FMD may just be WMD as this stock has been a weapon of mass wealth destruction of late.

I was stupid enough to pick this as a Wallstrip worthy stock back in February. I was smart enough (lucky) to stay away from it and blog the same at the time . In March I actually blogged about it as a short candidate . In April, after the FIRST 50 percent decline, I revisited it . Thank goodness I passed. Others have not been so lucky.

Few things here…If you buy broken, busted stocks like First Marblehead, you better know the freaking story because even if you THINK you know it, YOU DON’T. I have been poking at Starbucks thinking I understand the broken possibilities. It has poked me back with losses.

As I wrote back in March…

One third of all stocks do the BIG ROUND TRIP to ZERO and that is why I don’t buy falling knives anymore. The few that go to zero that you and your conviction are buying all the way down will leave you broken.

Trends end. Stocks that make all-time highs can be at all-time lows shortly thereafter. Remember that when you are feeling cocky and your stock looks invincible. They are not!

Except Apple of course .

The stock market is not a game and not easy.

Disclosure – Long Apple

Trends End…FAST! Check out CROX, WCG and SWHC

It’s not all rosy for all-time highs these days. Tonight, CROX was bludgeoned after closing at an all-time high and ‘missing?’ numbers.

I long sold this trendy biiitch. Still love the products. Until tonight my sells looked stupid, now just less so. The lesson is that trends end.

Expectations get too high, stocks get too loved, investors become complacent…now that CROX has a severely halted trend, the stock will act much differently. The shorts will become emboldened, especially those that just did so the last few weeks. A much bigger tug of war between the lovers and haters will take place. Here is the Whole Foods piece I did last year on Wallstrip that walks you through what happens when stock trends end. TIME is what the stock will really need now.

The end of Brian’s video tonight is a great walk-through of what can go wrong:

Wellcare (WCG) is an awesome example of why you must sell when given a chance. If you do this long enough, you just have stocks like these. Based on the tremendous runs in leading stocks, I expect much more of these scenarios over the next few years.

No strategy is perfect. Don’t fall in love with broken trends. They can end with a bang or a whimper but will eat your capital and spit you out if you get lazy or complacent.

Smith and Wesson (SWHC) Shot Dead?

Stocks fall faster than they rise. I ‘got lucky’ with this one, booking profits in the low 20’s . I have looked but not reentered, especially after we Wallstripped it again on our anniversary show.

If you held on, today you will likely be stopped out. It is a brutal part of the investment business. Too many great names right now for me to look at Smith and Wesson as a new position. The trend looks broken for now.

This morning’s plunge is a reminder of two other important investment habits you must practice:

1. Booking profits on the way up is not and a tool you must use.
2. Diversification

Stocks have had huge runs in the last few years, especially the stocks we have covered on this blog and Wallstrip. If you avoided this one, good. If not, sorry. Either way, use the Smith and Wesson news to remember that stocks don’t just go up. It sucks, but it’s reality. Don’t be hogs.

Fertilizer “Turds” on Wallstrip…Agrium (AGU)

First off, in case you get the wrong idea from todays ending outake…I never inhaled, though I have had the munchies .

I have totally missed owning this trend though we have covered the chemical industry on Wallstrip in the past. It’s not just Agrium (AGU or as we like to call it AGOOOOOOOO ) which we are covering today. Look at Potash Corp and Terra Industries and agricultural behemoth and evil mongering ’seedster’ Monsanto .

Gigantic OY!

Turds ( o.k. fertilizer) are the new Google. Make that Google is starting to act like the ‘turd’ stocks .

In hindsight, these stock runs make sense. It’s a perfect storm of increasing global wealth, technology enhancements and the gigantic base (bottom) of the pyramid in what people want with their money…food. If you don’t believe me, check out Maslow’s Hierarchy of Needs . Don’t know where the golf fits in.

The analysts will call the stock and industry ‘extended’ and overvalued. They may finally be right. I do know this trend in the stocks is not early so buyers today must mind their position size and stops as the volatility has definitely increased. The extra concern for a company like Agrium is their Canadian domicile. The uber strong Canadian dollar makes their selling into the US much less competitive.

Brian has a look at the technical picture on Agrium today and outlines his concerns about investing in the later stage of a trend:

PS – It was great hanging out with Lindsay on the golf course despite the rain and she is a great athlete. A great sense of humor and patience working with me as always. Just fun. There are lot’s of new faces at Wallstrip mixed with the old and I interviewed them for this weekend’s Naked Putz as well.

Disclosure – No positions

Noise and Crowds…So Costly

Andy’s great post got me thinking again on this subject .

In everyday life, noises and crowds leave you with a headache, bruises and anxiety problems. In the stock market, they force you to miss a trend completely or sell early.

I was looking at two stocks, one I don’t own today Crocs (CROX) and one that I own – Google – and adding up my mistakes. With CROX I was noised out and lazy in my last sells and Google is not a big enough position as much as I have blogged positively about search and Google itself. Ouch.

How wrong were the YouTube haters 180 points ago when Google announced the $1.6 billion acquisition (rhetorical…about $50 billion wrong). For those that use time as a way to bugger out of being wrong, 180 points and $50 billion against you holds no mustard. You are wrong no matter what happens next. You won’t be there for the possible bad ending anyway.

CROX offers more of a lesson to me and hopefully you. I hate focusing on my misses and early sells, but that’s how I learn and use this blog to hopefully stop my mistakes (not going to happen in this lifetime).

CROX has NEVER been cheap. The fundamentals have never blazed ‘all clear’ back up the truck. At this point in the company’s growth cycle, it will never be. If it is, it will likely be a dangerous trap. Stupid, plastic, easy to rip off shoes. Here is a thoughtful September 2006 piece by The Motley Fool on why they are SHORT CROX in the 20’s . The jist:

Fad, insider selling, overvaluation and competition.

Here’s the real problem…if the author had actually tried tried the product and listened to customers in the mall’s and on the web, he would have at least considered it was not a fad. Insider selling is never a great ‘tell’ for direction in the short and immediate term. Countrywide insiders were selling for years before the stock was hit as the most recent example. Overvaluation…OY…in growth stock investing that means nothing for years. Competition is always a valid concern, but one year later, it’s obvious that the competition was/is not an issue.

I have chronicled the CROX story as much as any blogger . Forget, as I had mentioned in my original buy piece and Wallstrip show back in October 2006, that the Motley Fooler did not even have a position. My post focused on price and money flow. It was easily backed up by a quick surf around the web and my own experience.

Crowd investing is comfortable, but weak. Following price and thinking outside the box or not thinking at all with lead to successful trend riding. Noise, comfort and crowds are our enemies.

You SHOULD watch the crowd for their BUYING BEHAVIOR on the web and in the malls, but NEVER LISTEN to that crowd for financial advice. If an investment becomes too comfortable, something is likely wrong.

Money SPENT by the consumers and money FLOW from the institutions is all you need to follow to beat the market. Combine this with money management (the real holy grail) and you will manage billions . On this blog as in my fiancial life I stick to my main money management principle…sell when you can, don’t be a pig and booking profits and paying taxes is fine. Definitely not perfect but it has produced some huge winners and helped me blog responsibly for 2 years now on the subject of trends.

Disclosure – Long Google

PS – I hear from friends of my wife that the ladies CROX Pumps are a huge hit and not available/sold out anywhere/everywhere…even on their great website . Not good for the CROX shorts and there are lot’s of them.

Stock Newbies…Please be careful

Investing is not easy. Life has been good on this blog and I for one am confident that I am not that smart.

Other than the barfing of financial stocks and homebuilding stocks this year, the market has been easy. That makes us look smart. Shit, even Goldman Sachs just rallied back 30 percent to within striking distance of all time highs. Was’nt the world ending a month back with the stock 50 plus points lower?

The stock market has a tendency to taketh back after times are too good. Times are too good in breakouts. Too easy.

I buy Synaptics…boom 20 percent gain. Nvidia… 50 percent, Baidu – boom another 100 points. I have seen this way too often. It’s way harder than this.

Please enjoy, but know that it won’t last and stocks drop WAY faster than they rise.

Now that it’s off my chest…Go GAIAM and EMC….wooooooooooooo

Disclosure – Long GAIA, NVDA, BIDU, EMC, SYNA

Why Oliver Stone is NOT in charge of Wall Street Part 2…and Trend Following

So true really .

But, also a reason why trend following has likely worked so well. The institutions just can’t hide their footsteps and trends are being magnified.

History shows that nothing lasts forever and this great run for trend followers in the stock market, including me, will likely not continue. Who is to say when though…