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Posted by ZorTrades

Frank Zorrilla is the founder and chief investment officer of Zor Capital LLC.He began his Wall Street career 10 days after his 20th birthday when he became a Series 7 licensed stock broker.

The Law Of Averages

by ZorTrades on October 1, 2011

in Stocks

It was a brutal quarter for most market participants; the Dow Jones lost –12% in the quarter, SP500 -14%, Nasdaq Composite -12.9%, Russell 2000 -22%.  This is the perfect time to learn or relearn how percentage gains and losses work.  It’s great to buy a company or an asset you believe in, you have done the homework, you’ve read all the press releases, you follow all the guys who also believe in the company/asset, you know that they are number one in their field, etc….But what most fail to do is allow the STOCK to tell them if they are wrong.  I have never felt comfortable holding on to a great company while the stock is going down.  Sure you can mention $AAPL, but that is one stock in a universe of 5,000 stocks.  You see folks, the price of the stock is your daily, monthly, quarterly, yearly report card.  The price tells you whether you are right or wrong.  No different than a worker in your business, if that worker is not doing what he is suppose to do, are you going to keep him around?  Probably not, especially if you know they are thousands of others (stocks) who can do the job that needs to be done.

The one type of worker that you must get rid of immediately when he starts showing signs weakness/stalling/or a change of character is the momentum worker.  This guy is tall, good looking and charming like Zor.  He has a great story (usually good sales and EPS growth), he starts out with a bang (stock goes up 40% in 15 days) like a bull running through a china shop, everyone is raving about the new guy, you see and hear nothing but good things.  But then suddenly he starts to come in late, smells like booze, crashed the Christmas party, tried going out with your daughter, groped your wife, and he is no longer delivering like he was (stock price).  In the real world, your world, you will probably fire this guy.  In the stock world, most  just start to reminisce about the good old days, the 15 days that it went up 40%, the great sales and growth numbers which don’t mean much anymore because they are sour on the guy and his prospects.  If you cut your losses quickly you can make them up quickly.  If you don’t then the losses will be as bad putting water in your motor.

The most import numbers that you need to know in bear/corrective markets:


If you get your monthly statement and scratch your head saying “why the hell did I buy this one” or “I should have sold that one when it was down 7%” then hit the manage assets tab at the top of the blog, give us a call and get a free portfolio analysis or we can play are own version of are you diversified.

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