Behavioral Trader is one individual investor’s online trading diary. I intend to track my trading behavior as well as discuss insights I’ve had from trading and from the behavioral finance literature. For a fuller explanation see my first post.
Who am I? I am a late 30s PhD student in economics. I am not a professional trader and do not trade full-time, but probably spend at least an hour or two in trading-related activities every day. Since 1999 I have averaged over 100 round-trip trades a year, and trading has provided the bulk of my income since I stopped working full-time in mid-2002. Prior to this I developed software systems, primarily for the financial services industry. I have also worked in finance and taught English in Japan. I have a BA in philosophy and an MA in the Math of Finance.
My Trading Style
My trading style is eclectic, pragmatic and evolving. Of the financial literature I’ve read, I find Dreman’s Contrarian Investment Strategies to make the most sense and often find myself trying to follow his Rule 14:
Buy solid companies currently out of market favor, as measured by their low price-to-earnngs, price-to-cash flow or price-to-book value ratios, or by their high yield.
But I find I trade other things for other reasons. I think I’m in the boat with many investors, relying on a mix of indicators from PE ratios to sales growth to insider transactions to trendlines and moving averages. And like most, I think I apply these haphazardly and emotionally. My goal with this blog is to try to get a better handle on what works.
If there is one thing I’ve done fairly well, its recognizing macro trends. This has worked for me shorting the Internet boom (though not before taking some lumps), with mortgage originators in 2002-2004 (though I was late getting out), and natural resource companies in 2006.
I get most of my macro sense from two sources: a paid investment discussion site I belong to and reading the Economist. I recommend the latter to everyone, even if you never trade. I don’t know of a better source of real-world economic wisdom.
Many of my best investments have been from knowledgeable posters on the web. I’ve never followed blindly, but I’ve not always done the exhaustive due diligence some would recommend. I think if you’ve found someone far more knowledgeable than you, it can be profitable to listen to what they think is important and follow advice. How do you tell who knows what? It’s difficult. I think I have a good sense for this, but can offer no prescriptions.
My returns since 2000 have been:
| Year | Return | S&P 500 |
|---|---|---|
| 2000 | 11% | -10% |
| 2001 | 14% | -13% |
| 2002 | 37% | -23% |
| 2003 | 43% | 26% |
| 2004 | 9% | 9% |
| 2005 | -19% | 3% |
| 2006 | 34% | 14% |
| 2007 | 60% | 4% |
Disclaimer:
I am not an investment profession, and hold no securities licenses. No mention of securities on this site should be construed to be recommendations for taking positions in those securities. I will make best efforts to present what I know as accurately as possible, but I ask my readers to verify any information and do their own research before using any information here as the basis for a position in a security.
