Friday, March 26, 2010

Frishberg, Investing without Borders

Daniel Frishberg is the founder of the Texas-based BizRadio Network where he broadcasts a daily two-hour program “The Money Man Report.” He is also a partner in a private equity fund and is the chief investment strategist for a management company. Investing without Borders: How 6 Billion Investors Can Find Profits in the Global Economy (Wiley, 2010) is his second book.

The book is not really about global investing although it starts off that way and comments on global investing do appear throughout the book. Rather, it’s a chatty hodgepodge of macroeconomic reflections (and predictions), the seemingly mandatory criticism of financial planners and stockbrokers, bond strategies, contrarian thinking, snippets from radio interviews, money management, investor psychology, and the occasional stock pick. Sometimes he writes for the rank novice, at other times for the professional or quasi-professional. For instance, he spends pages explaining the basics of bonds for the uninitiated; he also extols the virtues of structured notes. With respect to the latter, he says that he “can sometimes negotiate a deal with investment banks like Barclays Bank and Goldman Sachs” but that the individual investor without a few million to invest at a time can pick up the leftovers from a deal done by an institutional investor like the author. He admits that “you have to know what you’re doing, and you have to read THE FINE PRINT, because sometimes the way these notes are structured can be very deceptive.” (p. 34)

For the rest of this post I’m going to take off my critic’s hat and instead focus on two topics that interest me: intuitive trading and stop losses.

In the 1990s the Marines Leadership and Combat Development School was teaching standard business school decision-making techniques. In very tense combat situations, however, the men fell short. The head of the program talked with a psychologist who was studying firemen who have no time for rational analysis before making a decision. He then decided to bring a group of his men to the NYMEX trading pits because they “reminded him of a war room during combat.” To no one’s surprise, the Marines were decimated by the floor traders. The surprise came a month later when the floor traders went to Quantico to play war games against the Marines and “wiped the Marines out.” The traders were “just better gut thinkers. They were practiced at quickly evaluating risks, and they were willing to act decisively on imperfect and contradictory information.” (p. 68) Successful traders and investors, Frishberg contends, just get it. “The point here is,” he continues, “you can’t rely on any favorite technique except getting as much experience and information into your unconscious and learning to let that beautiful computer inside you do its job.” (p. 69)

As readers of this blog know, I have a love-hate relationship with initial stops; see my post “The case against stop losses” and the comments on it. Frishberg has his own take, distinguishing between two sets of entry criteria. If the entry is pattern-based, the trader must have a system of tight stops. If, however, “you’re investing your money with courage and commitment, helping people around the world get what they want, and you love the company at $20 a share, don’t you love it more at $17? . . . So how can you reconcile the strategy of applying tight stop-losses with a commitment to live your life with courage and conviction?” (p. 139) In this case Frishberg suggests splitting the money allocated to the trade into thirds. He commits the first third when he thinks we’ve reached “maximum fear and negativity.” If the stock continues to fall, he will commit the second third. And if the stock starts to turn up, he’ll add the final third. Of course, if the overarching thesis behind the trade falters, it’s time for a major reassessment.

The strategy of doubling down on a losing position has both advocates and critics and I’m not going to take sides here except to say that it’s definitely not my style. I would just comment that if an investor can’t reconcile the strategy of applying tight stop-losses with a commitment to live his life with courage and conviction (and note that this does not entail doubling down) the same should hold for the trader. It’s just that a trader can change his convictions much more quickly

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