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Improve Your Skill in the Fine Art of Selling (“It’s When You SELL that Improve Your Skill in the Fine Art of Selling (“It’s When You SELL that Counts !”) AAII Washington D. C. Metro Chapter April 17, 2010 Don Cassidy President, Retirement Investing Institute www. AAIIdenver. Chapter. Org >> Don @ R-i-i. org <<

DISCLAIMER Neither the speaker nor the Retirement Investing Institute provides individualized investment advice. Neither DISCLAIMER Neither the speaker nor the Retirement Investing Institute provides individualized investment advice. Neither is licensed as a Registered Investment Advisor. No investment products are offered for sale. Any individual securities (including stocks, mutual funds, or ETFs) mentioned are strictly examples and do not imply investment or trading recommendations. Investors should do their own homework before taking any actions.

It’s the money you could be saving with better selling ! It’s the money you could be saving with better selling !

PROBLEM, and STAKES • Thomas Friedman in The World is Flat: • p 21. PROBLEM, and STAKES • Thomas Friedman in The World is Flat: • p 21. “Change is hardest on those caught by surprise. Change is hardest on those who also have difficulty changing. But change is natural; change is not new. ” • p 378. “The weak will fall further behind faster. The traditional will feel the force of change more profoundly. The new will get turned into old quicker. ”

CRITICALITY OF SELLING WELL “If you avoid the big down cycle, you don’t have CRITICALITY OF SELLING WELL “If you avoid the big down cycle, you don’t have to hit it out of the park on the way up. ” -money manager Pat Adams, PVG Asset Management (which means taking less risk to hit home runs to catch up!)

INVESTING IS LIKE COACHING • Don’t Go Into the Game Unprepared! • Watch Game INVESTING IS LIKE COACHING • Don’t Go Into the Game Unprepared! • Watch Game Films for Opponent’s Tendencies • Focus on Correcting Our Own Weaknesses • OUR NEED IS MOST ACUTE re SELLING

WAYS TO BE ONLY HALF PREPARED 1. Think 100% Fundamentals and Ignore Technical Analysis WAYS TO BE ONLY HALF PREPARED 1. Think 100% Fundamentals and Ignore Technical Analysis & Psychology 2. Focus Attention on What to BUY, with No Special Attention on Selling Skills

“Hey, great! I can’t wait to see how my Enron, AIG, & GM stocks “Hey, great! I can’t wait to see how my Enron, AIG, & GM stocks are doing. ” PEOPLE HAVE A HARD TIME LETTING GO

Selling’s Pain Meter HIGH Sell @ Loss Finality Ends Hope Proves Us a “Failure” Selling’s Pain Meter HIGH Sell @ Loss Finality Ends Hope Proves Us a “Failure” Quantifies Official Loss Verdict Hold @ Loss Retains Hope; Postpones Pain Sell @ Gain “Realization Utility” – Prof. Barberis @ Yale Proves Brilliance – BUT Pay Taxes! Hold @ Gain Endowment Effect; Strokes Ego; Keeps an Known Friend Close at Hand Postpones Taxes; “I’m a Good L-T Investor” LOW

WHAT DO I BELIEVE ? By permission: Vitaliy Katsenelson (author of Active Value Investing WHAT DO I BELIEVE ? By permission: Vitaliy Katsenelson (author of Active Value Investing © 2008 )

MAJOR FOCUSES FOR SELLING • NOT primarily fundamentals – But don’t ignore them! • MAJOR FOCUSES FOR SELLING • NOT primarily fundamentals – But don’t ignore them! • Heavy emphasis on psychology – The crowd’s, but our own as well ! • Watch for extreme moves in price – these ARE unsustainable • Be careful of “religion stocks” ! • Volume extremes = useful immediate signal • Selling IS a reversible decision !!

“THE NEW NORMAL” • Implies the old normal is outdated • Implies a thorough “THE NEW NORMAL” • Implies the old normal is outdated • Implies a thorough portfolio re-exam • Strongly implies the need to be able to sell dispassionately !

ROAD MAP • Understanding Ourselves and Surroundings • Viewing the Market in Crowd Terms ROAD MAP • Understanding Ourselves and Surroundings • Viewing the Market in Crowd Terms • Becoming Contrarians • Naming & Battling the Barriers to Action • Listing Some Good-Selling Rules

WHY DO WE BUY STOCKS? • Think Like a Shop-Keeper • We Buy to WHY DO WE BUY STOCKS? • Think Like a Shop-Keeper • We Buy to SELL !! • Don’t Think Like a Collector !

WHICH IS MOST VARIABLE ? Price Value Taxes Comm’s & Expenses >> The MEDIA WHICH IS MOST VARIABLE ? Price Value Taxes Comm’s & Expenses >> The MEDIA Mis-focus the Public !

Looking in All the Wrong Places ! Looking in All the Wrong Places !

ERROR OF FOCUSING ON TAXES AND EXPENSES… • Implicit Assumption = Randomness and Helplessness ERROR OF FOCUSING ON TAXES AND EXPENSES… • Implicit Assumption = Randomness and Helplessness • Therefore ALL of AAII’s Tools are Useless ( NOT !!) • If YOU Believe THAT, no need for effort. • Give up and go index!

LAWS OF MARKET GRAVITY What Goes Up Probably Comes Down ! “In the long LAWS OF MARKET GRAVITY What Goes Up Probably Comes Down ! “In the long run, stocks will fluctuate. ” What Went Up MOST and MOST RECENTLY will come down the hardest ! What’s Gone Up May Not DESERVE to Stay Up.

HOPE IS NOT A USEFUL INVESTMENT (or trading) STRATEGY !! • Hope is designed HOPE IS NOT A USEFUL INVESTMENT (or trading) STRATEGY !! • Hope is designed to shield the ego • It often damages wealth in the process • At best, hope prevents considering potentially better opportunities

Behavioral Finance Integrates… • Human Realities: • Rational Theory: • • Economics Finance Accounting Behavioral Finance Integrates… • Human Realities: • Rational Theory: • • Economics Finance Accounting Security Analysis BF • Anthropology • Psychology • Sociology

USE BEHAVIORAL FINANCE ! • • • LOTS More than Fear and Greed Ego USE BEHAVIORAL FINANCE ! • • • LOTS More than Fear and Greed Ego – a subtly strong force Hope Springs Eternal Reinforcement Anchoring (3 stock prices) Endowment Effect (mugs vs. chocolate) The Tyranny of Choice Group “Evidence” Cave Dwellers: Risk Avoidance is #1 • Blue-Chip Memories? AT&T GM Wa. Mu Kodak Westinghouse Sears Merrill Lynch AIG GE

IMPORTANT IMPLICATION… Successful investing ALWAYS requires doing what feels UNCOMFORTABLE at the time. BECAUSE…Certainty IMPORTANT IMPLICATION… Successful investing ALWAYS requires doing what feels UNCOMFORTABLE at the time. BECAUSE…Certainty comes late and so is usually 100% wrong!

MARKET CLOCK ? • 3 Phases: – Denial / Disbelief – Migration – Panic MARKET CLOCK ? • 3 Phases: – Denial / Disbelief – Migration – Panic Todd Harrison, www. Minyanville. com

From Ray Johns “Nosce te ipsum” - Know thyself! “Becoming successful … has more From Ray Johns “Nosce te ipsum” - Know thyself! “Becoming successful … has more to do with learning about yourself and less to do with learning about the market. ” (DC: It’s about psychology, not fundamentals alone!)

“ 95% of this game is 50% mental. ” -Yogi “ 95% of this game is 50% mental. ” -Yogi

UNLOAD THE BAGGAGE ! Many decisions HAVE major costs for making errors… wrong college, UNLOAD THE BAGGAGE ! Many decisions HAVE major costs for making errors… wrong college, wrong mate, wrong house, wrong car, wrong job Investing (and trading) has LOW $$ costs for escaping (but high emotional baggage) Our EGOs get involved because keeping score is a daily ritual with investments.

HOPING FOR SOME HELP WITH SELLING ? ? ( better plan to D-I-Y ! HOPING FOR SOME HELP WITH SELLING ? ? ( better plan to D-I-Y ! )

NEVER Wait for Brokers ! • • • Their ‘Buy Bias’ Training is in NEVER Wait for Brokers ! • • • Their ‘Buy Bias’ Training is in Product Pushing Most CANNOT Use the S Word If / When They Ever do, it is WAY Late! Know the Code Words And ESPECIALLY IGNORE BUY ADVICE ON FINANCIAL-TALK RADIO & TV !

NOTE AND USE PUBLICLY AVAILABLE INPUTS • • Conversations/parties (celebration) Counting the chips Market NOTE AND USE PUBLICLY AVAILABLE INPUTS • • Conversations/parties (celebration) Counting the chips Market headlines on non-business pages ICI mutual-funds’ flows data (ICI. org) Cartoons and TV humor and ads (!) Having too much fun? ? The VIX Index Personal Diffusion Index

EQUITY MUTUAL FUNDS’ NET FLOWS, 1994 -2008 EQUITY MUTUAL FUNDS’ NET FLOWS, 1994 -2008

New Yorker Cartoon Count Bullish Percent and Total Number 1995: 100% (1) 1996: 63% New Yorker Cartoon Count Bullish Percent and Total Number 1995: 100% (1) 1996: 63% (8) 1997: 50% (14) 1998: 46% (13) 1999: 70% (33)

New Yorker Cartoon Count, cont’d. Bullish Percent and Total Number 1997: 50% (14) 1998: New Yorker Cartoon Count, cont’d. Bullish Percent and Total Number 1997: 50% (14) 1998: 46% (13) 1999: 70% (33) 2002: 0% (25) 2003: 0% (7)

Crowd Screaming Loudly? Give It What It’s Demanding • Cash? Give it some of Crowd Screaming Loudly? Give It What It’s Demanding • Cash? Give it some of yours ! • Stocks? Give it some of yours !

“TIMING THE MARKET” ? ? • TIMING = attempting to ANTICIPATE market or individual-stock “TIMING THE MARKET” ? ? • TIMING = attempting to ANTICIPATE market or individual-stock up or down moves • PRICING or HARVESTING = taking advantage of unusual recent moves that appear potentially unsustainable. • (Farmers do!)

RULE OF 3 -4 -5 -6 Markets are overextended, based on historical odds, after RULE OF 3 -4 -5 -6 Markets are overextended, based on historical odds, after rising consecutively for 3 years 4 months 5 weeks 6 days

“In Just Another …” (quarter? 3 points? ) HOPE IS NOT A USEFUL STRATEGY “In Just Another …” (quarter? 3 points? ) HOPE IS NOT A USEFUL STRATEGY ! AN IMPORTANT SELF-TEST: Are you TRULY able to Sell as readily as you Buy ? ( Keep working at it ! )

NOTHING IS FOREVER • Don’t Agonize/Obsess re Buys – This is NOT a marriage NOTHING IS FOREVER • Don’t Agonize/Obsess re Buys – This is NOT a marriage or career choice ! • • • Act on Themes Keep Themes Constantly Under Review Get Your Ego Out of the Way! Set Stops (but NOT at IBD’s 8%) Set Sell Targets When Bad Things Happen, Recovery May Never Occur (!) (GM, Wa. Mu, Enron, Beth Steel, ETC!)

BIG-PICTURE SELLING RULES • Sell when you’re having lots of fun • Sell when BIG-PICTURE SELLING RULES • Sell when you’re having lots of fun • Sell when tempted to count the chips • Sell when market is on an extended run (up) • Use Rule of 110 to make yourself sell high • Sell when S&P 500 ~ 20% above its 200 -day M A

BIG-PICTURE SELLING RULES • Sell when VIX index @ its lowest in several months BIG-PICTURE SELLING RULES • Sell when VIX index @ its lowest in several months • Sell when stock funds’ net inflows have been strong • Sell 60 -90 minutes after gap-up openings • Sell when market doesn’t rally on good news • Sell when news surprises are most likely not favorable (‘Goldilocks market’) • Sell when # stocks passing Schloss screen is under 6.

WINNING A GAME • Often Means NOT Making Killer Mistakes • Remember the 3 WINNING A GAME • Often Means NOT Making Killer Mistakes • Remember the 3 Market Phases – Denial /Disbelief – Migration – Panic • Don’t Join the Crowd ! • OBEY the Rule of 110

SINGLE-STOCK ( & ETF ) RULES • Sell when you fall in love with SINGLE-STOCK ( & ETF ) RULES • Sell when you fall in love with a stock • Sell when you feel really smart • Sell when stock is on a multiple-day run • Sell on volume crescendos • Sell on volume spikes

SINGLE-STOCK ( & ETF) RULES • Sell 60 -90 minutes after gap-up openings • SINGLE-STOCK ( & ETF) RULES • Sell 60 -90 minutes after gap-up openings • Sell on good earnings news (!) • Sell when stock is far above its 20 -day moving average • Sell when stock doesn’t rally on good news • Sell when EITHER the fundamentals OR technical analysis speaks caution

THE ACID-TEST QUESTION WOULD YOU BUY IT TODAY ? No? : Playing Greater Fool THE ACID-TEST QUESTION WOULD YOU BUY IT TODAY ? No? : Playing Greater Fool ! Holding IS Buying !

SUGGESTED READING • • • Blue Ocean Strategies Kim & Mauborgne The World is SUGGESTED READING • • • Blue Ocean Strategies Kim & Mauborgne The World is Flat T. Friedman Inside the Investor’s Brain R. Peterson More than You Know M. Mauboussin The Paradox of Choice B. Schwartz The WSJ Guide to the End of Wall Street as We Know It D. Kansas • Active Value Investing V. Katsenelson • When to Sell J & R Mamis • It’s When You Sell that Counts! D. Cassidy www. Global. Publishing. com Trading on Volume D. Cassidy

MORE GOOD READING… www. R-i-i. org Click on ‘Good Books’ Classics Market History Technical MORE GOOD READING… www. R-i-i. org Click on ‘Good Books’ Classics Market History Technical Analysis Market Psychology Selling & Contrary Opinion Bond & Income Investing Other Topics