Rebel Traders 037 : Get the ETF Outta Here…

We’re going to tackle how to design a virtual ETF portfolio designed to match your exact taste and needs...

The Rebel Traders are looking beyond trading in to the realm of investing with a very unique approach to ETF’s by actually creating a portfolio that is structured just like a conventional ETF but designed around your interests, knowledge wheel-house.

This is a very passive investing strategy that allows you to be flexible, passive and unlocks some interesting opportunities for capital growth.

Time Stamped Show Notes

Read Full Transcript

Sean Donahoe: Ready for a little virtual insanity? It's time to go ETF out of here.
Automated: Rebel Traders takes you inside the world of two underground world master traders who take an entertaining and contrarian look at the markets to cut through the noise of Wall Street and help you navigate the trading minefield. Together, Sean Donahoe and Phil Newton are on a mission to give you the unfair advantage of a Rebel Trader. Now, here are your hosts, Sean Donahoe and Mr. Phil Newton.
Sean Donahoe: Hey, hey, hey. This is Sean Donahoe back with another Rebel Traders' podcast with my cohort in podcasting, Mr. Phil Newton. Are you there, sir?
Phil Newton: I'm just about here. My core is now centered, zen-like and ready to rock and roll.
Sean Donahoe: He's here with rake in the sand, balancing on a rock and also have to give him a massive congratulations. It's his 10th anniversary and he was just talking to me about that so congratulations to him and his lovely missus.
Phil Newton: Wedding anniversary for reference. That could be anything, you just said anniversary.
Sean Donahoe: Well, wedding anniversary for clarification, but yes.
Phil Newton: Went from sitting on rocks to anniversary. What? It's 10-year anniversary for sitting on a rock? That's a painful anniversary.
Sean Donahoe: Could well be. It depends on the size and the shape of the rock. Anyway, with that being said we are going to be talking about how to tackle a very interesting we strategy, something that I have done for a long time is how to design a virtual ETF, an Exchange Traded Fund portfolio designed to match your exact taste and needs. We're going to get into that in a little more detail.
Phil Newton: We've also got the Quick Fire Round, where your trading questions are answered. We've got the continued favorite section of the week, which is the bullshit of the week, we call it the hyperbole, the shenanigans, the nonsense, the idiocy of the industry and as always, we try and answer the core question of where is the trade?
Sean, where is the trade?
Sean Donahoe: Well, I think it's going to be hidden in this next section.
Phil Newton: It's in the main section, yeah.
Sean Donahoe: Because we got something very different here for you today. Now ETFs are something that is kind of a very, I was going to say, yeah. Let's back track it.
Phil Newton: Well, what's an ETF, first of all, Sean? Just to play the dumb farm boy in the room again, as usual.
Sean Donahoe: Yes. We're going to be studying that.
Phil Newton: Well, it stands for Exchange Traded Fund, essentially. Still none the wiser, though.
Sean Donahoe: Basically, it's a collection of equities bundled up into one offering so when you buy a share or a portion, you have a position in an ETF, you have exposure to many of the individual elements that make up that ETF. By doing so -
Phil Newton: Kind of like an index, I would imagine, yeah.
Sean Donahoe: I was just saying, yes, I give you 500.
Phil Newton: It's 500 bucks.
Sean Donahoe:
Phil Newton: It's a construct of the popular stocks, or the DOW constructs of the top 30.
Sean Donahoe: Yeah. Blue chips and you have the Nasdaq and the Russel.
Phil Newton: What we've done is rather than a tracking index, they've put them in a fund, essentially, so it's tradable.
Sean Donahoe: Absolutely. Here's the thing, though.
Phil Newton: Surprise, now we know that so
Sean Donahoe: Very much so. Now it is an Exchange Traded Fund, but obviously, if we want to create our own ETF, we don't have an exchange, unless you have one in your back pocket and you have all sorts of regulations, rules and very high in computer equipment and all sorts of men with clipboards and windbreakers behind you watching every damn move you make. We don't want to do that. We want to have all of the advantages.
Phil Newton: We want to have the experience, yeah.
Sean Donahoe: We want to have the ETF without all the headaches, the hassles, and the BS that goes with it. This is what we're going to be talking about here today.
Now, right now in the world there are over 5,000 ETFs with about exactly and over 1800 of them are based in the U.S. alone with more cropping up every day it seems. We're not including -
Phil Newton: No, there's a lot of overload there, isn't there? There might be three, four, five, six of the same type of like sector or there might be one stock that's different or a different waiting. Technically, it didn't be for an ETF but for all intents and purposes, it might represent the same thing, so while there are 1800, not all 1800 are worth trading.
Sean Donahoe: Unique.
Phil Newton: well, a lot of them are flux.
Sean Donahoe: Yeah, they're not unique. They don't have the market cap and a lot of the top ETFs have options, but the vast majority don't because they don't have the liquidity, which is absolutely what we like. A lot of these ETFs could be -
Phil Newton: If we restricted ourselves to the options, you could kind of trim that number down to a sensible level and then it's not, perhaps, so overwhelming for the noob, so you figure out which ones work.
Sean Donahoe: Absolutely. That is a very valid point. These ETFs can be very broad like the SMB500 is the top market cap stocks and kind of selected around that, or the DOW30, which is Blue Chips, the Nasdaq which is primarily , but if you look at each one of those, one thing that Phil mentioned there, Apple is a major quotient of all three of these, which means when Apple has a big move, it can actually pull the entire ETF.
Usually because of waiting, this is one thing that Phil was talking about there for a moment, is that in each one of those -
Phil Newton: Apple represents about 13 percent of the Nasdaq last time I looked. I mean the figure fluctuates. It's a big chunk of a small index. That's what we mean by it's weighted, because not every stock is measured ... it's not measured equally. Let's just say that we've got a basket of 100 shares that you want to allocate to our ETF? 13 of those are in Apple and then one of them might be in another stock and three of them might be in another. The total number or the portion that would add up to 100 or 100 percent in this case. It's not equal waiting. It's quite biased, in my view.
That kind of links into what you were just saying, which is why the movement of one stock influenced the entire movement of the index, or in this case, the ETF, which is what we're talking about.
Sean Donahoe: Absolutely. Now one of the things here is with an ... if you invest in ETF, if you're buying one of the allocations, shall we say of an ETF, their selection tends to be fixed, which means you get the good and the bad. Now if you take a ETF, maybe ROBO as an example, which is one ETF that has had incredible growth over the last few years and it's made up primarily of robotics automation and AI. Yeah, a sector of .
Phil Newton: Absolutely. That's quite close to your home.
Sean Donahoe: Exactly.
Phil Newton: No wonder you mentioned it.
Sean Donahoe: Again, it's an , an industry I know I understand so it appeals to me because it gives me exposure. Absolutely. Now here's the thing, though, there's a few stocks in there that I don't like, or companies in there that I don't like, that I don't think should be in there because they have a very bad approach. Their dogs, absolutely.
Phil Newton: They're probably in there to make the numbers up.
Sean Donahoe: I would agree wholeheartedly. That's exactly my opinion. I look at this like, well, this would be great but I don't want those. This virtual ETF approach allows you to construct a portfolio which has all of the elements of your preferred ETFs but it allows you to run the filter, so to speak, of your BS detector and, does this meet my expectations, my criteria?
Because the way I look at it, a lot of ETFs are like recipes. You get this allocated, look, here's the ROBO recipe. Here's all the ingredients. Well, I like a little more salt or pepper in mine. I like to change the ingredients around just to suit my particular palate.
Phil Newton: Like Apple represents 13 percent of the index, you might want to say, well, I don't want that much exposure. I only want half that with Apple, for example. It might be that you go, you know what, I think that there's way more in Apple. Maybe I want to double the exposure than what's the ETF is allocating to that particular stock.
Sean Donahoe: Yeah. Another example would be taking half of that position, but then I like Apple in the mobile space, but you know what, I want to put Samsung in there as well, because I want that kind of exposure but I want to diversify between those two leaders.
Phil Newton: Make sense.
Sean Donahoe: Buy.
Phil Newton: It allows you to throttle, either up or down, your personal exposure. That would suggest that there is a little bit more work to this than just going in and saying, I want to be exposed to a sector and I'm going to use an ETF because it gives me that diversification that we all talk about. You can buy the ETF and forget about it for the most part. What that comes with it draw downs is you were just explaining, but a more active approach would be to self select.
Sean Donahoe: Absolutely. Now this is coming from an investment standpoint, for the most part, which is where I was for a long time. I was doing passive investing, but I wanted to do the homework to have a portfolio that really met my specific requirements and criteria. This is, as Phil suggested, a little bit of work, but as we talk about a lot, we are portfolio traders, for the most part. We want to construct portfolios that allow us to maintain a basketful of positions.
Now, they could be long-term positions. They could be swing trading, they could be whatever your particular flavor is, but in this case, I'm looking at more of the longer term because I'm looking to the future to have stocks that I can buy and hold because I really think that these are going to take off like rockets, so to speak -
Phil Newton: You're using the ETF as that foundation to kind of jumpstart you into which dock do I look at, first of all?
Sean Donahoe: Exactly because, again, a lot of these proves -
Phil Newton: Selected ETF, they kind of done all the hard work for you.
Sean Donahoe: Exactly.
Phil Newton: You can use that as the foundation. Here's a selection of sector TEX stocks, for example, and now I can say, well, I don't like this one, as you were saying. It's like adding salt to food. You can add a little bit more or take a little bit out, or you can put a few different ingredients to suit your flavor, but it starts with that foundation. Well, all the hard work has been done here, now you can fine tune for your investments over a longer term by adjusting your allocation or excluding it completely.
Like you said with Roeper, you don't like a few of the components of that ETF, so one would assume that you would exclude them from your virtual ETF as you're thinking about, well, what does the set, what does the future hold for these thoughts and I don't want to be involved in those as I think they're dogs. They're just making up the numbers.
Sean Donahoe: Well that's exactly it, because I mean I'll take the example of AI, or artificial intelligence ETFs there might be -
Phil Newton: Because talking to me, we need some artificial intelligence.
Sean Donahoe: There you go, funny. Absolutely. Get the cymbals going. I mean, for example, with AI, maybe I wanted to get some exposure with say , which is the POWL's share Cucucu, which has a lot of tech stocks in there. There's ROBO, there's BOTZ, there's IGM. I'm trying to think of the ones off the top of my head here. ROBT. There's lots of different ones that might have players and companies you've never heard of, which is great, for the most part, because it can raise your awareness and you can -
Phil Newton: Raise your awareness, yeah.
Sean Donahoe: If you look at the components that make up any one of these individual ETFs, this is something that Phil and I have talked about before, is you can use them to create a watch list with exposure into all of these different industries and these different individual equities to see, are they going to with your particular strategy?
Phil Newton: Well, that raised an interesting angle then, because it might be that you're, say, invested in the ETF as a whole, long term. Then you want to be a little bit more actively involved without maybe disturbing your exposure to the ETF, so I suppose one idea would be robbed and then make your own virtual ETF. You can kind of trade around your position with the components of the ETF that you like.
It might be that you got exposure to the ETF, but then also, as you're looking at, say, a dozen or more or however many components there are to stock, you could say, well, these are actively moving and I can, what's known as, trade around the position, but use the individual components to trade around your ETF position.
What I mean by that is if the certain stocks that are ebbing and flowing back and forth on a regular basis, it might be that you have a few charting setups, short-term setups that would get you bullish on some stocks and maybe bearish on some and take advantage of some short-term DOW movements, so you can profit from those fluctuations and price without having to jump in and out of the ETF, which is your investments. What you can trade around your investments using the fluctuations of the short-term price movements.
Sean Donahoe: Yeah, exactly.
Phil Newton: Right. Did I lose you there? I just had a random thought.
Sean Donahoe: No that's absolutely valid because at the end of the day, I mean I'll take an example of one that I've got in my portfolio.
Phil Newton: The ETF would be the core position and then the individual stocks as they fluctuate back and forth. You can kind of be in and out. As an individual trader, as a retail trader that ability is saying that the big hedge funds and the intuitions don't have that nimbleness, that fleet of foot to jump in and out and at your leisure, to be fair, based on what you see and how you view the charts.
Sean Donahoe: Absolutely. I mean I'll take an example of BOTS, which is one that I've got in my portfolio and that's the Global Robotics and Artificial Intelligence.
Phil Newton: BOTS, BOTS, I thought you said you liked big butts.
Sean Donahoe: Well, I can't deny. Dear me. This show is going down the bend very quickly here. This launched in 2016, October of 2016. I think I only got into it only about the beginning of 2017, but again, because of the industry, the components, the growth of this sector and also I think somewhat because it's a new fund with exposure to this industry, but that has gone from about $15 all the way up to about $30 within 12 months. I mean it's almost 100 percent gain within that time because of the exposure.
Now they've had a little bit of a roller coaster in the last few months but it's kind of balanced out quite nicely. It's settled back down to 25. Again, just because of the hard work, as Phil mentioned, skimmed over has been done for you by all the researchers who build and compile these ETFs. They've done all the kind of fundamental work and everything else to make sure they're included.
It's a good foundation to start from to understand who are the leaders, the laggards, everything else. Who are the players in this individual sector?
Phil Newton: I suppose, more specifically, who are the players worth looking at?
Sean Donahoe: Well, there you go. Exactly. Now one -
Phil Newton: Because that's a big problem. What stocks do you look at? You know what I mean, if the heavy lifting is being done because that's the big question on most new traders minds. Now that I'm aware of this universe, what do I look at? Well, just take a look at the components of the ETF. That gives you a starting point and that's a great tip just to kind of underscore there.
Sean Donahoe: Yeah, absolutely. Now here's the thing that I do and you can reverse engineer and research the companies that make up the ETF, but I like to look at the ones that have at least the 50 percent share of the fund. This is kind of my general rule of thumb measuring stick, because again, they're going to be with the leaders and then they'll fill in some numbers with some other companies and a lot of the times I feel that they're just, again, filling in the blanks. Just, oh well we better have some there at the bottom.
That usually tells me that those ones that are at the bottom, they may have made whatever the threshold or cut is.
Phil Newton: Maybe there's a little bit of a brown envelope involved.
Sean Donahoe: You never know. You never know.
Phil Newton: On a side alley somewhere.
Sean Donahoe: Indeed, but I always look at the ones that make up the majority, where the weighting is biased towards because usually they've got the strongest presence in the industry. Then I'll start looking at different fundamentals. I know Phil hears the word fundamental and kind of cringes in the corner, but I look at things like return on investment capital and then the historic numbers for that, equity growth rate, EPS growth rates, sales growth rates, net asset value per share or value per share, dividends. I have certain criteria that I look at and say, historically, I don't care where they are right now, per se, although that is important. I want to see where they've come from.
Have they grown? Are they strong? Do they have a moat of safety? Kind of going back to the Benjamin Graham, kind of Warren Buffett style of investing. I want to make sure that this company is good, solid, that they have something that they're in an industry that's difficult to get into and to grab market share that they have some form of dominance.
Basically, yeah, good management.
Phil Newton: For long-term prospects, yeah. That's what your turn around there is, I heard, yeah.
Sean Donahoe: Exactly. Pretty much. I want to make sure that all of the bases, basically, I would want to own this company, not just from a share value but I would want to actually be a part of this every damn day because it's a good company and industry I understand and I know about -
Phil Newton: That's the investing angle that you were talking about.
Sean Donahoe: Yes, exactly.
Phil Newton: I mean while we normally focus on, certainly me particularly, I'm a trader. I'm short term so I'm not so concerned with the fundamentals, but if I were interested then we're talking two, three, five years as a minimum to being invested, which is why a lot of people are trapped into ETFs that they can kind of put the trade on and kind of walk away.
Still, people want a little bit more so you could be invested in that and by looking at the individual components that are certainly the bulk of the ETF is what you're suggesting as your well, these are the most interesting ones. Then I can apply my fundamentals filters. The net asset value or book value, do they have a lot of debt to profit? All those usual ratios.
See, I'm not naïve with the fundamentals, Sean, I just don't see the need to use them for what I'm doing.
Sean Donahoe: Absolutely.
Phil Newton: At the same time, you can apply those fundamental filters that you want to. If they then meet your criteria for investment, you can start to either construct your, come back to the point of this, your virtual portfolio. You can take the elements that you like out of the ETF and say, well, these five stocks the ones that I want to be involved in and that's my collective limb. I'm going to look at those as my investments and measure them collectively in your little virtual ETF. That gives you a nice solid foundation to work with.
Sean Donahoe: Absolutely. That's really where it comes down to here is the process here is to weed out the ones that are weak and keep the strong. Basically, compiling and creating the ultimate or -
Phil Newton: Do not enter, one man leave.
Sean Donahoe: Exactly. We are Thunderdome here.
Phil Newton: Into the Thunderdome with the ETFs, that's what it is, but you're absolutely right. It's placing the ones that you like and discarding the ones that you don't like. I mean that, literally, is trading and investing personified. Do more of what you like and less of what you don't like. That's what we're trying to get to, but you can use that ETF as that foundation to then decide what you want to do next.
Sean Donahoe: Now as Phil mentioned earlier on, which is a very good point, I kind of want to hammer this one home, this could be a separate investment portfolio that is passive in nature and set aside from your actively trader.
Phil Newton: Once you've set it up and you've done the work, yeah. Yeah.
Sean Donahoe: You could then take all of the elements, even if they are some weak ones, because even weak businesses can provide opportunities in the right conditions. You could have that separate watch list that is all of the elements that were a part of your portfolio or, sorry, the ETFs that you're using to create your virtual ETF hearing and portfolio. Take all of those items, now create a separate watch list in an industry that you're familiar with. You may believe that is going forward and glowing, or you want to create multiple little virtual ETFs. Maybe I've got one in robotics and AI and I've got another one in alternative energy.
Phil actually was talking about moralistic investing and trading before the show. Phil, I mean just to repeat what you were saying there earlier on.
Phil Newton: Yeah, I mean so we've talked about the off-the-shelf ETFs, but when you kind of get the idea of what can you use as this foundation to jumpstart your own exposure to the market? We know that the easy button, if you like, is the ETF, which is why they're attractive, but what we're suggesting is after you've done that is a lot of people want more, so if you're looking for more, more ways to invest and the ETFs that are offered don't quite meet the requirements, well, what are your requirements is what we were talking about.
It was maybe you've got an affinity for maybe you're a new Texan. Maybe that you want to be involved in the oil industry, a little bit more now that there's more of that going on around you and you're a little bit more familiar with it on a day-to-day basis. Maybe you want to be involved in the oil sector, the oil mining, the oil drilling. Maybe you want to be involved in fracking, or maybe you don't want to be involved in fracking.
You can start to include those types of things in your virtual portfolio. Maybe you want to be an advocate for gun control. Maybe you don't want to be an advocate for gun control, so you might include or exclude military type.
Sean Donahoe: Smith and Wesson.
Phil Newton: Exactly, yeah. Military type elements in your portfolio. Maybe you want to be green. Maybe you don't want to be green. You can see that there's two sides to every coin here. Maybe you want to advocate and be a champion for women in business. Maybe you only include stocks that have chief executives or they have a large female staff on the C-suites. Maybe that's the way you want to go because that meets your moralistic viewpoints and the things that you want to be involved and invested in because of your personal viewpoints.
You can express whatever you want in this virtual ETF. Now we're just trying to take the idea and the concept just a little bit further. You know if you need help with that, what included, this is a lot of the time how a hedge fund operates. They have a core value and the real hedge funds that only invest in maybe female leaders so the company has got to have a female executive captaining the ship, as it were, and they're only going to invest in those companies because there's a female at the helm. That raises them on their radar as potential candidates to trade because that's foundational viewpoints. That's the whole reason why they're in business, from a hedge fund point of view.
You can start to dip into the hedge fund world to see what sectors, what comprises the fund, because they've got this value that they're adhering to in the first place. That should help you to come up with almost an infinite number of possibilities of how you want, I'm going to use the word, invest as an investor because we're talking about long term and my focus is short term, which I would say is trading anywhere up to 18 months, 2 years would be investing and anything beyond sort of 18 months or 2 years would be ... sorry, anything beyond that would be investing anything, head of that would be short trading, as far as I'm concerned.
It just allows you to have this foundation stone based on what's your value? You can sit down on a nice, sunny afternoon should you choose to and think about, what do I want to be invested in? Is it dividends? Is it green companies? Now we can take it so much further and you create this virtual ETF. I mean what we're skirting around is how to create a portfolio when you don't know how to create a portfolio.
This is really what we're talking about.
Sean Donahoe: Well, very much so. If you want to reverse engineer some of the ETFs, one of the sites I use is ETFDB.com. I'll put a link in the show notes, and that will show you literally, all the individual companies that make a ETF, show you the waiting, like with one I use, another one I use is ARKQ, A-R-K-Q.
For example, they've got a 10 percent bias and weight towards Tesla. They've got everything from Invidia, Amazon, Alphabet in their , which is a Chinese company, Teradyne.
They've got different, they'll show you all the different elements, all the different ratings. You can click on any one of the elements and it'll tell you more about it, what other ETFs contain this particular item and then you can look up more about it.
Phil Newton: If you do want to look at the world stocks more fundamental viewpoints, you could do no worse than take a look at Stockopedia.com. I'm sure we link up it.
Sean Donahoe: Yeah.
Phil Newton: The word Stock and opedia on the end of it. I put, the reason why I suggest them is it's not just the US markets that they serve. They literally have every exchange and data feed around the world.
If you're in Australia, because I know we've got a few listeners there, you can have a look at the Aussie exchanges, but it'll scan them from a fundamental viewpoint should you use to align with that investing elements.
Again, you can construct your filter from a fundamental viewpoint. It's quite an interesting site, actually. Some good fundamental information if you want to explore that side of the world, that side of the trading world a little bit more.
Sean Donahoe: You'll also get a lot of fundamentals from who finance as well and a few others. A lot of this stuff that we're talking about in terms of fundamentals is listed for free on a lot of different places. It's not magic, it's all there for you, you just have to decide how you go through it.
Phil Newton: As with the technical side of it, which is my focus, that side and lots of other sides. There are lot of other alternatives as well and softwares. There's usually a lot of pre-built scans. If you want to kind of scan the stops that Warren Buffett might take a look at, then you can just click a button and it'll do it for you, or Charlie Monger, or Ben Elton, not Ben Elton, it was the other guy. It was Benjamin Gray. Somebody call Ben.
You've got to understand, it all starts with what do you want? You come back to this value idea that we were talking about just moments ago. If you know what values you want, what do you want to be invested in for five, ten, fifteen years? Then when you've got that value of moralistic viewpoints that you want to express, you can find stocks that suit your flavor, your green exposure or your champion in women exposure, or maybe you're a die-hard gun-toting rooting tooting shooting type person. You can have it all military stocks if you want. You can pop whatever flavor you want in your recipe.
Sean Donahoe: Yes, see, Phil has actually looked at my military portfolio is what it is. I am a rooting, tooting, I am Yosemite Sam.
Phil Newton: Is that a dagger in your pocket?
Sean Donahoe: One, indeed. I will not go there. I will not go there. I will not go there. I will not go.
Phil Newton: Please don't go there.
Sean Donahoe: Indeed.
Phil Newton: No, but I think we got to be off track a little bit, I think, but it was an interesting little side road, I think, because hopefully what we're trying to do is just open the eyes to the possibilities of what you want as an individual trader.
We've spoken at length about what I want from a lifestyle viewpoints. I suppose what we're touching on now is well, what do you want for your trading from a moralistic viewpoint? You can express those viewpoints in your investments anywhere you want. There's a little bit of work involved, but it certainly worth the time to express your viewpoints in any which way you prefer.
Sean Donahoe: Absolutely.
Phil Newton: Which also, I mean if we're talking about stocks that have options just to kind of bring it back to things that we like, how can you get in your position with that? You could certainly use options in a more smarter way, so maybe you've got that core position of your half dozen stocks.
Lets just say that you got 100 shares in each in say five stocks and maybe you want to try and take advantage. Maybe you could sell puts against that. If you're assigned the stock, the stock moves lower, you'll be assigned the stock at a lower price than what it is now. If the stock doesn't move lower then you collect the premium. You can start to reduce your cost basis of your investments just to throw in a where's the trade kind of opportunity there.
That would be one kind of really quick way to participate more actively on a month-by-month basis while still being quite passive in nature. You want to be invested in these stocks for five, ten, fifteen years so if you get another 100 shares of a stock that you're already invested in anyway, it's no big deal, but you can still collect some premium by selling options, selling puts, assuming you think that the stock's going to go higher and if you're invested I think you probably would think that anyway.
You could still put against or in that stock. Again, if you get assigned the stock, you want the shares anyway, but if you're not assigned the stock and the option expires worthless as the seller of the option that's your benefit. You might collect a couple of dollars' worth in premium every 30, 45 days and it just increases your profit margin and your bottom line and reduces cost basis all the time.
Sean Donahoe: Absolutely. It's exactly at the end of the day is there's many ways to use this as a starting point for a few different approaches to the market. That's kind of what we wanted to expose you to, raise your awareness of because, again, this is something I do from an investment side, while actively participating in many, many other opportunities, but this is because, again, these are companies I would like to own in a more longer term but this is outside of my trading but there's still ways to trade within this and be a lot more active as Phil's mentioned and different ways to get multiple -
Phil Newton: And it still be quite exciting. I mean on a month-by-month basis you'd be say selling puts in this example.
Sean Donahoe: Exactly.
Phil Newton: You're not really doing anything. If they expire worth rate you'll collect the premium and if you're assigned the stock, well, you want the stock anyway because you're an investor.
Sean Donahoe: Yeah. Exactly.
Phil Newton: Not only that, you've got them at a lower price.
Sean Donahoe: Absolutely.
Phil Newton: You look at the
Sean Donahoe: Look at the value for 50 cents.
Phil Newton: Yeah, you've bought them at a discount and you've still collected the premium.
Sean Donahoe: Yeah.
Phil Newton: Always, it's reducing the overall cost. Think about it like you've bought a house at one price and you've kind of rented the room off? You're collecting a little bit of income against the value of the property. That's what you're doing.
Sean Donahoe: Exactly. Exactly. Exactly. There you go, ladies and gentlemen. A different approach to looking at the markets and creating a portfolio. As you guys know, we're all about creating a portfolio-style approach to our business, which is trading.
Phil Newton: More of a longer-term view this time, though, which is quite interesting.
Sean Donahoe: Abso-damn-lutely. With that being said, let's rock on.
Automated: Now, it's time for the Rebel Traders tip of the week, brought to you by TradeCanyon.com. Ready to take your trading game to the next level? Discover where smarter traders come to get coached by the best and learning to trade just got way easier. Trade Canyon. Smarter traders live here.
Sean Donahoe: Rebel Trader tip of the week. Kind of a cautionary note to what we just talked about is don't have all of your eggs in one basket. Now I see a lot of traders do this. They tend to have an industry bias, which honestly, I have. I do have a tendency towards .
Phil Newton: We've all got biases. We're human. We're human.
Sean Donahoe: Absolutely. We did an entire show on it last week just because of this. Now that we've talked about creating a virtual ETF with exposure in industries that you understand and are familiar with, don't fall into the basket trap. Vary some different industries in the mix. Don't just have one ETF.
Phil Newton: Tech exposure, for example.
Sean Donahoe: Exactly. It's the same with trading. We see people with biases in industries and equities. Purely, they understand like tech only or health sector or biotech. When entire industries are dragged down, your portfolio can feel that squeeze too. Be aware how you've grouped your positions that account for variance in different industries because you have knowledge in businesses outside of the ones that you may be consciously aware of.
Maybe, hey, did you travel on, do you travel regularly? Do you fly different airlines? Well, guess what? You now have exposure and knowledge of how those businesses are actually run from the consumer standpoint. You could then compare, I really like Delta but I don't like Frontier. Frontier gets me there in one place but I really hate ... again, you start to build an awareness of different things that you could then add into your portfolio and because of your knowledge base, again, raise your awareness and start you off on a little research part.
Phil Newton: Absolutely, yeah.
Sean Donahoe: That way you're not all the way locked in to one area. I mean we can tell horror stories. We've all seen a lot of ...
Phil Newton: I'm going to give you a recent example of this happening as well because I relearned this, not necessarily basket drop, it was just the way the markets unfolded. Recently, I was reminded of why I liked trading multiple occurrences. A style of approach for both stocks and strategies.
That, we call it a flash crash. Has anyone decided yet? Another week goes by and still not the
Sean Donahoe: Really? Because I feel it's more -
Phil Newton: A big sell off.
Sean Donahoe: Yeah, because I feel -
Phil Newton: Big sell off.
Sean Donahoe: I feel it's a bloody flash crash, but there you go.
Phil Newton: Yeah, the big sell off that we saw recently, because of the way things were, you mentioned this before, it was about 65, 68 percent of my portfolio was on the . That's just the way things were settled and it was making me quite nervous, but because of that chop sell off, they all came home to roost quite quickly and a lot of the positions I had were closed.
Also, around about the same time there was some options were expiring for either a small profit or a small loss. Basically, my portfolio, my rolling portfolio I liked had shriveled up to three of four positions. Very quickly had gone from 25, 30 positions down to less half a dozen positions. Suddenly, I found myself very, very nervous.
Yes, I've got a lot of profit on one side of the legend, but on the other hand, on the open position side, I've got a half dozen positions and that made me exceptionally nervous because I didn't have the diversity that I typically like.
I now got to wait for the sets to occur and I was very anxious to try and get more positions on because I only had a few positions. I was nervous. I was with literally, despite having banked in good amounts, it was a very nervous experience. I was sleeping very fickly. I was very nervous. I was checking prices on multiple times a day and it just wasn't my usual trading experience.
The reason was, the only reason was is I didn't have a lot of exposure to the markets. As counter intuitive as that sounds, I only had a few positions up. That's how most traders are. They only have one or two or three, maybe less than half a dozen positions, half a dozen exposures to the markets. You're only looking at those things. You're like a rabbit in the headlights. This is where the emotions come to play.
What I've got to say now that we're a few weeks later, I'm back to pushing 22. I've got several, well actually, I've just had a few orders fill as we're doing this, but I'm now back up to the 25, 26 open positions mark. Again, I've still got many positions pending that I'm looking at. I should have a portfolio of around 30 to 35 positions this time next week.
Anyway, the point I'm trying to come to is that my emotional experience has now dramatically reduced because I've got more positions. This one we've said many times before. It's counterintuitive. You trade smaller but you trade more frequently. I'm now sleeping better, I'm not emotional. I'm not checking the prices multiple times. I'm back to checking them once or twice a day and not facing my spreadsheets.
I'm not checking in multiple times. I'm not nervous. I've not got that anxiety from having two or three positions and that's this basket trap you were just talking about, Sean. It's not just from a practical point of view, it affects you quite, or can affect you quite dramatically from an emotional point of view, which is something that's I struggle with and how to overcome that is surprisingly to trade more frequently.
Now that I've got more exposure, multiple occurrences of a variety of different stocks so that I've set up over the last couple of weeks since the flash crash, I'm now back to a very relaxed frame of mind when it comes to my exposure to the markets. Again, counterintuitively, it's because I've got more positions open, strange as it may be.
Sean Donahoe: No that's a very valid point and something that I think we've all gone through at some stage as well.
Phil Newton: Yeah.
Sean Donahoe: You're right.
Phil Newton: I'm not dependent on ...
Sean Donahoe: You've had all that success. You've got all those profits coming in, you're suddenly like, oh crap. Now I've got to reload -
Phil Newton: It was a stressful couple of weeks.
Sean Donahoe: You don't want to be forced to then pick sub-par positions.
Phil Newton: Yeah. The hard part was not reloading for the sake of reloading, but I was very anxious to get more positions on. As soon as they were on it was the pressure's off. I'm relaxed. I've got exposure to the market, which is what I like anyway, but compare that to three or four positions and high emotional impacts versus having lots of positions, low emotional impacts. Who would have thought? Who would have thought?
It's something that we've spoken about at length in the past, but I'm just reminded recently again of this basket trap of only having you think you've got this basket of portfolio, but it's all in, say, one set that you might as well have one stock bond in that regard. You need that diversity and the way that you do it is you place lots of small positions.
It sounds crazy. It's very counterintuitive, but it works. I've seen it work for many of our students over the years that have had that exposure or that experience to only having a few positions on. As soon as you reduce the position size very dramatically and then increase the number of occurrences that you're trading quite dramatically, I'm only talking one or two trades a day here. It's not time intensive.
You swing from one extreme to the other, you start being less depend on one trade working out every time and now you're looking for the average, the portfolio. You've got more of a business mindset. If one employee phones in sick, if needs to shop on the high streets, it's not detrimental to the business because you've got other employees working for you.
It's the same thing with a portfolio. You've got lots of opportunity to you to make money.
Sean Donahoe: There you go. Rebel Trader tip of the week; don't have all your eggs in one basket.
Automated: If you've got questions, they've got answers. Sean and Phil dive into the virtual mailbag for this week's Rebel Traders quickfire round.
Sean Donahoe: Rummaging around in the Rebel Trader mailbag. I've got one here for you, Phil; what is the best way to invest or trade right now when the market is already too expensive to enter? Now I know there's going to be a flippant answer here but we need -
Phil Newton: You know there's going to be a flippant answer?
Sean Donahoe: - but it's a question we see every now and then and I thought it's one to kind of address, so take it away.
Phil Newton: Flippant answer first, you can never be too high to buy. Is that too much? Forgive, man.
Sean Donahoe: That's it. Pass it to the left end side.
Phil Newton: Do your own Cheech and Chong reference. No, seriously, though, who says the markets are expensive, first of all, again, another kind of flippant answer. Are you believing the talking heads? Who says that it's too high to buy? I mean sure, the market's been going up straight hockey sticks style and for what? Nine years straight now, but does that mean that stocks are overvalued? Probably. Does it mean that they're going to stop immediately? Most likely not. The markets are still going up. It's undeniable.
What is the best way to invest versus if you think a stock is too expensive, trade after it's doubled or tripled in price by pull backs? Wait for corrections. Wait for it to be on discount relative to what it's already been doing.
This is what we teach on a regular basis. If a stock is going up, wait for it to correct. Wait for it to pullback. There's a little bit of patience involved. You can wait for a small pullback of two or three days or you can wait for a deep retrace like a fair in an up trend over the last 12 to 18 months, which is what the foundation stone of one of the things that we teach.
You can wait for price to retrace and to be at the lower end of a Bollinger Band, that's one of the scans that we use on a regular basis. That means that it's on a discount relative to the trend. That's one of the ways you can do it.
Again, you can use a big pullback, like I've just described, or you can wait for a small pullback just a pause in price essentially two or three days it just meanders sideways. You bind pull marks. Break above the new high in a small pullback case, or you're buying the deep re-tracements in the case of price being at the other end of the Band.
That's what I do. It's been working for many, many years. It's worked for a lot of people, for more than a hundred years by pullbacks.
There's a reference to reminiscence to a stock operator. It's written in 1933, wouldn't you give up buying pullbacks, and it's the ... how is it phrased? I'm just trying to do this from memory. The first pullback, the failure of the first pullback not to make a new high is how it's referenced. That's like if you picture the head and right shoulder of a Head and Shoulders patent, that's the failure of the first pull, or the failure to make a new high is that head and right shoulders. That might be the time to stop buying pullbacks. That doesn't make new highs after that retracement is essentially what we're saying. That's the time to reevaluate situation, at least in the short term.
Sean Donahoe: Absolutely. The other side is that you don't -
Phil Newton: Sorry, Sean, kind of rambling there again.
Sean Donahoe: No, all valid -
Phil Newton: Didn't actually answer the question.
Sean Donahoe: You did. You did. The other way to look at it is don't invest in the stock itself, options. Options are a cheap way to get exposure to a particular move.
Phil Newton: Inexpensive.
Sean Donahoe: Whether you're going long or short, whether you're looking at different angles. If you think it's too expensive and is due for a correction then express a short position. Whatever you think -
Phil Newton: A strategy we mentioned already is that I'm just reading the question, invest. Maybe you sell . If you're looking to buy stock and invest for maybe several years, maybe you sell putz. And you can collect premium if it continues to go up and you've been making money there, or if the stock doesn't move lower and the option expires in the money as seller, that means you'll be assigned some stock. That's what you wanted all along. You're buying them on a discount and you're collecting some premium along the way. That'd be one way.
Sean Donahoe: There you go.
Phil Newton: I suppose it comes down to it's one of those questions, it can be difficult to answer because it comes down to what is your objective for trading, or in this case investing? It's going to different answer if you've got something more specific in mind. I mean just general advice here.
Sean Donahoe: Absolutely. It also depends on what you consider expensive, I mean a lot of variances there, but at the end of the day is don't worry about it. It's look for opportunities. The opportunities abound no matter what the price is. The prices made today might be way more expensive than they were 10 years ago or 20 years ago or 30 years ago. What's happened? Well, price has gone up. Does that mean that it's never going to go up past where it is today? Of course not. Anything could happen. It's just the new level. Don't worry about it.
Phil Newton: Exactly. Then you don't have to worry about whether something is expensive or inexpensive, just if you can always try and buy it at a discount relative to itself then you're not going to go too far wrong. Sometimes you're going to have to wait for them.
Sean Donahoe: Abso-damn-lutely.
Phil Newton: Be patient. Be patient, I think, is the best advice there.
Sean Donahoe: Absolutely. What else is on?
Phil Newton: Do you think that the FET is going to raise rates faster than expected?
Sean Donahoe: I'm going to have to take the Phil approach here. Who cares?
Phil Newton: Yeah.
Sean Donahoe: Now here's why. There's a lot of talking heads speculating that this is driving nervousness in the markets, the markets going up and down based on are they going to raise rates? They originally talked about maybe three rate hikes this year, but here's the thing, it's already telegraphed. It's already really priced in outside of the nervous nellies that are lucky to take chips off the table, in real terms, great, great -
Phil Newton: And micro-analyze everything.
Sean Donahoe: Yeah. Great hikes are coming. There may be four.
Phil Newton: It's going to happen.
Sean Donahoe: There may be five.
Phil Newton: Fact.
Sean Donahoe: Guess what? The market is booming. It has done for quite a while. It's certainly been in the last year going a little bit berserk and up, which we've talked about as a pressure cooker that hey, we're due for a serious correction. We kind of had one. We're recovering from it. There's a little bit of, we talked about this in The Happening Now show, which was released on Wednesday/Thursday of last week. I mean this is released on Sunday.
Yeah, you know what they're talking about it because the market is and the economy is booming, so guess what it's priced in, it's factored in. In real terms, this is all just a little bit of shaken, little bit of shivering to wrackle off some little bit of chips here, little bit of chips there.
Phil Newton: Same thing that rattles.
Sean Donahoe: Yeah. At the end of the day, it's all announced, it's all telegraphed. It's pretty much factored into everything. Don't stress it.
Phil Newton: What will be, will be. Yeah.
Sean Donahoe: Absolutely.
Phil Newton: I think if they're going to do surprise hikes, which they stopped doing more than a decade ago, and they used to do it quite regularly in the early, the mid '90s, you'd see a surprise hike interest rate adjustments or there'd be a significant jump in some economic figure. These days, either they've realized that the speed of information is very fast. It's bad health. It's bad news for the market if you're going to surprise the market and shock it in some way.
These days it would be foolish for the government to do something that would surprise or shock the markets. It would be unnecessary for them to do that. I think it's always going to be well advertised. Again, we've spoken about this many times before. It would be stupid of governments and the powers that be to surprise the markets and shock them in the way that they've done in years gone by. They don't need to do it anymore.
Sean Donahoe: Now, does that mean -
Phil Newton: It would be stupid.
Sean Donahoe: Does that mean that governments aren't and don't do stupid things? Of course they do. They always do.
Phil Newton: I think they might raise rate, it could be they raise rates more than that we currently expect and that's a worth that currently expect. They're going to tell us that we need to adjust our plan. We might need to raise them five times in the next 18 months. Maybe that's what they'll do, but they're going to let us know. I mean it would be stupid of them. They'd be shooting themselves in the foot if they just did a surprise hike.
Sean Donahoe: Absolutely. At the end of the day a lot of what we do is very short term. It's well within the normal realm of activity and announcement, even with J. Powell taking over now and everything else, putting his foot in it a little bit like he did in his first public appearance since he took over from yelling.
At the end of the day it's really, it's just a lot of nothing to worry about. It's a lot of noise in the background to the Rebel Trader strategy. We don't care.
With that being said -
Phil Newton: Meh.
Sean Donahoe: Meh. Exactly.
Phil Newton: Whatever. I think even long term, outside of our usual strategy, I personally don't think it matters, one way or the other. What's going to happen, it's all factored into price anyway. What's going to happen will happen. If you've got a nice positive, expectancy strategy as we say, you'll be on the right side of most of the moves, usually six, seven times out of ten in my experience.
Sean Donahoe: There you go, exactly. Now without being said, this is an interesting little sidebar, how do you guys keep saying with all the pressures, market noise, opinions and counter voices to every single thing in the markets?
Now this is, outside of being flippant, we talk about these different things inside trading and how we deal with them. Phil was just talking about one where he felt pressured because he didn't have enough positions up.
Phil Newton: Surprisingly, my answer is twofold. It's you know one of them, it's trade less position size and trade more frequently. You'd be surprised at how that pressure, this psychological pressure disappears. As regards to the noise, I go to great lengths to be intentionally ignorant.
This song that I've spoken about at length in the past is I don't care what other people are doing, I've got a strategy that I follow rigidly or as rigidly as I humanly can and it works 65 percent of the time. Why do I need to listen to talking heads? They're not telling me anything that is going to impact or influence my trading decisions. That's it.
Just simply, do not look at the other voices in the markets, especially inside your head. Turn your news off. Don't watch the talking heads. For the most part, I don't watch mainstream or any news at all. I find it quite frustrating from a general point of view, but how can you reduce the pressure if you find reading the news frustrates the crap out of you as it does me, don't read the news.
I want to stress real life. Market noise, don't look at the markets all day. Put your trades on and walk away. That's what this strategy is designed for. It's stop trading for busy people. It works.
Just put your trades on, do your analysis, update your spreadsheets and then walk away. Come back tomorrow. That's how you get around the noise, you don't look at the noise.
Sean Donahoe: That's exactly it.
Phil Newton: That's it.
Sean Donahoe: If there's noise, turn off the noise. It's simple.
Phil Newton: Turn off the noise, yeah.
Sean Donahoe: It's the same thing with all the opinions, the counter opinions and everything else. There's a little -
Phil Newton: Opinions on the opinions.
Sean Donahoe: Yeah. I have this wonderful little gadget, it's called a remote control and on there there's a big red button that says shut the hell up. I press that button and it's gone and that's it. I've got this little thing on my computer called a browser and I can close the windows and it's great because now I've just got my portfolio and what I'm dealing with and that's it. I've got all these positions in my portfolio.
Phil Newton: That's exactly right.
Sean Donahoe: I look at them and say, great. Those ones came home. These were the ones I was going to put on. Put them in those positions. Then I've got one of those great, beautiful things, this is one of my favorite things in the whole world, it's the big red X in the corner of every program. Boom. Then I walk on and enjoy the rest of my day. It's as simple as that.
Phil Newton: I do some god-awful stupid things to try and keep the ... I suppose what we're talking about is the emotional side of the trading and the impact that you can have because of market noise or talking heads opinion. I would physically sit on my hands so I didn't tinker with my trades, because you're looking at the markets.
At the time I was quite actively day trading. I would physically sit on my hands so I didn't play with the trade, because you're looking at it. You're looking at it, you want to play with it.
Sean Donahoe: I'm not going there. I am not going there.
Phil Newton: Don't do it.
Sean Donahoe: I am not going there.
Phil Newton: We're talking about trade, Sean. No, but I would sit on my hands, physically sit on them until I could develop the discipline to not bugger around with the trade. That that's essentially it. The other thing that I would try and do, I would try and put a bridge in place, a hurdle to prevent me from taking unnecessary action.
of those was, this was back before wireless mouses. My mouse, wireless mouse, I would unplug it at the back of the computer, but the byproduct of that was I ended up learning all the shortcuts on the keyboard.
No, but the point is I put a hurdle intentionally in place that just stopped me from being spasmodically having a knee-jerk reaction to, oh my god, the prices up ticked by two points. It's still million miles away from a stop loss, for example, but the markets moved adversely and the knee-jerk reaction is to go and do something, whatever that is, you're just kind of making it up. It's just to avoid those things.
What can you do that would prevent you from having that reaction, that spasmodic, knee-jerk reaction in the first place? Sean just said, put your trades on, manage them and then close the program down. That was the eventual solution I would turn the monitor off then I would get used to turn the computer off so that if I wanted to go and do something, I had to then physically log in.
Put a hurdle in place, even if that means taking the app off your mobile phone because most brokers have some type of mobile phone. Make sure that it's not on your, whatchamacallit? On your mobile phone, so you can't just press the button and put the trade on or take it off or you're not having that reaction. That's probably the best way of doing it and eventually you'll develop a natural discipline to do that automatically because you've got that built-in restraints, but you've got to develop it at some point to start with.
It's just the little things sometimes just help you along the way and, again, these days I don't mean to think about it, it's just part of the process of not touching a damn thing. Yeah, I mean that's probably just some practical advices. Put a hurdle in the way from you taking action and if there's market noise or chatter in the minds, reduce your position size and turn off the talking heads. You don't need them.
Sean Donahoe: Very much so. So with that being said, let's rock on.
Automated: Don't forget, if you have a question you want to ask Sean and Phil, just go TraderCanyon.com/rtquestions and your question may be featured on a future show.
Uh-oh, what's that smell? It's time to call out the Wall Street shenanigans mainstream confusion and outright high-jinx and hokum of so-called experts. Yep, it's time for bullshit of the week.
Sean Donahoe: Bullshit of the week. Now, again, this is -
Phil Newton: Have you got any spare change, Sean?
Sean Donahoe: Well, I might have 50 cents and that is -
Phil Newton: Whatever.
Sean Donahoe: Yeah, this is about rapper, 50 Cent who literally -
Phil Newton: You've got to say it properly. It's with -
Sean Donahoe: 50 Cent.
Phil Newton: 50.
Sean Donahoe: 50.
Phil Newton: Rapper, Half Dollar.
Sean Donahoe: Yes, is now worth sweet FA, according to his bankruptcy court filings, but one of the things that came has been rumored is that 50 Cent, the rapper, Curtis Jackson, was actually a secret BitCoin millionaire. That he had over eight million tucked away in BitCoin that he forgot he had. That was the rumor that was going around.
Phil Newton: Let me just get this straight, so everybody knew that he was a secret BitCoin millionaire?
Sean Donahoe: Yes.
Phil Newton: That's bullshit right there.
Sean Donahoe: Well, it is. It is.
Phil Newton: Everyone knew it.
Sean Donahoe: There was a story going around that he had discovered -
Phil Newton: That's not a secret.
Sean Donahoe: Yeah, exactly. Basically, here's the thing, he just played along with the erroneous but favorable story, but when it came to court, he's going through his bankruptcy he says, "I do not personally own, or have never owned either a BitCoin account or any Bit Points."
Basically, he did not dispute a TMZ report in January that he had made a surprise BitCoin windfall. His response was, "As general matter, so long as the press story is not irreparably damaging to my image or brand, I usually not feel the need to publicly deny the reporting," he said in sworn testimony.
I'm quoting the article here. This is particularly true.
Phil Newton: Case of viewpoint so I can neither confirm or deny of ...
Sean Donahoe: Yeah, very much so. Basically, he says when he feels that the request report in question is favorable, even if that is based on a misunderstanding or facts that contain outright falsehoods, he won't deny them and everything else.
When they came to court and said, hey what about this? They're saying, I got no money there. That's just bull. Yeah, I mean a lot of the stuff that's out there -
Phil Newton: So he's either is and he's going, prove it.
Sean Donahoe: Yeah, basically.
Phil Newton: Prove it. It's generally bullshit.
Sean Donahoe: It is, generally, BS. Again, obviously, it's TMZ so take it with a grain of salt.
Phil Newton: Five minutes of headlines, didn't it?
Sean Donahoe: It did and that's it. He said well, as long as it's not hurting me I'll just shut the hell up and let them ride and don't let them say whatever the hell they want, which yeah, it's BS, but especially when you're in bankruptcy court and you've got to visit the judge and he's like yeah, not really.
Phil Newton: I think the untold bullshit side of it is the fan base that probably rushed out by BitCoin because of the rumor that he owns BitCoin. If you're thinking about the timing looking backwards on this, it was probably not best time. I would imagine that there was a lot of people just on the basis, his fan base than rushed out to buy some BitCoin and overinflated price because they thought that he had some. That's the sad part in all this.
Sean Donahoe: Yeah, pretty much. Pretty much.
Phil Newton: What can you do?
Sean Donahoe: Abso-damn-lutely. Yeah, little bit of BS.
Phil Newton: Your due diligence.
Sean Donahoe: Just don't fall for every single thing that you hear in the markets. Like we said in the main questions there at the end.
Phil Newton: Many times before, yeah. Make up your own mind.
Sean Donahoe: Yeah, it's just do your own research and make your own decisions and don't listen to the noise. That's really what it's all about. With that being said, that's it for this week's show. Hope you enjoy becoming a lot of -
Phil Newton: Already?
Sean Donahoe: I know. It was the swift one here today. It did seem to fly by but we had a lot of good swift kick strategies.
Phil Newton: A swift kick to the markets.
Sean Donahoe: Yes, swift kick in the markets, but a different outlook from time horizons, talking about some investing stuff, virtualizing your portfolio as an ETF and using those pre-done research to increase your watch list in different areas. You might want to expand your horizons and raise your awareness, indeed.
With that being said, like as always, this show is not free. It will cost you a five-star review. Just go to TraderCanyon.com/rebeltraders. Select how you listen to this show, be it Stitcher, be it iTunes, Google Music or however you're listening, just go there, leave us a review.
Phil Newton: Pick your favorite method.
Sean Donahoe: Leave us sort of rating. Yeah, absolutely. Pick your favorite method and we'd love to hear from you because it really helps us also get this message out to more people just like you who wanted to be smarter, more profitable traders in the markets.
Phil Newton: It's been an interesting show, Sean, looking back on it. Certainly different perspective from my viewpoints sort of looking back on what we've talked about. I just having those different time horizons. Even if you weren't to invest, you could certainly, if you wanted to have a basket things to trade, you'd do no worse than just picking the popular ETFs and looking at the components of it.
Yeah, it's a very interesting, certainly a very different take on what we would normally comment. Yeah, I've thoroughly enjoyed it. It's been thought-provoking once again, but with my little worth placed in that, you can also connect with us on Facebook if you'd like to get us there or on the Twitter machine. You can certainly find us on there.
Where can we find us, though? At TraderCanyon.com/rebeltraders. You'll find all the links that you need right there. What do we have coming up on next week's show, Sean?
Sean Donahoe: Well, in next week's show, we are going to be looking at the popular delusions of the technical trader. Now I'm going to leave it right there. We'll just carry on and we'll see you all next week.
With that being said, take care for now.
Phil Newton: Bye for now.
Automated: For more cutting edge trading advice and a free trader workshop to help you build a personalized trading plan and make smarter trading decisions, you go to TraderCanyon.com now.
Automated: Futures, options on futures, stock and stock options trading involves a substantial degree of risk. It may not be suitable for all investors. Past performance is not necessarily indicative of future results.
Trade Canyon Inc. provides only training and educational information. If you actually understood and listened to this then that means that you are awesome. Congratulations and well done.
Notice, this product may contain nuts.

(Click the time stamp to jump directly to that point in the episode.)
[00:00:10] Show Introduction

[02:06]Sean: ETFs are something that's very...

[02:12]Phil: Well what's an ETF, Sean? Just to play the dumb farm boy in the room. It stands for exchange traded fund. Still none the wiser, though.

[02:26]Sean: Basically, it's a collection of equities bundled up into one offering, so when you buy a share or a portion, you have exposure to many of the individual elements that make up that ETF and by doing so...

[02:51]Phil: Kind of like an index.

[02:53]Sean: I was gonna say, if you look at the S&P 500, it's an ETF.

[02:57]Phil: It's a construct of the popular stocks. The DOW is a construct of the top 30 stocks.

[03:03]Sean: Blue chips. You have the NASDAQ and the Russel.

[03:09]Phil: Rather than a tracking index, they've put them in a fund so it's tradable.

[03:16]Sean: Absolutely. Here's the thing though. It is an exchange traded fund. But obviously, if we want to create our own ETF, we don't have an exchange, unless you have one in your back pocket and you have all sorts of regulations, rules, and very high-end computer equipment and all sorts of men with clipboards and windbreakers behind you watching every damn move you make. We don't want to do that. We want to have all the advantages of the ETF without all the headaches, the hassles and the BS that goes with it. This is what we're talking about today. Right now in the world, there are over 5,000 ETFs, without over 1,800 based in the US. More are popping up every day it seems.

[04:06]Phil: There's a lot overlap there, isn't there? There might be 3, 4, 5, 6 of the same type of sector or there might be one stock that's different or a different weighting. Technically, it's a different ETF, but for all intents and purposes it might represent the same thing. While there are 1,800, not all 1,800 are worth trading.

[04:32] Sean: They're not unique. They don't have the market cap. A lot of the top ETFs have options, but the vast majority don't because they don't have the liquidity which is what we like.

[04:50]Phil: If we restricted ourselves to the options, you could trim that number down to a sensible level and then it's not so overwhelming for the noob to figure out.

[05:05]Sean: That is a very valid point. These ETFs can be very broad, like the S&P 500 is the top market cap stocks and selected around that or the DOW 30, which is blue chips, the NASDAQ which is primarily tech stock chips. If you look at each one of those, Apple is a major quotient of all three of these. When Apple has a big move, it can actually pull the entire ETF. Usually, because of waiting, this is one thing that Phil was talking about for a moment. In each one of those-

[05:39]Phil: Apple represents about 13% of the NASDAQ, last time I looked. The figure fluctuates, but it's a big chunk of a small index. That's what we mean by 'it's weighted'. Not every stock is measured equally. Let's just say we've got a basket of 100 shares we want to allocate to our ETF. Thirteen of those are in Apple. One of them might be in another stock. Three of them might be in another. The total number we've portioned out would add up to 100 or 100% in this case. It's not equal weighting, so it's quite biased in my view. That links into what you were just saying, which is why the movement of one stock influences the entire movement of the index, or in this case, the ETF.

[06:28]Sean: Absolutely. If you invest in an ETF, if you're buying one of the allocations, their selection tends to be fixed, which means you get the good and the bad. If you take a ETF, maybe ROBO as an example, an ETF that has had incredible growth over the last few years. It's made up primarily of robotics, automation and AI. It's a niche in an industry I know, I understand. It appeals to me because it gives me exposure. But there's a few stocks in there, companies, that I don't like, that I don't think should be in there because they have a very bad approach. They're dogs.

[07:28]Phil: And they're probably in there to make the numbers up.

[07:31]Sean: I would agree wholeheartedly. That's exactly my opinion. I look at this like well, this would be great, but I don't want those. So this virtual ETF approach allows you to construct a portfolio which has all the elements of your preferred ETFs but it allows you to run the filter of your BS detector and see, does this meet my expectation, my criteria? The way I look at it is, a lot of ETFs are like recipes. Like, oh, here's the ROBO recipe. Here's all the ingredients. Well I like a little more salt or pepper in mine. I'd like to change the ingredients around to suit my palate.

[08:16]Phil: So like Apple represents 13% of the index fund. You might say, well I don't want that much exposure, I only want half, with Apple for example. Or it might be that go, I think there's way more in Apple. Maybe I want to have double the exposure than what the ETF is allocating to that particular stock.

[08:39]Sean: Or another example would be taking half that position, but then I like Apple in the mobile space, but I want to put Samsung in there as well. I want that kind of exposure, but I want to diversify between those two leaders. Hmmm, okay. Bye.

[08:58]Phil: It allows you to throttle either up or down your personal exposure. That would suggest that there is a little bit more work to this than just going in and saying I want to be exposed to a sector, and I'm gonna use an ETF because it gives me that diversification we all talk about. You can buy the ETF and forget about it for the most part. That comes with its drawdowns as you were just explaining. A more active approach would be to self-select.

[09:28]Sean: Absolutely. This is coming from an investment standpoint for the most point, which is where I was for a long time. I was doing passive investing. But I wanted to do the homework to have a portfolio that really met my specific requirements and criteria. This is, as Phil suggested, a little bit of work. But as we talk about, we are portfolio traders for the most part. We want to construct portfolios that allow us to maintain a basket-full of positions. They could be long-term positions, they could be swing trading. It could be whatever your particular flavor is. But in this case, I'm looking more at the longer term because I'm looking more at the future to have stocks I can buy and hold, because I really think these are gonna take off like rockets.

[10:26]Phil: But you're using the ETF as that foundation, to kind of jump start you into which stocks do I look at first of all? A pre-selected ETF has done all the hard work for you, so you can use that as the foundation and say okay, here's a selection of sector, tech stocks for example. Now I can say, I don't like this one. As you were saying, it's like adding salt to food. You can add a little more or take a little out or put a few different ingredients in to suit your flavor. But it starts with that foundation. Now you can fine tune for your investments over the longer term by adjusting your allocation or excluding it completely. Like you said with ROBO, you don't like a few of its components. One would assume you would exclude them from your virtual ETF as you're thinking about what does the future hold for these stocks? I don't want to be involved in those because I think they're dogs. They're making up the numbers.

[11:31]Sean: Well that's exactly it. I'll take the example of AI, or artificial intelligence ETFs.

[11:40]Phil: Because talking to me, we need some artificial intelligence.

[11:44]Sean: There you go. Funny. For example, with AI, maybe I wanted to get some exposure with QQQ, which is powershares QQQ which has a lot of tech stocks in there. There's ROBO, there's bots, there's IGM, ROBT. There's lots of different ones that might have players, and companies you've never heard of, which is great for the most part. It can raise your awareness. If you look at the components that make up any one of these individual ETFs, this is something Phil and I have talked about before, you can use them to create a watch list with exposure into all of these different industries and individual different equities, to say are they gonna align with your strategy.

[12:43]Phil: That raises an interesting angle, then. It might be that you're invested in the ETF as a whole, long-term, but then you want to be more actively involved without maybe disturbing your exposure to the ETF. One idea would be, rather than make your own virtual ETF, you could trade around your position with the components of the ETF that you like. It might be you've got exposure to the ETF, but then also, as you're looking at the dozen or more components of the stock, you could say these are actively moving and do what's known as trading around the position, using the individual components. If there's certain stocks that are ebbing and flowing back and forth on a regular basis, it might be you have a few short-term setups that would get you bullish on some stocks and bearish on some and take advantage of some short-term downward movements. You can profit from those fluctuations in price without having to jump in and out of the ETF, which is your investments. You can trade around your investments using the fluctuations of the short-term price movement.

[13:56]Sean: Exactly. That's absolutely valid. I'll take an example of one I've got in my portfolio.

[14:04]Phil: The ETF would be the core position, and then the individual stocks as they fluctuate back and forth, you can kind of be in and out. As an individual trader, as a retail trader, that ability is something that the big hedge funds and institutions don't have that nimbleness, that fleet of foot to jump in and out at your leisure based on what you see and how you view the charts.

[14:29]Sean: Absolutely. I'll take an example of BOTS, which is one that I've got in my portfolio. That's the global robotics and artificial intelligence.

[14:39]Phil: Oh, BOTS. I thought you said you like big butts.

[14:42]Sean: I can't deny. Dear me. This launched in October 2016. I think I only got into it beginning in 2017. Again, because of the industry, the components, the growth of this sector, and also, I think because it's a new fund with exposure to this industry, that has gone from about $15 to about $30 in about 12 months. That's almost 100% gain within that time because of the exposure. Now they've had a little bit of a roller coaster in the last few months but it's balanced out quite nicely, settled back down to $25. Just because of the hard work that's been done for you by all the researchers who build and compile these ETFs, they've done all the fundamental work and everything else to make sure they're included, it's a good foundation to start from, to understand who are the leaders, the laggards. Who are the players in this individual sector?

[15:47]Phil: I suppose more specifically, who are the players worth looking at?

[15:49]Sean: Well there you go, exactly.

[15:52]Phil: Because that's a big problem. What stocks do you look at? If the heavy lifting's being done, because that's the big question on most new traders' mind. Now that I'm aware of this universe, what do I look at? Just take a look at the components of the ETF. That gives you a starting point. That's a great tip to underscore there.

[16:09]Sean: Absolutely. Here's the thing I do. You can reverse engineer and research the companies that make up the ETF, but I like to look at the ones that have at least the 50% share of the fund. This is my general rule of thumb. Again, they're gonna be weighted with the leaders, and then they'll fill in some numbers with some other companies. A lot of the times, I feel they're just filling in the blanks. Just, oh well we better have some there at the bottom. That usually tells me those ones at the bottom, they may have made whatever the threshold or cut is-

[16:48]Phil: Maybe there's a little bit of a brown envelope involved down a side alley somewhere.

[16:51]Sean: You never know. I always look at the ones that make up the majority, where the weighting is biased towards. Usually, they've got the strongest presence in the industry. Then I'll start looking at different fundamentals. I know Phil hears the word fundamental and kind of cringes in the corner. I look at things like return on investment capital, and then the historic numbers for that, equity growth rate, EPS growth rates, sales growth rates, net asset value per share or book value per share, dividends. I have certain criteria that I look at historically. I don't care where they are right now necessarily, though that is important. I want to see where they've come from. Have they grown? Are they strong? Do they have a moat of safety, going back to the Benjamin Graham, Warren Buffett style of investing. I want to make sure this company is good, solid, that they're in an industry that's difficult to get into and to grab market share, that they have some form of dominance. Good management.

[18:05]Phil: They have long-term prospects. That's what you're chewing around, as I heard. Yeah.

[18:09]Sean: Pretty much. I want to make sure that all the bases, that I would want to own this company, not just from a share value, but I would want to be a part of this every damn day because it's a good company in an industry I understand and I know about.

[18:28]Phil: That's the investing angle you were talking about. While we normally focus on, certainly me particularly because I'm a trader - I'm not so concerned with the fundamentals - but if I were interested, we're talking 2, 3, 5 years as a minimum to be invested, which is why a lot of people are attracted to ETFs. They can put the trade on and walk away. Still, people want a little bit more so you can be invested in that. By looking at the individual components, certainly the bulk of the ETF is what you're suggesting as your, okay well these are the most interesting ones. Then I can apply my fundamental filters to say the net asset value or book value, debt to profit, all those ratios. I'm not naive with the fundamentals, Sean, I just don't see the need to use them for what I'm doing. At the same time, you can apply those fundamental filters you want to. If they then meet your criteria for investment, you can start to either construct your virtual portfolio. You can take the elements you like out of the ETF and say these five stocks are the ones I want to be involved in. Collectively I'm gonna look at those as my investment and measure them collectively in your little virtual ETF. That gives you a nice solid foundation to work with.

[19:51]Sean: Absolutely. That's really where it comes down to. The process here is to weed out the ones that are week and keep the strong. Basically, compiling and creating the ultimate portfolio.

[20:10]Phil: Into the thunderdome with the ETF. Placing the ones you like and discarding the ones you don't like. That literally is trading and investing personified. Do more of what you like and less of what you don't like. You can use that ETF as that foundation to then decide what you want to do next.

[20:29]Sean: Now as Phil mentioned earlier, I want to hammer this one home. This could be a separate investment portfolio that is passive in nature and set aside from your actively traded.

[20:42]Phil: Once you've set it up and you've done the work...

[20:44]Sean: You could then take all of the elements, even if there are some weak ones. Even weak businesses can provide opportunities in the right conditions. You could have that separate watch list that is all of the elements that were part of your portfolio or the ETFs that you're using to create your virtual ETF and portfolio. Take all of those items, now create a separate watch list in an industry you're familiar with you may believe is going forward and growing, or you want to create multiple little ETFs. Maybe I've got one in robotics and AI and another one in alternative energy. Phil actually was talking about moralistic investing and trading before the show. Repeat what you were saying there earlier on.

[21:33]Phil: We've talked about the off-the-shelf ETFs. But when you get the idea of what can you use as this foundation to jump start your exposure to the market? We know the easy button is the ETF, which is why they're attractive. What we're suggesting is after you've done that, a lot of people want more ways to invest and the ETFs don't quite meet the requirements, what are your requirements? It was maybe you've got an affinity for, maybe you're a new Texan, maybe you want to be involved in the oil industry now that there's more of that going on around you. You're a little more familiar with it on a day-to-day basis. Maybe you want to be involved in the oil sector, the oil mining, the oil drilling. Maybe you want to be involved in fracking, or maybe you don't want to be involved in fracking. You can start to include those things in your virtual portfolio. Maybe you want to be an advocate for gun control. Maybe you don't want to be an advocate for gun control, so you might include or exclude military elements. Maybe you want to be green, maybe you don't want to be green. There's two sides to every coin here. Maybe you want to advocate and be a champion for women in business. Maybe you only include stocks that have chief executives or have a large female staff on the C suite. Maybe that's the way you want to go because that meets your moralistic viewpoint and the things you want to be invested in because of your personal viewpoint. You can express whatever you want in this virtual ETF. We're trying to take the idea and the concept a little bit further. If you need help with that, or what's included, this a lot of the time how hedge funds operate. They have a core value and there are hedge funds that only invest in female leaders. The company's got to have a female executive captaining the ship. That raises them on their radar as potential candidates to trade because that's their foundational viewpoint. That's the whole reason why there's in business from a hedge fund point of view. You can start to dip into the hedge fund world to see what sectors, what comprises the fund because they've got this value they're adhering to in the first place. That should help you to come up with almost an infinite number of possibilities. I'm gonna use the word invest because we're talking about long-term. My focus is short-term, which I would say is trading. Anything up to 18 months - 2 years is trading. Anything below that would be short-term and considered trading as far as I'm concerned. It just allows you to have this foundation based on your value. You can sit down on a nice sunny Sunday afternoon and think what do I want to be invested in? Is it dividends? Green companies? But now we can take it so much further and create this virtual ETF. It's how to create a portfolio when you don't know how to create a portfolio. This is really what we're talking about.

[25:16]Sean: Very much so. If you want to reverse-engineer ETFs, one of the sites I use is etfdb.com. I'll put a link in the show notes. That will show you all the individual companies that make up an ETF. It will show you the weighting. One I use is called ARKQ. They've got a 10% bias and weight towards Tesla. They've got everything from Invidia, Amazon, Alphabet, Active, PLC, Bidio, Terradyne. They'll show you all the different elements, all the different ratings. You can click on any one of the elements and it will tell you more about it, what other ETFs contain this particular item and then you can look up more about it.

[26:07]Phil: If you do want to look at the world stocks from a fundamental viewpoint, you could do no worse than take a look at Stockopedia.com. The reason I suggest them is it's not just the US markets they serve. They literally have every exchange and data feed around the world. If you're in Australia, I know we've got a few listeners there, you can have a look at the Aussie exchanges. It will scan them from a fundamental viewpoint and allow you that investing element. Again, you can construct your filter from a fundamental viewpoint. It's quite an interesting site actually, some good fundamental information if you want to explore that side of trading a little bit more.

[26:58]Sean: You can also get a lot of fundamentals from Yahoo Finance and a few others. A lot of this stuff we're talking about is listed for free a lot of places. It's not magic. It's all there for you. You just have to decide how you go through it.

[27:12]Phil: As with the technical side of it, there's usually a lot of pre-built scans. If you want to scan stocks Warren Buffet might take a look at, you can click a button and it will do it for you. Or Charlie Munger or Benjamin Grace. It all starts with what do you want? If you know what values you want, what do you want to be invested in for 5-15 years, when you've got that moralistic viewpoint you want to express, you can find stocks that suit your flavor, your green exposure or your champion in women exposure, or maybe you're a die-hard, gun-toting, rooting, tooting, shooting type person, you can have it all military stocks if you want. You can put whatever flavor you want in your recipe.

[28:15]Sean: You see, Phil's actually looked at my military portfolio is what it is. I am a rooting, tooting, I am Yosemite Sam.

[28:23]Phil: Is that a dagger in your pocket?

[28:22]Sean: Well, indeed. I will not go there.

[28:32]Phil: Please don't go there. We got off the beaten track a little bit. What we're trying to do is open the eyes to possibilities of want you want as an individual trader. We've spoken at length about what I want from a lifestyle viewpoint. What we're touching on now is what do you want from your trading from a moralistic viewpoint. You can express those viewpoints in your investments anyway you want. There is a little bit of work involved, but it's certainly worth the time to express your viewpoints in any which way you prefer. If we're talking about stocks that have options, to bring it back to things that we like, how can you get in your position with that? You can certainly use options in a smarter way. Maybe you've got that core position of your half-dozen stocks. Let's just say you've got 100 shares in each, let's say 5 stocks. Maybe you want to try and take advantage, maybe you could sell puts against that. If you're assigned the stock and the stock moves lower, you'll be assigned the stock at a lower price than what it is now. If the stock doesn't move lower, then you collect the premium. You can start to reduce your cost basis of investments, just to throw in a where's the trade type of opportunity there. That'd be one really quick way to participate more actively on a month-by-month basis while still being quite passive in nature. You want to be invested in these stocks for 5, 10, 15 years, so if you get another 100 shares of a stock you're already invested in anyway, it's no big deal. But you can still collect some premium by selling options, selling puts, assuming you think the stock's gonna go higher and if you're invested you probably would think that anyway. But you could sell puts against or in that stock. Again, if you get assigned a stock, you want the shares anyway. If you're not assigned the stock and the option expires worthless, as the seller of the option, that's you're benefit. You might collect a couple of dollars of premium every 30-45 days and it just increases your profit margin and your bottom line and reduces your cost basis all the time.

[30:48]Sean: Absolutely. There's many ways to use this as a starting point for a few different approaches to the market. That's kind of what we wanted to raise your awareness of, because again, this is something I do from an investment side while actively participating in many other opportunities. This is because again, these are companies I would like to own in a more longer term, but this is outside of my trading. There are still ways to trade within this and be a lot more active, as Phil's mentioned.

[31:23]Phil: It can still be quite passive. On a month-by-month basis, you'd still be selling puts in this example. You're not really doing anything. If they expire worthless, great. You'll collect the premium. If you're assigned the stock, you want the stock anyway because you're an investor.

[31:39]Sean: Exactly.

[31:41]Phil: Not only that, you've got them at a lower price.

[31:42]Sean: Absolutely. You've got a dollar's worth of value for $0.50.

[31:47]Phil: You bought them at a discount. And you've still collected the premium. So, always, it's reducing the overall cost. Think about it like you've bought a house at one price and you're kind of renting the room off. You're collecting a little bit of income against the value of the property. That's what you're doing.

[32:05]Sean: Exactly. There you go, ladies and gentlemen - different approach to looking at the markets and creating a portfolio. As you guys know, we're all about creating a portfolio-style approach to our business, which is trading.

[32:20]Phil: More of a longer term view this time which is quite interesting.

[32:24]Sean: Abso-damn-lutely. So with that being said, let's rock on.

[32:27]Rebel Trader Tip of the Week

[32:45]Sean: Okay so, Rebel Trader Tip of the Week. Kind of a cautionary note to what we just talked about. Don't have all of your eggs in one basket. Now I see a lot of traders do this. They tend to have an industry bias, which honestly, I have. We did an entire show on it last week. Now that we've talked about creating a virtual ETF with exposure in industries that you understand and are familiar with, don't fall into the basket trap. Vary some different industries in the mix. Don't just have one ETF.

[33:19]Phil: Tech exposure, for example.

[33:21]Sean: Exactly. It's the same with trading. We see people with biases in industries and equities. Purely they understand, like tech only or health sector or biotech. When entire industries are dragged down, your portfolio could feel that squeeze, too. Be aware of how you've grouped your positions and account for variance in different industries. You have knowledge in businesses outside of the ones you may be consciously aware of. Hey, do you travel regularly? Do you fly different airlines? Guess what, you now have exposure and knowledge of how those businesses are actually run from the consumer standpoint. You can then compare, oh I really like Delta but I don't like Frontier. Frontier gets me there in one piece, but I hate... you can start to build an awareness of different things you can then add into your portfolio and because of your knowledge, raise your awareness and start you off on a little research path. That way you're not locked in to one area. We can tell horror stories.

[34:29]Phil: I can give you a recent example of this. I re-learnt this. Recently I was reminded of why I like trading multiple occurrences, a portfolio-style approach, both stocks and strategies. Are we calling it a flash crash? Has anyone decided?

[34:47]Sean: Not really, but I feel it's a bloody flash crash.

[34:59]Phil: The big sell-off we saw recently. It was about 65-68% of my portfolio was on the bearish side. That was just the way things were set up, and it was making me quite nervous. But, because of that sharp sell-off, they all came home to roost quite quickly and lots of the positions I had were closed. Also, around the same time, some options were expiring either for a small profit or a small loss. Basically, my rolling portfolio that I like was shriveled up to three or four positions. Very quickly, it had gone from 25-30 positions down to less than a half dozen. Suddenly, I found myself very nervous. Yes, I've got a lot of profit on one side of the ledger, but on the other hand, on the open position side, I've got a half dozen positions. That made made exceptionally nervous because I didn't have the diversity that I typically like. I've now got to wait for the setup to occur and I was very anxious to try and get more positions on because I only had a few positions on. Despite having banked a good amount, it was a very nervous experience. I was sleeping very fitfully, I was very nervous. I was checking prices multiple times a day. And it just wasn't my usual trading experience. The reason was I didn't have a lot of exposure to the markets. As counter intuitive as that sounds, I only had a few positions on. And that's how most traders are. They only have one or two or three, maybe less than half a dozen positions, exposures to the markets. You're only looking at those things. You're like a rabbit in the headlights. These emotions come to play. Now, over a few weeks later, I'm pushing up to 22. I've got several - well actually, I just had a few orders filled as we're doing this - but I'm now back up to the 25-26 open positions mark and I've still got many positions pending. I should have a portfolio of around 30-35 positions this time next week. The point I'm trying to come to is that my emotional experience has now dramatically reduced because I've got more positions. This is something I've said many times before. It's counter-intuitive. You trade smaller but you trade more frequently. I'm now sleeping better. I'm not emotional. I'm not checking the prices, I'm back to checking them once or twice a day and updating my spreadsheets. I'm not checking in and I've not got that anxiety from having two or three positions. That's this basket trap you were just talking about, Sean. It's not just from a practical point of view. It affects you, or can affect you quite dramatically from an emotional point of view which is something that I struggle with. How to overcome that is surprisingly to trade more frequently. Now that I've got more exposure, multiple occurrences of a variety of different stocks that I've set up in the last couple of weeks since the flash crash, I'm not back to the relaxed frame of mind when it comes to my exposure to the markets. Counter-intuitively, it's because I've got more positions open.

[38:26]Sean: That's a very valid point, considering that we've all gone through at some stage as well. You've had all that success. You've had all those profits coming in, and you're suddenly like, oh crap, I've got to reload, and you don't want to be forced to then pick subpar positions.

[38:43]Phil: The hard part was not reloading for the sake of reloading, but I was very anxious to get more positions on. But as soon as they were on, it was okay the pressure's off. I'm relaxed. I've got exposure to the market. But compare that to three or four positions and high emotional impact, versus having lots of positions and low emotional positions. Who would have thought? I'm just reminded recently again of this basket trap, of only having, you think you've got this basket of portfolio, but it's all in one sector. You might as well just have one stock in that regard. You need that diversity and the way you do it is place lots of small positions. It sounds crazy but it works and I've seen it work for many of our students over the years that have had that exposure or that experience to only having a few positions on. As soon as you reduce the position size very dramatically and then increase the number of occurrences that you're trading quite dramatically, and we're only talking one or two trades a day here. It's not time intensive. You swing from one extreme to the other. You start being less dependent on one trade working out every time. Now you're looking for the average, the portfolio. You've got more of the business mindset. If one employee phones in sick, it's not detrimental to the business because you've got other employees working for you. It's the same thing with a portfolio. You've got lots of opportunity to make money.

[40:16]Sean: Perfect. So there you go, Rebel Trader Tip of the Week. Don't have all your eggs in one basket.

[00:40:21] Quickfire Round

[40:32]Sean: Rummaging around in the Rebel Trader Mailbag, I've got one here for you, Phil. What is the best way to invest or trade right now when the market is already too expensive to enter? Now I know there's gonna be a flippant answer here but it's a question we see every now and then and I thought it's one to address. So, take it away.

[40:57]Phil: Flippant answer first. You can never be too high to buy. Is that too much?

[41:09]Sean: Pass it to the left hand side.

[41:10]Phil: Your own Cheech and Chong reference. Seriously though, who says the markets are expensive? Are you believing the talking heads? Who says that it's too high to buy? Sure, the market's been going up straight hockey stick style for nine years straight now. But does that mean stocks are overvalued? Probably. Does it mean they're gonna stop immediately? Most likely not. They're still going up. It's undeniable. What is the best way to invest versus... If you think a stock is too expensive, trade pullbacks. Wait for a correction. That is mainly how I always enter a position, on a pullback. Invidia. Good example. I think we'll all agree that for the last 12-18 months, it's been in a straight line. It's very representative of the ever upward curve stocks seem to make. How do you get in on Invidia after it's doubled or tripled in price? Buy pullbacks. Wait for a correction. Wait for it to be on discount relative to what it's already been doing. This is what we teach on a regular basis. If a stock is going up, wait for it to pull back. There's a little bit of patience involved. You can wait for a small pullback of two or three days or you can wait for a deep re-trace like if we're in an uptrend over the last 12-18 months, which is the foundation stone of one of the things we teach. You can wait for price to retrace and to be at the lower end of a bollinger band. That's one of the scans that we use on a regular basis. But that means it's on a discount relative to the trend. That's one of the ways you can do it. Again you can use a big pullback like I've just described or you can wait for a small pullback, just a pause in price essentially, two or three days. It just meanders sideways. You're buying pullbacks. The break above the new high in a small pullback case or you're buying the deep retracements in the case of price being at the other end of the bollinger band. That's what I do. It's been working for many, many years. It's worked for a lot of people for more than 100 years. Buy pullbacks. There's a reference to Reminiscences of Stock Operator, written in 1933. When you give up buying pullbacks is when you see the failure of the first pullback not to make a new high. That's how it's referenced. If you picture the head and right shoulder of a head and shoulders pattern, that's the failure to make a new high. That might be the time to stop buying pullbacks. If it doesn't make new highs after that retracement is essentially what we're saying, that's the time to reevaluate the situation, at least in the short term.

[44:06]Sean: The other way to look at it is don't invest in the stock itself. Options. Options are a cheap way to get exposure to a particular move whether you're going long or short, whether you're looking at different angles. If you think it's too expensive and is due for a correction, then express a short position.

[44:32] Phil: A strategy we mentioned already is invest. Maybe you sell puts. If you're looking to buy stock and invest, maybe you sell puts. You can collect premium if it continues to go up. You'll be making money there. If the stock does move lower and the option expires in the money, as the seller that means you'll be assigned some stock and that's what you wanted all along. You're buying them at a discount and you're collecting some premium along the way, albeit one way. I suppose it comes down to it's one of those questions that can be difficult to answer because it comes down to what is your objective for trading or in this case investing. It's gonna be a different answer if you've got something more specific in mind.

[45:20]Sean: Absolutely. It also depends on what you consider expensive. Lots of variances there. At the end of the day, don't worry about it. Look for opportunities. The opportunities are bound no matter what the price is. The prices today might be way more expensive than they were 10, 20, or 30 years ago. What's happened? Price has gone up? Does that mean it's never gonna go up past where it is today? Of course not. Anything could happen. It's just the new level. Don't worry about it. So there you go.

[45:51]Phil: I wouldn't worry about whether something's expensive or inexpensive, just if you can try to buy it at a discount relative to itself, you're not gonna go too far wrong. Sometimes you're gonna have to wait for that. Be patient.

[46:03]Sean: Absolutely. Okay, what else is on?

[46:04]Phil: So, do you think that the Fed is going to raise rates faster than expected?

[46:08]Sean: Okay, I'm gonna have to take the Phil approach here. Who cares? Here's why. There's a lot of talking heads speculating that this is driving nervousness in the markets. The market's going up and down based on are they gonna raise rates faster. They originally talked about three rate hikes this year. But here's the thing. It's already telegraphed, it's already really priced in. Outside of the nervous Nellies that are looking to take chips off the table, in real terms, rate hikes. There may be four, there may be five. Guess what? The market is booming. It has done for quite a while. It's certainly been in the last year, going a little bit bizerk and up, which we've talked about as a pressure cooker that, hey we're due for a serious correction. We kind of had one. We're recovering from it. They're talking about it because the market is booming. It's priced in, it's factored in. In real terms, this is all just a little bit of shaking and shivering to rackle off a little bit of chips here, little bit of chips there, but at the end of the day it's all announced. It's all telegraphed. It's pretty much factored into everything. Don't stress it.

[47:45]Phil: What will be will be. I think if they're gonna do surprise hikes, which they stopped doing more than a decade ago, they used to do it quite regularly in the early to mid 90s. You'd see a surprise interest rate adjustment or there'd be a significant jump in some economic figure. These days, they've realized that the speed of information is very fast. It's bad health, it's bad news for the market if you're going to surprise and shock it in some way. So, these days it would be foolish for the government to do something that would surprise or shock the markets. It would be unnecessary for them to do that. So I think it's always gonna be well-advertised.

[48:43]Sean: Does that mean that governments aren't and don't do stupid things? Of course they do. They always do.

[48:51]Phil: I think they might raise rates more than we currently expect. They're gonna tell us we need to adjust our plan. We might need to raise them five times in the next 18 months. Maybe that's what they'll do. But they're gonna let us know. It would be stupid of them. They would be shooting themselves in the foot if they just did a surprise hike.

[49:12]Sean: Absolutely. At the end of the day, a lot of what we do is very short term. It's well within the normal realms of activity and announcements, even with J Powell taking over now and putting his foot in it a little bit since he took over from Yellen. It's really just a lot of nothing to worry about. It's a lot of noise in the background to the Rebel Trader strategy. We don't care. With that being said...

[49:45] Phil: I think even long-term, outside of our usual strategy, I personally don't think it matters one way or the other. It's all factored into price anyway. What's gonna happen will happen. If you've got a nice positive expectancy strategy as we say, you'll be on the right side of most of the moves, usually 6-7 times out of 10 in my experience.

[50:05]Sean: There you go. With that being said, this is an interesting little sidebar. How do you guys keep sane with all the pressures, market noise, opinions, and counter voices to every single thing in the markets? Outside of being flippant, we talk about these different things inside trading and how we deal with them. Phil was just talking about one where he felt pressured because he didn't have enough positions on.

[50:32]Phil: Surprisingly, my answer is two-fold. You know one. It's trade less position size and trade more frequently. And you'd be surprised at how that psychological pressure disappears. As regards to noise, I go to great lengths to be intentionally ignorant. I don't care what other people are doing. I've got a strategy that I follow as rigidly as I humanly can, and it works 65% of the time. Why do I need to listen to talking heads? They're not telling me anything that is gonna impact or influence my trading decisions. That's it. Just simply, do not look at the other voices in the markets, especially inside your head. Turn the news off, don't watch the talking heads, and for the most part, I don't watch any news or mainstream at all. I find it quite frustrating from a general point of view. But how can you reduce the pressure? If you find reading the news frustrates the crap out of you, like it does me, don't read the news. I want a stress-free life. Don't look at the markets all day. Put your trades on and walk away. That's what this strategy is designed for. It's stock trading for busy people. Put your trades on, do your analysis, update spreadsheets and then walk away. Come back tomorrow. That's it. That's how you look at the noise. Don't look at the noise.

[51:59]Sean: That's exactly it. If there's noise, turn off the noise. It's simple. It's the same thing with all the opinions, counter opinions and everything else. I have this wonderful little gadget called a remote control and on there is a big red button that says shut the hell up and I press that button and it's gone. That's it. I've got this little thing on my computer called a browser and I can close the windows and it's great because now I've just got my portfolio and what I'm dealing with and that's it. I've got all these positions in my portfolio, I look at them, and say those ones came home, these were the ones I was gonna put on. Boom. Put on those positions. And then I've got this great, beautiful thing. It's one of my favorite things in the whole world. It's the big red X in the corner of every program. Boom. And then I walk on and enjoy the rest of my day. And it's as simple as that.

[53:00]Phil: I used to do some god-awful, stupid things to try and keep the emotional side. I would physically sit on my hands so I didn't tinker with my trades. At the time, I was day trading. But I would physically sit on my hands so I didn't play with the trade. You're looking at it. You want to play with it.

[53:31]Sean: I'm not going there.

[53:37]Phil: But I would sit on my hands until I could develop the discipline to not bugger around with the trade. That's essentially it. The other things I would do is try and put a bridge in place, a hurdle to prevent me from taking unnecessary action. One of those was, this was back before wireless mice, I would unplug it at the back of the computer, but the byproduct of that is I ended up learning all the shortcuts on the keyboard. I put a hurdle intentionally in place that stopped me from being spasmodically having a knee jerk reaction to OMG, the price has upticked by 2 points. It's still a million miles away from a stop loss for example. But the market moved adversely and the knee jerk reaction is to go and do something, whatever that is, you're just kind of making it up. It's to avoid those things. What can you do that would prevent you from having that reaction, that spasmodic knee jerk reaction in the first place. As Sean just said, put your trades on, manage them, and then close the program down. That was the eventual solution. I would turn the monitor off, then I would get used to turning the computer off so that if I wanted to go and do something, I had to go and physically log in. It put a hurdle in place. Even if that means taking the app off your mobile phone. Most brokers have some type of app. Eventually you'll develop a natural discipline to do that automatically because you've got that built-in restraint. But you've got to develop it to start with. It's just silly little things sometimes to help you along the way. These days, I don't need to think about it. It's just part of the process of not touching a damn thing.

[55:56]Very much so. With that being said, let's rock on.

[00:55:59] Bulls**t of the Week

[56:26]Sean: Okay, Bullshit of the Week. This is-

[56:30]Phil: Have you got any spare change, Sean?

[56:33]Sean: Well, I might have $0.50. This is about rapper, 50 Cent, who is now worth sweet FA according to his bankruptcy court filings. But one of the things that has been rumored is that 50 Cent, the rapper, Curtis Jackson, was actually a secret Bitcoin millionaire, that he had over 8 million tucked away in Bitcoin that he forgot he had. That was the rumor that was going around.

[57:17]Phil: Let me just get this straight. Everybody knew that he was a secret Bitcoin millionaire? That's bullshit right there.

[57:25]Sean: There was a story going around that he had discovered... He just played along with the erroneous but favorable story, but when it came to court, he's going through his bankruptcy, he says I do not personally own, or have never owned either a Bitcoin account or any Bitcoins. Basically, he did not dispute a TMZ report in January that he had made a surprise Bitcoin win for, and his response was, as a general matter, so long as a press story is not irreparably damaging to my image or brand, I usually do not feel the need to publicly deny the reporting, in sworn testimony. I'm quoting the article here.

[58:12]Phil: He's taking the CIA's viewpoint of I can neither confirm nor deny.

[58:16]Sean: Very much so. Basically, he says when the report in question is favorable, even if that is based on a misunderstanding or facts that contain outright falsehoods, he won't deny them. But when it came to court and they said what about this? He's saying I've got no money there. That's just boom.

[58:41]Phil: He either is and he's going, prove it. It's generally bullshit.

[58:48]Sean: It is generally BS. It is obviously TMZ, so take it with a grain of salt.

[58:53]Phil: Got him 5 minutes of headlines.

[58:55]Sean: It did. And he said as long as it's not hurting me, I'll just shut the hell up and just let them say whatever the hell they want, which yeah is BS, but especially when you're in bankruptcy court, you gotta face the judges like nah, not really.

[59:11]Phil: I think the untold bullshit side of it is the fan base that probably rushed out t buy Bitcoin because of the rumor that he owns Bitcoin. If you think about the timing, looking backwards on this, it was probably the best time. I would imagine there's a lot of people in his fan base then rushed out to buy some Bitcoin at an overinflated price because they thought that he had some. That's the sad part in all this.

[59:41]Sean: Yeah, pretty much. So don't fall for every single thing you hear in the markets. Like we said in the main questions at the end, do your own research. Make your own decisions, and don't listen to the noise. That's what it's all about. With that being said, that's it for this week's show. Hope you enjoyed. It was a swift one here today. It did seem to fly by, but we have a lot of good strategies.

[1:00:18]Phil: A swift kick in the markets.

[1:00:19] Sean: Yeah, a swift kick in the markets. But a different outlook from time horizons. We talked about some investing stuff, virtualizing your portfolio as an ETF and using those pre-done research to increase your watch list in different areas. You might want to expand your horizons and raise your awareness indeed. With that being said, as always, this show is not free. It will cost you a five star review. Just go tohttps://richardgrannon.wpengine.com/rebeltraders, select how you listen to this show, be it Stitcher, be it iTunes, be it Google Music or however you're listening, just go there and leave us a review.

[1:01:02]Phil: Pick your favorite method.

[1:01:03]Sean: Leave us a rating. Pick your favorite method and we'd love to hear from you because it really helps us also get this message out to more people just like you who want to be smarter more profitable traders in the markets.

[1:01:19]Phil: It's been an interesting show, Sean, looking back on it, certainly a different perspective from my viewpoint, sort of looking back on what we talked about. Just having those different time horizons, and even if you weren't an investor, certainly if you wanted to have a basket of things to trade, you can do no worse than just picking the popular ETFs and looking at components of it. It's very interesting, certainly a very different take what we would normally comment on. I've thoroughly enjoyed it. It's been thought-provoking once again. You can also connect with us on Facebook or the Twitter Machine. Where can you find us?https://richardgrannon.wpengine.com/rebeltraders. You'll find all the things you need right there. What do we have coming up on next week's show, Sean?

[1:02:07]Sean: Well in next week's show, we are gonna be looking at the popular delusions of the technical trader. I'm gonna leave it right there. We'll just carry on and we'll see you all next week. With that being said, take care for now.

[1:02:21]Phil: Bye for now.

Resources & Links Mentioned in This Week's Show

3 Key Takeaways From This Show

  • There are over 5000 ETFs globally with around 1800 based in the US alone and more cropping up every day it seems (not including ETNs which add almost 2k more!)
  • Think of conventional ETFs as recipes - I may like mine with a little extra spice, a little more salt or a few different ingredients to match my palate. So, Virtualizing an ETF gives me just what I want in my portfolio.
  • You can create your own universe of stocks based on this principal of uncovering just what makes up the ETFs you specifically are interested in.

Connect With The Rebel Traders

Download our Private "Universe of Stocks"

Download the 350 "Core" stocks we look at every day that present the best opportunities. Just enter your name and email below to download now...
DOWNLOAD THE LIST NOW
We value your privacy and will never spam you

Comments are closed.

×
HEADLINE HERE
SUB HEADLINE