Invest Like a Shark

I am a subscriber to RealMoney.  And on RealMoney, there are two columnists that are must reads for me.  One is Helene Meisler.  The other is James "RevShark" DePorre.

DePorre's story, encapsulated in his book Invest Like a Shark, is a fascinating and inspirational one.  A lawyer by trade, DePorre went deaf and lost his practice, his livelihood and his marriage.  Going broke, he began searching for a way to make a living. 

He eventually made his way to investing.  At first, he listened to the recommendations of a broker, but after buying a stock, the broker did not want DePorre to sell.  "Hold for the long-run" was the response from his broker when DePorre wanted to dump a losing position.

Being poor, as DePorre was, has a unique effect that most investors probably do not share.  If one is attempting to make a living from one's profits in the market, one must profit. A falling stock does not put food on one's table.  It may over a year or two, but between then and now, one must eat. 

Frustrated with his broker, DePorre struck out on his own and developed a system that not only put food on his table, but lots of it.  It was also expensive food as DePorre became wealthy in a relatively short period of time.

DePorre's system is one of trend-following and preserving one's capital.  DePorre argues that such a system is an edge the small trader has relative to Wall Street.

Trend-following - also known as "momentum investing" - is often looked down upon by the investment community, though that is changing with the astonishing success of some hedge fund managers such as Jim Simons and John Henry.  "Proper" investing, according to what is taught in MBA schools, is deep fundamental research and financial analysis, and is the dominant methodology of Wall Street.

But what edge, DePorre asks, does the small trader have doing deep fundamental analysis when giant firms such as Fidelity, T Rowe Price, Wellington, Capital Research, etc. have hundreds of analysts eating, breathing and sleeping the 20 stocks they cover?

They do not.  The edge the small trader has derives from the structure of Wall Street in that the firms above are so massive and have so many resources, they have to do in-depth fundamental analysis.  They have no choice.  They cannot follow charts because they are the charts.  Their actions draw the charts.  Recognizing this, the small trader can hop on board or sell quickly based on the charts the big whales draw.

Selling quickly is another facet DePorre emphasizes.  Wall Street is loathe to tell its retail clients to sell.   Why?  As DePorre states, if a client sells, he may take his money elsewhere.  Best that it stays with the broker so the assets can generate future commissions or profits for the broker who invests the clients' cash balances.   

Many investors themselves do not like selling stocks because they see it is an admission of failure.  This is wrong, says DePorre.  You can always buy it back later, even if the stock is higher.  DePorre argues that rather than looking at selling as an admission of failure, investors should view it as insurance.  If you think the stock is going to fall, and you sell it, then if it goes up instead, you can buy it back. The difference between the sale price and the higher purchase prices is the investor's insurance premium against a loss.  And loss of capital is anathema to small traders because if you lose your capital, you are out of the game.

I have deliberately been using the term “small trader” as opposed to “small investor” because this book is best for small traders who make a living trading stocks as opposed to investors who spend no more than an hour or two a week on their portfolio.  DePorre is derisive of the buy-and-hold methodology of many investors, but for those who do not have the time nor the resources to trade full-time, buy-and-hold is often the best option because the option for many passive investors is not between market returns and outstanding returns, it is between market returns and cash returns generated in a bank deposit.  And over the long-run, most investors will be better served in a buy-and-hold market strategy than earning less than the rate of inflation on a time deposit.

This book will not take you long to read.  One of the disappointments is that it is long on very useful generalities and short on specifics.  I believe that DePorre may have done this deliberately as the book is more of a framework on approaching the market as opposed to specific trading strategies, which is really too bad because I would have loved to have read many more examples of DePorre's successful trades and his rationales since the reader wants to be rich like him too!

Invest Like a Shark goes on my Investment Book Log, and I rate it out of five,

Comments

[Eric]

Small momentum traders who make a living trading stocks? Didn't they all die in a previous life known as Day Trading? Because the trend is your friend until it isn't and kills you. Cause of death: repeated whipsaw followed by shutdown of all internal trading organs, including mouse hand.

No specific trading strategies from Revshark? Maybe he are who we thought he were, but what good is he?

[psychodave]

Thanks Eric. A fine obituary.

[vikas]

God created the world in six days and on the seventh He rested from his labors. Use this model to once a week dedicate your own Sabbath Day where you can clear your mind, walk in nature, meditate, talk with people face-to-face, do some exercise, and basically get away from blogging for a bit. This will not only do wonders for your own health but for the health of your blog as well.
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