The Weekly Trader

In my latest Marketwatch article, I went a little outside my usual subject area to address the 2012 doom-and-gloom predictions. These type of articles always create controversy, but they also help people to think, which is my goal. I hope everyone had a great holiday and a happy new year 🙂

Here is a link to my article: http://bit.ly/v9urLr

Every week, I receive a lot of letters from readers about my books and articles. I answer all the letters, and usually don’t post them. However, in my latest article for Marketwatch, “5 Trading Strategies If You Have Less Than $3,000,” (http://bit.ly/tzoP3J) people left over 150 comments. Many wrote that college students had no business learning about the stock or options market.

Then I received a letter from Daniel Dombroski from the University of Connecticut. As you’ll see below, Daniel has been successfully trading options while going to school. Although it’s not easy, it is possible to make money with a little money. I’m sure that more than a few financial firms will be interested in speaking with him about a job or internship.

Here’s his complete letter to me:

My name is Daniel Dombroski, an undergraduate student at the University of Connecticut. I read your article, “5 trading strategies if you have less than $3,000”, and laughed a little when I read your suggestion on implementing option strategies. I started trading options about three years ago, right out of high school. The markets have been less than friendly over the past few years to many investors and traders but this increased volatility has provided many profitable strategies utilizing options.

My experiences over the past few years have provided me with many unique opportunities, the most important of which is my understanding of the markets. Comprehending and capitalizing on movements has differentiated me from other students who are simply being lectured in the class room. This is a huge competitive edge in the minds of other traders and potential employers. I have also been given the opportunity to educate other students about options trading and how creating a well planned strategy can protect investments in ways simply buying and selling equities cannot accomplish.

I fully support students learning about options and how they can protect and leverage themselves when using a well thought out, discipline trading strategy.  What is important to point out is that results will reflect how the trader views options . If you treat this vehicle like gambling then your account will reproduce similar results. You may win in the short run but the house always gets its money.

As a disclaimer, my primary trades are credit and debit spreads to generate steady income. Correct sizing allows me to adjust my positions accordingly. I plan on continuing to grow and adapt my strategy and rules over time to reproduce results I am comfortable with.

In short, thank you for recognizing this investment vehicle for people with small accounts (particularly college students.) I look forward to reading more articles that encourages eager young prospective traders my age to take active steps in creating their own financial independence and securing a profitable future.

Warm Regards,

Daniel Dombroski

Update December 7th: The only error in this article is that in reality, even though it was homecoming weekend, many Colgate students attended my seminar. I was amazed at the interest they had in the stock market even during homecoming. By the way, Colgate beat Cornell in overtime. (Note: Photos below)

Right now many people are negative about the stock market, and believe that you should avoid the market completely. I believe, however, that it’s a good time to learn more about the market, and studying costs nothing. If the only money you have in the world is $3,000, by all means pay off debt or keep it in a savings account. But if you do have extra money that you can “afford” to lose, then you can use it to invest in the stock or options market.

When I went to Colgate University in Hamilton, New York to teach a seminar on “Understanding Stocks,” “Understanding Options,” and ways to avoid investment mistakes, I spoke with Josh Lasker, chairman of the Stock Trading Club and an executive member of the Colgate Finance Club, and William Civitillo, president of the Finance Club.

The finance club, with over eighty members, was created to “take Colgate students and educate them about the world of finance and the careers they might be interested in,” says Civitillo. “We want to help them to make the most money in the future, and find happiness.”

William Civitillo says they try to make the club fun, and often bring in people to give insights about the financial world.

Josh Lasker first got interested in the market when he was fifteen years old. “I saw the market was volatile in 2008, and I saw the markets tank,” he says. “My father’s partner said that you don’t have much to lose when a stock is already down 90% and you are only throwing in 140 bucks. That’s when I bought 1,000 shares of Sirius at $.14 a share and sold at $.54. Then it went over a dollar.”

What did he learn? “I learned that anything can happen in the stock market,” Lasker says. “Even a big company can go bankrupt.”

Below are photos of the beautiful Colgate campus and of me teaching:

Colgate University

Colgate University

Colgate University

Colgate University

Colgate University

Colgate University

Commentary: Wall Street may need a little help from angels

I am standing on the sidewalk in front of a SoHo clothing store in lower Manhattan. It’s Fashion’s Night Out, and thousands of people are having a one-night fashion celebration. On this night, models, celebrities, and designers are encouraging customers to shop for clothes at reduced prices. Judging by the festive crowds and ringing cash registers, the night is a huge success.

Models and Money

In front of me are hundreds of awe-struck fans waiting in line to meet the angels: Victoria’s Secret Angels. Victoria’s Secret (NYSE:LTD), an American retailer of women’s clothes, is popular for its spectacular fashion shows and reasonably priced lingerie. The twelve Victoria’s Secret angels are some of the highest paid models in the industry, and a few go on to become supermodels. Victoria Secret’s Adriana Lima’s estimated annual income is eight million dollars; Alessandra Ambrosio’s estimated income is five million dollars.

Four angels suddenly enter the room, and the large crowd hushes. Adriana Lima, Alessandra Ambrosio, Lily Aldridge, and Erin Heatherton walk over to me for an interview. These million dollar models are charming, and very knowledgeable about Victoria’s Secret products. (See photos of my interview with the angels here: http://bit.ly/nBT6Ev.)

Models and the Market

What do fashion models have to do with the stock market? Actually, the stock market and fashion industry are more alike than many people realize. The similarity? Both are based on a fantasy: one promises to make you beautiful while the other may make you rich.

Yet, when customers enter a fashion store, they expect to be seduced by gorgeous models. When investors enter the market, theydon’t expect to hear fantastic promises that won’t come true. Instead of beautiful models, investors often feel as if they’re looking at the Emperor’s new clothes.

Even if Wall Street hired a flock of lovely angels, it’s not easy to inspire faith in its products. Who cares that the stock market rose more than 70 percent from its 2009 lows? Because many investors didn’t earn back their money, they feel that the market is rigged against them. Unlike the fashion industry, Wall Street has lost its sex appeal.

In the last few months, some people have revolted against Wall Street by protesting against an unfair financial system. There is some truth to the complaints, so unless Wall Street wants to lose investors for the next decade, they’ll need to change the way they do business.

How Wall Street can bring investors back

As the protests grow louder and last longer, Wall Street may want to consider taking the following steps:

  1. Create a fair stock market
    The stock market isn’t fair anymore. The market often goes up or down not based on fundamental or technical analysis but volume generated by high frequency traders (HFT) or flash traders. Although the increased volatility might help a handful of traders, it certainly doesn’t instill confidence in the system. In addition, some rules, such as the uptick rule, were eliminated or changed to favor insiders. If Wall Street wants to recover from the negative PR, they’ll need to create a fair stock market with logical regulations. Otherwise, it is buyer beware.
     
  2. Make a transparent stock market
    Right now, there are almost two stock markets, one for the insiders and the other for everyone else. “The average investor is not privy to how Wall Street really works,” explains former hedge fund manager Shah Gilani. “If you don’t know what is woven in that cloth, it’s hard to tell what kind of quality it’s going to be.” If Wall Street truly wants to level the playing field, then “they’ll have to start looking at what’s good for the economy and investors, and not just for them,” he cautions. (Click here for my full interview with Gilani: http://bit.ly/o8Okax.)
     
  3. Punish wrongdoers
    For years, the Securities and Exchange Commission (SEC) looked the other way while Bernard Madoff and others scammed individual investors. This gave the impression there were no consequences for illegal behavior. Lately, the SEC appears to have found courage, but some still want this agency defanged. When bad behavior is ignored or rewarded, it destroys people’s faith in the financial system. If individual investors or traders break the rules, they’ll get in big trouble. Who was penalized for helping cause the 2008 crash?
     
  4. Putting lipstick on a pig
    This season, the fashion trend is bright, bold, and colorful, anticipating good times ahead. On Wall Street, however, the market trend is indecisive and volatile. Unless Wall Street undergoes an extreme makeover, even angels with lipstick can’t make it pretty again.
     

Note: Here’s the Marketwatch link to the article: http://bit.ly/tpkb6p

The following is an interview I had with former hedge fund manager Shah Gilani. He is also a contributing editor to bothMoney Morning and The Money Map Report.

Q. Would you say that Wall Street is transparent right now?

Gilani: No, it’s not. It’s confusing to investors. The average investor is not privy to how it really works. If you don’t know what is woven into that cloth, then it’s hard to tell what kind of quality it’s going to be. You can’t tell. Investors know there is a problem but they can’t put their finger on it. The problem would be self evident if they had an understanding of values.

Q. What do you see in the market right now?

Gilani: I see more volatility, particularly in the global markets. Debt is the problem in the global picture. The market is incredibly dangerous right now. Although investors want to make back their money, they also don’t want to get duped. They don’t want to be used as a backstop. Sadly, though, many don’t have a choice.

Q. What should investors do?

Gilani: Right now you have to cherry pick stocks. You also have to be an investor-trader. You have to be proactive, and look at your portfolio every day or two. You can’t wait a month anymore. The days of buying and falling asleep are over. You also have to put in stops, and have profit targets. And as your stock goes higher, raise your stops higher. That way, if the market falls, you can get out. The market moves so fast you could lose all of your profits in a matter of days.

Q. What is the problem with the market right now?

Gilani: The market is unfair but it doesn’t have to be that way. In my opinion, volatility has been engineered into the financial markets for the sake of Wall Street and traders, and to the enormous detriment of the public, investors, and the economy.

Q: Could you expand on that?

Gilani: Capital markets are set up to serve to raise cash, equity and debt, to facilitate business development, and to provide liquidity to investors providing financing so businesses can grow and share the wealth. Wall Street was set up to be the capital market’s intermediary, but they realized it’s better if they could be principal risk takers as well as market makers. Then they can trade their own book against the market, which includes their clients. Wall Street doesn’t like a calm market. There isn’t a lot of money to be made when volatility is low and spreads are super tight. In the old days, the market was calmer, which was bad for the traders on Wall Street.

Q. How did they change the system?

Gilani: The first thing they did was eliminate fractions. At the time, it seemed to make sense. After all, fractions came from the days when the Spanish, for example, cut up silver and gold into “pieces of eight.” Unfortunately, by moving to a decimal system, it destroyed liquidity by greatly reducing the “depth” of bids and offers investors were once willing to line up to execute. That changed the market. And now Wall Street specialists and market makers, instead of risking an eighth or a quarter, only risk a penny if they step in front of any client or book orders to try and profit themselves as a principal. Everyone seems to think that decimalization was good for the markets.

Q. Was there anything good about decimalization?

Gilani: The only positive was that transaction costs came down. Another problem it created was that no one knows where the liquidity is anymore. When specialists and market makers can step in front of client orders to take their positions essentially from them, it caused traders and institutional players to look for different venues. Now many high volume traders are going into hidden venues like dark pools. This is not good for investors or traders who don’t have the same access to multiple venues, or the market, but it is good for the Wall Street players. Instead of making the market more efficient for everybody, it decreased liquidity for the general public and increased volatility.

Q. Any other rules that caused problems?

Gilani: Eliminating the uptick rule was another mistake. The uptick rule was working just fine until they took it away. When you think back to all of the rules that Wall Street changed since the eighties: deregulation, decimalization, the uptick rule, allowance for multiple venues, no central order handling book, and the blind pools, it all adds up to a trader’s game. Wall Street is no longer facilitating A and B in the capital markets, but is all about making money for themselves now. That is why the Occupy Wall Street people are protesting. They know that something is wrong, but they don’t know what. They don’t know why they are protesting. Instead of a level playing field, all of the investors have been leveled. The tail is wagging the dog now.

Q. What’s the solution?

Gilani: We have to start looking at what is good for the economy and investors, not just Wall Street. But banks and lobbyists are pushing back. They don’t want the rules to favor investors. Let’s see what happens to the Volcker Rule, which will keep banks out of the securities business. We’ll see if that ever gets implemented as it was originally contemplated.

Q. Are there any other ways to stop the shenanigans?

Gilani: Wrongdoers should be punished. If fraud was done on purpose, and you made a lot of money and caused pain, you should not be able to walk away and hurt the economy and investors. The first place to hit them is in the wallet and claw back that money. If you do it legally, go for it. But if it was illegal, and you manipulated the system, then it’s fraud. If guilty of the crime, you should do the time. Make certain things are punishable by prison time. If guilty, they might even have to sell that second house in the Hamptons.