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Podcast Length: 31 minutes

Today I spoke with my good friend John Del Vecchio about his new book What’s Behind The Numbers: A Guide To Exposing Financial Chicanery & Avoiding Huge Losses In Your Portfolio.

Although John runs the Active Bear ETF (Ticker: HDGE), this book is not really about short selling. Long-only investors will benefit greatly from John’s insights and especially how to get out of their losers quickly just by following a few simple fundamentals on the balance sheet and income statement.

One of John’s most impressive skills is that he spends his days as a forensic accountant looking for the chicanery that is a lot more prevalent that you may care to believe. Then there’s the fact that he’s a short seller in the face of QE “infinity”, but that’s besides the point.

One of his biggest shorts (below) is Green Mountain Coffee Roasters (Ticker: GMCR). They are offering big discounts to generate revenue and as we mention in the podcast, that’s robbing Peter to pay Paul. As he states, “eventually there will be an earnings shortfall, like there always is with companies like this, and the stock will tank.”

GMCR 300x212 You Cant Trust Anyone

Green Mountain Coffee Roasters, Weekly Prices

The WSJ just ran a story a few days ago called Coffee Standoff Tests Growers’ Grit that discussed Brazil’s coffee producers hoarding physical until prices rise.

If coffee prices rise, and GMCR is offering discounts, they are going to have their top line revenue growth squeezed in a vice, especially if they don’t hedge by purchasing coffee futures contracts to offset higher prices. You can’t pass on higher costs to the clients in this regard and concurrently offer them discounts.

GMCR had this to say about their basis risk in their most recent 10-Q: “At June 23, 2012, we are exposed to approximately $73.5 million in un-hedged green coffee purchase commitments that do not have a fixed price as compared to $119.9 million in un-hedged green coffee purchase commitments that did not have a fixed price at September 24, 2011. A hypothetical 10% movement in the “C” price would increase or decrease our financial commitment for these purchase commitments outstanding at June 23, 2012 by approximately $7.4 million.”

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You should know if you trade commodity futures what the contract expiration dates are.

After all if you are trading Lean Hogs and you forget you could end up with 40,000 pounds of carcasses on your door step – which is not my idea of a good day.

Actually you would have to work pretty hard for this to happen. Your broker keeps a very close idea on your open positions and will likely inform you to exit your position or roll over your contract so as to avoid exactly this delivery issue.  Remember if you were short you would need to actually have to have the required quantity and quality of the deliverable commodity on hand.

I like to play it safe and make sure that I am fully aware of the expiration dates.

Well in a funny turn of events a Hedge Fund had taken delivery, somewhat forcibly, of a ship as payment! That’s right Elliott Capital Management took control of the ARA Libertad, a training ship owned by the Argentine navy, whilst it was docked in Ghana.

Argentina have been avoiding paying for a 2001 bond and after a recent court hearing Elliot Capital Management went all pirate and seized the assets.

So even if you are a Sovereign State know that the debt collectors will find you.

ara libertadship 300x225  Taking Delivery: Commodity Education and Comedy

More on A Hedge Fund Has Physically Taken Control Of A Ship Belonging To Argentina’s Navy

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productivity 300x214 4 Productivity Hacks For Traders

1) If you do two things at once, one of them will be done wrong

When you trade, focus on your methodology. Do not check your Twitter feed, reply to E-mails and chit chat on IM while you are trying to make decisions. Without exception, multi-tasking takes away from your ability to focus, as well as from the ability of your subconscious mind to properly store patterns and information, and from your ability to access your inner voice.

2) Everything that isn’t your main purpose should be either delegated or dropped

Speculation is a business, treat it like a business and you’ll have a chance to succeed. That means that anything that is not part of your core business should be delegated. Outsource the nonsense in your life and focus on your core business activities, the price you pay for outsourcing will be the best trade you ever made.

3) Pay attention to what’s vulnerable, not just what’s strong

Trade from the short as well as the long side. Markets go up the stairs and down the elevator. Try to balance your emotional system so a trade from the short side is as easy as a trade from the long side. The ability to trade from both directions will smooth the volatility in your account and your income. In doing so, you’ll make your business more robust and your emotional stress more manageable.

4) Take some time to do absolutely nothing

Professional athletes in ALL sports do not operate at a high level 52 weeks a year, they take extensive periods to rest, relax and do nothing. Speculation is an intense mental sport which also requires periods of total relaxation. Take the time to do absolutely nothing.


 

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Total time: 21 mins

I caught up with Jon before his flight to Paris and a week of speaking there. We talked about his outlook and set-ups for Netflix, Apple, and Gold.

Jon, Guy Adami, and Jeff Macke will be headlining the ILAM Houston event in early November.

martinnajarian 300x150 Podcast with Jon Najarian on NFLX AAPL Gold & ILAM Houston Nov 2 3

Michael Martin and Jon Najarian at the Milken Institute’s Global Conference in May 2011.

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You can read in many places that you should only risk 1% of your equity per trade.

It’s so prevalent that it’s almost taken as gospel.  I think that’s a good thing as it promotes protecting your account and if you have a system with a decent risk return your winners ought to cover your losses leaving you nicely up – keeping it all gravy for you.

Now take a look at this chart showing a poll from the Wall Street Journal:

Cautious poll Meaningful Risk?

Link to chart here

Now granted, this is about a mistake that mutual fund investors feel they have made most often, but it shows that at least 40% of respondents regret having been too cautious.

While the general advice of risking no more than 1% a trade is sound advice, you have to:

“Risk no more than you can afford to lose and also risk enough so that a win is meaningful”

It’s important to consider not just what you are willing to lose but also what you want to win and how you are going to trade to make that a reality.

There are two sides to this equation that are worth thinking about. Have you considered both? Having too little risk might mean not achieving your financial goals.

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