two types of orders: market and limit

As a professional, I always believed that the key to success was to have a sound strategy and good stock selection.  I’m still convinced this is true.

At the same time, good execution of my plan through competent trading–buying and selling the stocks in my portfolio–while a secondary objective, could add or subtract a percentage point from my overall performance during a year.  Given that the typical active portfolio manager underperforms the S&P 500 by around one percentage point yearly, good trading can be worth its weight in gold.  Having been blessed with good traders most of my career, and cursed with one horrible trader I couldn’t get rid of for about a year, believe me I know the difference between the two.

The main tool we as individuals have to control the trades we do is our choice between limit and market orders.

types of orders

market order is one where our instructions are to buy a certain amount of a stock at the market price, that is, the price at the time the human or computer that will transact for us receives the order.  Except in the most unusual circumstances–I can’t remember this ever happening with an order of mine–the transaction will always occur.  Sometimes, the price will differ a little from what we’ve seen on the screen a moment before entering the order, but in practical terms we’ll always buy/sell the stock.

limit order, on the other hand, is one where we specify the exact price where we want the transaction to happen.  That may or may not occur on a given day.  Limit orders take two main forms, day  and GTC (Good Til Cancelled).  GTC orders are, technically speaking, really not exactly what the name says.  They most often are tagged with a time limit, say, three or six months, after which they expire if not renewed. When entering an order online, a message will typically pop up giving an expiration date.

choosing one

As regular readers will know, I’m a growth stock investor.  For people like me, I believe firmly in the cliché that the more important decision is how we sell, not how we buy (more about this on Monday).


I tend to buy in two or three transactions.  I’ll almost always use a market order, for about a third of what I ultimately intend to own ,just to establish a new position.  I’ve found over the years that owning a small amount of a stock focuses my mind on it in a way that simply thinking about it, or having it in a paper portfolio, doesn’t. This also protects me a bit from the stock running away on the upside before I’ve finished buying.

My intention will be to buy the rest in one or two more transactions, hopefully at progressively lower prices.  If the market allows me, I’ll use limit orders to acquire the rest. I may decide, however, that I don’t have enough time to do so before others discover the stock.  If so, I’ll buy the rest at market.


If I change my mind about a stock, that is, if I realize that my favorable view is probably wrong, I’ll sell all I own at market–and relatively quickly.  On the other hand, if the stock has gone up a lot, and my sale is motivated by price, I’ll usually use limit orders.

For example, one of my sons and I own both own Tesla (TSLA), at his suggestion.  We decided to sell half of our holding at $260 (I’m thinking the rest should go at $275, but I haven’t broached the subject with him yet).  We placed a limit order about a week ago.  It hit yesterday.  (For what it’s worth, I think a large convertible bond offering is imminent and that, like last year, it will mark a near-term top in the stock.  And, of course, we can’t forget that this is a highly speculative, if intriguing, issue.)

More on Monday.



trading: buying in thirds

coming late to the party

I’ve found that the situation arises more often than one might think where I find a stock I think it interesting but where I’m very clearly not the first one at the party.  In other words, the company has potentially attractive long-term prospects but the stock is not cheap enough that I can justify buying a full position right away–and I don’t have a practical feel for how it trades.  My instinct is that the price is a bit too high, but I’m not sure.

how to get involved?

What I’ll typically do is buy a third of the position I ultimately want to have.

I’ll then continue to find out more about the company and watch the stock’s trading carefully (my experience is that people, myself included, never look hard enough if the name is only in a paper portfolio–a kind of portfolio I find psychologically pretty useless, anyway).

My intention will be to buy another third on a decline of, say, 5% – 10%, assuming I don;t turn up new information, positive or negative, that overturns my whole thesis.

If I I buy the second third, I’ll wait for a further decline to buy the final portion.

What does this method get me?  I have immediate exposure, in case I’m correct on the stock but too pessimistic on valuation.  At the same time, I still have a chance to lower my average cost by buying the bulk of the position at a lower price.

an example

My California son and I have been talking about the Elon Musk empire for a long time.  Following its weak  4Q14 results, our conversation turned to Tesla (TSLA).  It’s a stock I’ve owned off and on, but my son hasn’t.  (My view, (too) simply put, is that TSLA is a lot like a gold mining issue whose assets consist solely/predominantly in ownership of a reportedly fabulous orebody now under development.  Such stocks typically peak the day the mine opens–when investors have to deal with facts, not dreams.  Before then, the dreams are more important. )

My reading of the TSLA chart–hopefully more useful than parsing nocturnal visions with a dream book–made me think the stock continues to trade in a range between $180 and $260-ish.  I was also willing to believe that TSLA’s 4Q14 failure to sell enough cars was mostly due to bad weather and port difficulties.

Anyway, I decided to buy my first third at $200.  My son said he would wait for $190.

I bought his first third at around $191, where I bought my second third.

I bought his second third at $186? …and another (less than) one-third for myself there. as well.

Then the stock began to move up quickly and we haven’t bought any more.

The result:  my son has a somewhat smaller position, relative to his total portfolio size, with an average cost of $188?.  I have a larger relative position, with a higher relative cost, $194?.  So we both have exposure, and at a lower cost than if we’d bought all at once.

Another point: We’re dealing with a discount broker where our total commission costs are around $20.  Paying for two or three trades instead of one makes little difference.  For a traditional “full service” broker, this probably won’t be the case.





my recent Pink Sheet experience

what the Pink Sheets are

I’ve written about the Pink Sheets before, in much greater detail than here.

Basically they’re an electronic marketplace for trading equities not registered with the SEC.  Some are stocks of foreign issuers and the Pink Sheets is the main place they’re traded.  Others are domestic.  Some of the latter are small, illiquid and haven’t filed financials (if they have any) with the SEC.  This second group, and the rough-and-tumble trading that sometimes occurs with both, are the source of the Pink Sheets’ shady reputation.

In the pre-computer days, quotes for such stocks were delivered to traders in daily lists printed on long strips of pink paper.  That was to distinguish them from quotes for bonds of similar ilk, which were printed on blue paper.  Hence the name.

anyway, what happened–

About an hour before the close in Hong Kong last Wednesday, the Macau casino regulator issued its report of the total amount lost by gamblers in SAR in January.  The figure was a surprisingly weak +7%, year-on-year.  The Macau casino stocks sold off immediately, and were down at the close by about 10% from their pre-announcement levels.  At the New York open, WYNN and LVS sold off  by more than 5% as well.

As the New York morning progressed, reports began to circulate that the Macau market had actually been strong–that the apparently weakness was caused solely by the timing of the Lunar New Year.  The US stocks rallied.

During the afternoon, I checked the Pink Sheet quote for Sands China (SCHYY).  I noted that average daily volume is US$1.6 million vs. US$145 million for HK:  1928 in Hong Kong.  More important, the stock hadn’t budged an inch; it was still stuck at the Hong Kong close.   Weird.

So I bought 150 shares.  Yes, it was a risky thing to do.  It took maybe ten minutes for my (puny) limit order to be filled, another warning sign.  But I was curious.

The Macau gambling stocks rose on Thursday in Hong Kong by around 10%.

SCHYY mirrored the Hong Kong close.  I sold as fast as I could.

The following day, Friday, the Macau gambling stocks were flat to down in Hong Kong.

here’s the interesting part:

SCHYY opened down 3%, at $76.53, on 21, 952 shares.

After that one trade, the market became 200 shares bid at $74.29, 300 shares offered at $76.29.

In other words, liquidity dried up completely.

The stock traded about 10,000 shares during the rest of the day, at what the chart shows as prices below $75.

Monday, the stock traded only 6,866 shares, or about $500,000 worth of stock, all day.

what you should notice

–no mutual fund or pension plan portfolio manager is going to buy SCHYY.  It’s just too illiquid.  So there’s going to be no buying support for the stock from this quarter.  (Let’s say an average position size for one of these professionals is $10 million and that they thought they could be a a quarter of the daily volume without anyone figuring out they were in the market (fat chance).  Even if so, it would take a month+ to buy or liquidate.)

–after the big (for SCHYY) opening trade, market makers widened the bid-asked spread to almost 3% and pushed the market down.  They also committed themselves to only trading a tiny amount of stock at the price they showed–meaning the market would sink further if more stock followed the next trade.

All this is designed to signal they’re only willing to take more stock on their books at a heavily discounted price–that is, to stop the selling.  As the rest of the day showed, this tactic was successful.

–in most cases, the best course of action for a seller who thinks he must get out of the stock for some fundamental reason is to accept the discounted price and be the first out the door.  Yes, selling will be ugly.  But that’s better than having the market 10% lower, with you having sold nothing.

Welcome to the Pink Sheets!!

a normal start to the new year

a down day

Stocks sold of throughout the day yesterday.  Nothing unusual about that, especially after the strong performance of stocks on Wall Street last year.

My take is that this is taxable investors, predominantly individuals and not mutual funds or other taxable institutions, I think, who are rearranging the positions where they have gains.

what to do

Three things, other than rearranging your own holdings:

1  wait for the selling to abate  The amount of downward pressure on the market and the number of days it takes for selling to tail off will tell us a lot about the overall tone of the market.  Shallow and short are my guesses–but I’m content just to watch to see how tax-selling plays out.  It’s always possible that selling will begin to feed on itself and turn into a minor correction.  I don’t think so, but I find the twists and turns of the market nearly impossible to predict.  So my primary inclination is to watch and wait.

2.  analyze  Look for odd price action–either stocks that come under a lot of pressure or ones that are rising in a down environment.  Yesterday, the strength of TWTR really caught my eye, as did the up movement of SPLK, WYNN and LVS.  That’s bullish for all four (all of which my family owns).  I’m not looking to buy any of them right now, but if I were I’d be thinking I shouldn’t wait for them to dip before buying at least part of the position I was contemplating.  I know that’s not watching and waiting, but…

3.  shop for bargains  For example, I’m intending to add to my VZ before the merger with VOD happens.  So a several-day selloff in the former would suit me fine.  I’ve got one or two stocks earmarked for sale at slightly higher prices.  But if I could find a replacement at, say, 5% less than I’d expected to pay, I’d make the switch now.

Also, for anyone in the northeast US, try to stay warm.  It’s -9 degrees Celsius in New York now (colder in the suburbs).  It will be -15 tonight.  The wind is making it feel 5 to 8 degrees colder.  Brr!

developing competence as an equity investor


The teachers of many sports or craft skills use a Zen-like scale to rate students on their progress toward mastery of their specialty.  The scale typically has four levels, that are often expressed as:

–unconscious incompetence

–conscious incompetence

–conscious competence

–unconscious competence.

…and investing

I think these classifications have some relevance for us as individual investors.  Here’s my take on each–

1.  unconscious incompetence.  This is where everyone starts out.  You know you’re smart–certainly smarter than most of the people you see on stock market cable shows.  You’re successful at your career.  You’re informed about economics.  You read the financial press.  You look at stock prices every day.  You think that’s enough.

People at this stage misunderstand two related things (at the very least I did):

–investing is a craft skill.  Almost every concept is easy to understand.  Complexity comes from the way simple ideas are repeated and combined into intricate and less-than-obvious structures.  Here, experience is more important than having a stratospheric IQ.

–the person on the other side of the trade knows much more than you suspect.  Typically, it’s someone who has served a five-year apprenticeship under an experienced professional investor and has maybe ten years of experience working on this own.  That translates into 50 hours a week gathering information about stocks.  More than that, the person probably spends most of that time focusing on a single stock market sector–or even a single industry, or a subsection of that industry.  Yes, some of these professionals actually have two years experience 7.5 times (meaning they’ve been spinning their wheels for most of their careers–thank goodness for that).  But even so, that’s 5000 hours studying the stocks they tend to buy and sell.  How good is the hot tip from your buddy Charlie in comparison?

2.  conscious incompetence.   Some people remain in stage one forever.  They either don’t evaluate their investment performance vs. their objectives or a benchmark, or their underperformace doesn’t register because it doesn’t square with their self-image.

Others–here I’m much more familiar with what starting-out professionals do that with ordinary individuals–begin to understand that this activity, like almost any other where professionals are involved, is harder than it seems.  They react to the situation in two ways:

–they stop doing the things that lose them the most money, and

–they begin to work harder at learning the ropes.  If they can, they find a successful investor who is willing to teach and who will take them as an apprentice.

3.  conscious competence. At this stage, an investor knows:

–enough accounting to read company financial statements with ease and understands the important financial variables in a company’s success

–enough microeconomics (which is mostly common sense, in my view) to evaluate a firm’s competitive strengths and weaknesses

–how to create a detailed spreadsheet to estimate future earnings (or to forecast other relevant metrics)

–from reading 10-Ks or elsewhere, the financial history of the companies and industries he’s interested in

–that his research process, and his plan for monitoring the key variables his research has uncovered, generally lead to success.

4.  unconscious competence.  This is the Zen stuff.  In sports, it’s the idea that after you’ve done enough conscious practicing, you’ve engrained knowledge deeply enough that you can/should cultivate “the zone.”  You try to stop thinking out what you intend to do and let your unconscious run the show.

In the most literal sense, I don’t think there’s a place for this in investing.  The reason?  –the activity is much more complex than any sport, so accumulated experience isn’t enough to rely on.

Nevertheless, there is something analogous.  For example:  you may encounter a new investment idea.  You know it will easily take a month or more to do the research you need to make an informed decision to buy or not (for me, it usually takes me over a year to become completely comfortable with a stock).  On the other hand, you see that the stock is already beginning to outperform as others become aware of it.  What do you do?

At some point I think every seasoned professional develops a sense of what research tasks are crucial and which amount to crossing the ts and dotting the is, and can be done after buying a small position in the stock.  In effect, you develop a feeling of confidence that a stock has a chance to be an outstanding performer that’s based in part on unconscious processing of information that you aren’t yet able to articulate consciously.

Some veteran investors (me among them) consider this a competitive advantage.  They rarely, if ever, talk about this.  On the other hand, some use “hunches” as a substitute for doing basic research work.  That’s very bad.  If investors like this are not “managed” by their subordinates–analysts or portfolio managers–they threaten to bring down whole investing operations.  Still others shy away from the idea of unconscious thought completely, and remain at stage 3.  I think it’s foolish not to use all the tools at your disposal, but such investors may simply be recognizing their limitations and acting accordingly.

frozen by the screen: a portfolio manager’s ailment

frozen by the screen

Every seasoned professional investor I’ve sat down and compared notes about the profession with has experienced this phenomenon.  Usually it happens when the market is declining and you’re underperforming–sometimes badly.  You turn on your computer or your trading machine to see what prices are doing.  Your stocks are doing poorly again.  But instead of either turning to another page or going back to work, you sit and watch the flow of trading in your stocks and worry.  You may be mesmerized or horrified.  You’re using up a lot of emotional energy.  You know this isn’t helpful, but you just sit and watch–and maybe perspire heavily.  You can’t tear your eyes away from the screen.

This isn’t good.  For one thing, you’re not doing anything productive.  You’re not thinking about how you can tweak your holdings to achieve even higher levels of outperformance.  In a deeper sense, though, this behavior is a sign that you’re either about to lose your confidence or have lost it already.  You’re focusing on failure, not success.

for professionals

This happens to every professional now and again.  It’s the equivalent of a hitter going up to the plate worrying about being hit by a hundred mile an hour fastball and breaking his ribs, rather than visualizing how he’s going to hit a double off an accomplished pitcher.  You’re setting yourself up for failure.And the cold reality is that if you can’t get into a positive frame of mind, then you may not be cut out for this line of work.

For a portfolio manager, there are several obvious steps to take to restore a positive mood:

1.  Turn off the price screen and don’t turn it back on.

2.  Take out your analysis of the stocks you hold that are performing the worst, rethink and rework your assumptions, and come to some conclusion.  The result will probably be that you believe the stock is as cheap as you thought.  Even if you spot some fatal flaw, you’ll have some reason other than fear for making a change.

3.  Rethink your portfolio structure and whether it’s still appropriate.

4.  Look for depressed stocks that you always wanted to own but thought they were too expensive.  Consider whether a market downdraft has made them more attractive.

5.  Look for long-term weak performers in your present portfolio (you know they must be there, because everyone has them).   They’re probably not going down much (because they never went up).  Think about using them as a source of funds for any new additions.

6.  You can always take some risk out of the portfolio by making it look more like the index.  In my case, however, every time I’d done this it’s been a mistake.

7.  If you’re going to do something stupid, like selling a perfectly good stock while its price is down, do it in a very small amount.

8.  If nothing else works, go to the gym  …or read a book.  Just don’t turn the screen back on.

Of course, there’s an underlying assumption I’m making–that what’s going on is a moment of mental weakness, a temporary loss of focus.  It’s also at least possible that your unconscious is telling you that you have deep fundamental flaws in your portfolio that you need to fix as fast as possible.  But if you know yourself well enough psychologically, you should be able to tell the difference.

for regular people investing their own money

Funnily enough, these are much harder cases to diagnose.  Good professional investors are highly trained in what is an often counter-intuitive way of thinking about the world.  So the pitfalls they encounter are usually well understood, because they’re the ones every other manager has encountered as he tries to master his craft.

For regular investors experiencing angst at declines in their holdings, I’d have three basic questions:

1.  Do you know how the companies whose stocks you hold earn their money?  Have you read quarterly/annual reports and 10Q/10K filings?  Have you formed an expectation about potential returns for each holding?  If you haven’t, you’re not investing, you’re buying lottery tickets.

2. Do you have an overall financial planning strategy?  Is the risk in the stocks you hold appropriate for your economic circumstances?

3.  Are you willing to devote the time needed to develop investing skills, or would you be better off finding a financial planner to help?  (Finding a competent adviser is a whole other can of worms, however.)

why am I writing this today?

My personal stock portfolio had been holding up relatively well during the correction–until yesterday.  I did end the day with two green lights on the screen, DKS (who knows why) and 1128:hk, where the market was closed while New York was falling sharply.  But my other stocks really got clunked.  That’s just life.   But I noticed that I was starting to stare at my screen in an unhealthy fashion.  So I ran for about a half-hour and read a couple of chapters in a book about web design. 

For what it’s worth, my take on the sharp reversal in my portfolio’s relative fortune signals that the correction has entered a new phase.  The tendency in downdrafts in the market is for investors to begin by selling stocks they don’t care much about.  As the correction progresses, the selling reaches closer and closer to what people consider their crown jewels.  If the decline ends in a mini-panic, even parts of core holdings get shown to the door.  I’m not saying this last happened yesterday, but I do think the correction took another step closer to completion.

finding a stock entry point: figuring the percentages


The decision to buy an individual stock, or an ETF or an index fund ,for that matter, is the product of a series of increasingly focused judgments.

The first is the investment plan that sets out an asset allocation among cash, bonds and stocks based on your goals and risk tolerances.

The second level is a comparison of the relative returns you judge are available to you from the different classes of liquid assets, namely, cash, bonds and stocks.  (At present, it seems to me the odds are tilted unusually strongly toward stocks.)

The main benefit of cash in a bank or a money market fund at the moment is that the funds are safeguarded; returns are miniscule, although capital loss is extremely unlikely.  The 10-year Treasury bond yields 3.2%, the 30-year 4.1%.  I find it hard to imagine that interest rates will fall further, creating capital gains for bondholders.  If anything, rates will begin rising in the coming year, producing capital losses.  Stocks?  The long-term average, which I regard as the default number, is around 10%.  I think the year-ahead potential is greater than this, but that’s another story.

The third judgment is whether you perceive a reward from deviating from a benchmark stock index–in the case of US investors, it’s typically the S&P 500–to take the extra risk of buying an individual stock.

figuring the percentages

first pass

Let’s say I decide to add equity exposure to my portfolio.  I figure that earnings on the S&P 500 can be $85 this year and $95 next.  I think the market can trade on 15x earnings, which would be an earnings yield of 6.6%.  That compares very favorably, I think, with the 3.2% interest yield on the 10-year Treasury.

If those numbers are reasonable–I think the earnings could be high and the multiple could be low–then the S&P offers 20% upside over the next half year or so.  Downside?  Le’s say that in the current period of market fear the index could drop another 10%.  I think that’s too much, but it allows me to make a point I think is important.  And when people get scared, who knows what their emotions will lead them to do?

Let’s also say that I think both outcomes, up 20% or down 10%, are equally likely and are the highest probability results.  This means I’m risking the loss of $1 in order to gain $2–2 to 1 odds.  This sounds ok but not fabulous.  Should I wait for better odds?

second pass

Suppose the market drops 5% from here.  Then the situation is 25% gain vs. 5% loss.  5 to 1! This looks much more attractive.  But…

third pass

I’m not the only participant in the market.  Others have pocket calculators and can make guesses about possible market outcomes.  In other words, everyone already knows the market is very attractive down 5% from here.  In all but the most panicked markets, there’ll be someone who says to himself that he’ll get a jump on the crowd by buying down 4%.  After all, a 24% gain (eight years of 10-year bond interest) vs. a 6% loss isn’t bad, either.  There may also be someone who not only thinks about the crowd but about the guy who intends to buy when the market falls 4%.  He may think that a 23% gain vs. a 7% loss, or 3-to-1, is acceptable and place limit orders to buy at 3% below the current market.


The reverse regularly happens when the odds favor selling.  In this case, astute sellers forgo the last few percentage points of theoretical upside to be assured of exiting their positions before a decline commences.

The same kind of calculation applies with individual stocks as with the index.  One difference, though:  the risk/reward ratio has to be higher, I think, than that of the index to justify the extra risk of buying an individual stock.

I’ve always found it harder to figure out the bottom of a trading range than the top.  This may partially be my bullish temperament.   But marking the bottom also requires a good understanding of how much risk the market attaches to the possibility of actually achieving, or breaking through, the top of the range.

In the current situation, for instance, the market may still think that the most likely year-end target for the S&P is 1250-1300.  But it clearly now wants to assign a higher risk to this outcome, as the break below 1100 (which had previously been a solid-looking floor) and the current search for support around 1050 show.  Part of the new anxiety comes from the slowing in the pace of growth in consumption in the US over the past month.  Part doubtless also comes from worry about the impact of a slowdown in Europe on corporate profits here.

Both concerns appear to me to be already overly discounted in today’s prices.  But the market, which is always the final arbiter, disagrees.