November 22, 2006 – In Part I of this blog, you learned the first seven rules. Here, you will learn seven additional rules. For the curious, the photo to the right are SEALS undergoing an exercise in “drownproofing” where their hands are bound behind their backs and their ankles are bound together.
7. Think ahead and stay organized.
SEALs will win if they stay just one step ahead of the enemy. But they aren’t satisfied with being just one step ahead. They want to be three, four, or five steps ahead of the enemy. In investing you’ll never win unless you are also at least one step ahead of the economy and ahead of the “thundering sheep herd (my euphemism for the mindless public masses).
When global markets sharply corrected this past May, many people were caught completely off guard. And when it happens again, the same people will probably be caught off guard once again. But they shouldn’t have been and they should not be. Because almost all the top technical indicators had been signaling a sharp pullback for weeks. However even though I liquidated many stocks in preparation for this pullback and then bought back many stocks in partial, not full, positions after they had dropped 15%, this still proved not to be the best strategy in a very volatile market.
However, as I mentioned before, the worst thing an investor could do is panic — and buy high and sell low. So you must adjust and adapt your game plan. And you can only do that by knowing exactly what you own and if the stocks are down just because of the worldwide global weakness in the markets or if they are down because they are terrible stocks and would have tanked anyway. You can’t win in the stock market just by thinking about today and reacting to what is happening now. The only way to win is to think ahead.
8. When you have a good idea that benefits your team, share it with others.
Although this sounds like a rule from kindergarten class, it is actually a principle tenet of SEAL teams. And it should be a principle tenet of your investment group.
This way, when one person has a great idea, it will benefit the entire team. In fact, I highly recommend that you form or join an investment group if you are not a member of one. Here you will see the benefit of becoming specialists and also the benefit specialists add to a team before you even begin trading for real.
9. If you don’t know or didn’t understand, ask. It is your responsibility to find out. Research. Demonstrate an unquenchable desire to know everything about your job.
This principle of being a member of the Navy SEAL teams is particularly applicable to paper trading. You should never buy a stock without understanding everything you can about what makes it a good stock to buy and what makes it a dangerous stock to buy. Even on the basis of my alerts. If you bought Focus Media several months back and made 25% in a couple month’s time just because of my special alert without the sound advice of a professional, you got lucky. Just because I believe something doesn’t mean it will happen.
Just because Warren Buffet believes something doesn’t mean it will happen. You should always fully research the positives and negatives of a stock before making a decision to buy. If there are things that you uncover about a company that seem important but you don’t understand how it may affect the company, it is your responsibility to ensure that you understand this information before making a decision to buy. Don’t just ignore or disregard information that you believe might be important to the future performance of the stock price because you don’t understand it. Research it until you do.
10. If something is broken or not right, take the initiative to fix it or make it right. Don’t wait for someone else to take action.
I used to hear people say in terrible bear markets that they would cease checking their portfolio because it was too depressing to look at. And I used to hear LOTS OF PEOPLE say this. This is the absolute worst thing you could do. You know it’s broken, yet you continue to ignore all the signs that scream for you to take steps to fix it. If your portfolio is performing poorly, take the steps to fix it. Are you over-weighted in industries that no longer have the strong points that made you invest in them in the first place? Or is your portfolio over-diversified into mediocrity and it needs to be re-allocated and overweighted in industries poised to take off? If so, don’t just ignore the problem. Fix it.
11. Listen and take notes during all Patrol Leader orders. Prior to going into the field, know the minimum.
Since you are the “Patrol Leader” of your portfolio, you must always take notes when you purchase stocks so that you do not forget the reasons you bought a stock. Though this sounds so simple, this is an invaluable exercise so make sure you do it. For example, you may be waiting to sell a certain stock, but after researching this fact, you discover that the stock price will probably receive a nice bump in price after the release of their next earnings report which is in one month. Therefore, you decide it’s best to hang onto this stock for three more months.
But if you don’t note this somewhere in a place that you check frequently then one day you may remember, “Oh, I meant to sell this stock and I still own it.” So you may sell it only to see the price rise for the next three months because you forgot that you had discovered information to tell you to hold on to it. Or you may buy a stock because you uncover a strategic advantage that a certain company has. But it turns out you bought in too early and within three months this stock hits your stop loss point and you automatically sell out of your position.
If you haven’t physically noted the reason you bought the stock in the first place, you’re most likely not going to remember it, especially after having a negative experience with it. So most likely, you just chalk it up as a loss and stop tracking this stock. But sometimes stocks like these have corrections of 15% or more, then run up 100% after this happens. If you had noted the reason you bought the stock in the first place, you would have been able to review these reasons after the stock had hit your stop loss and research whether these conditions still existed. If all the conditions that excited you about the stock still existed, then this stock might be one to buy back in the very near future. But it’s almost impossible to remember this if you don’t take notes.
12. ALWAYS rehearse/dirt dive everything.
SEALs call rehearsing an operation “dirt diving” it. Paper trading is your “dirt dive” of trading with real money. If you’re currently in the markets and haven’t “dirt dived” your situation yet, get out. For SEALs, not dirt diving a tactical operation may get them killed. For you, not dirt diving your financial situation may not kill you, but it most certainly will lead to financial death.
13. The easy way out may not be the safe way out.
During SEAL operations, the easy way to infiltrate or exfiltrate enemy targets is often not the safe route. As you learned in earlier modules, the easy way to invest is almost NEVER the safe way as well. In May 2006, we saw some of the best performing emerging market mutual funds in Russia and Turkey get hit the hardest, some shedding 40% to 60% in value in just a matter of weeks. We will see this situation happen with Chinese mutual funds at a future point in time, whether that is next year or two to three years from now. So even if you are heavily invested in Chinese mutual funds and currently ecstatic with 40% to 60% annual returns, you are perfectly primed for a hard, severe fall. As you know, individual stocks are the better, though much more difficult route. Mutual funds are the easy way out.
14. Do K.I.M. exercises as much as possible.
Being a SEAL requires much more mental resolve than the majority of civilians realize. What separates those that make it through Hell Week and BUD/S (Basic Underwater Demolition SEAL training) is often pure will. Those that are the best swimmers and best runners out of an entering class sometimes are among the very first DORs (drop on request) while those that are not as physically gifted sometimes endure until the end because their will is unparalleled. You just cannot measure will until severe physical duress is imposed. That’s where separation begins.
As part of their training to sharpen their mental acuity and observation skills, SEALS constantly engage in KIM (Keep In Mind) exercises. If they are on a subway train, they may try to remember facial features and the clothes of everyone on their subway car. And they may do the same thing while eating in a public restaurant. So should you. Take note if the door opens inward or outward. Does it open to the left or to the right? Is it made out of steel, wood, or glass? Where are the exits located and how many exit points are there? How many wait staff? Doing KIM exercises repeatedly automatically sharpens and trains the mind to be more observant and aware.
I remember one time running into my martial arts instuctor (and a Navy SEAL instructor) on the streets of Philadelphia. I ran up behind him and when I caught up with him, he casually looked over and broke into an easy smile.
He said, I heard you coming.
I asked him, What do you mean?
He told me, I could tell from the sound of your footsteps that you were a man because the footsteps were too heavy to belong to a woman or a child. And from the beat of your steps I could tell that you were a “friendly” and not a “hostile”. Your footsteps weren’t at a pace of a mugger or robber.
I looked at him like he was crazy. I thought to myself “Who in the world thinks like this?”
But as I learned later, he was merely doing a classic KIM exercise – the sign of a truly observant SEAL.
You should do the same because believe it or not, KIM exercises will increase the amount of stock opportunities you uncover. Although you probably don’t realize it, if you travel a lot, there already have been lots of companies you’ve been exposed to in their infancy stage of growth that exploded upward in growth and price. But you probably never realized that you even had these opportunities. For example, if you’ve traveled in a country with a booming economy and have played a round of gold on a five-star golf course that had been recently developed, have you ever noticed signs about the Real Estate developers?
Or if you’ve ever been in a city with booming construction, have you ever looked at the names plastered on the heavy machinery that is in plain site? Have you ever noticed what company is dominating the scene? Was it Caterpillar? Or Komatsu? Or a local construction company? And what names were plastered on the cement trucks that were providing all the cement? Or have you ever vacationed in Macau and while gambling in their casinos, learned that all Casino chips had been implanted with RFID chips for identification.
I’m not saying that all observations similar to the ones above will lead to great stock opportunities but some are bound to, even if there is no visible sign of a company that is leading a trend that you notice. I know, because it has led to at least two stocks that have returned over 100% for me in less than 18 months. Just note the trend on a piece of paper and you can easily research information on the leading companies on the internet later.
Living in Asia, I noticed billboards in Thailand everywhere for Hutch mobile phones. I had purchased my first Chinese play while still living in the U.S. in 2004, Tom Online (TOMO), and it promptly went from $13 a share to $27 a share in about 18 months, at which point I sold out. I knew that Tom Online was owned by the same owner as Hutch mobile phones, Li Ka Sheng, who also ran a corporate conglomerate called Hutchison Whampoa. So I researched Hutchison Whampoa, and discovered that they were like the Berkshire Hathaway in Asia. Hutchison Whampoa owns ports, real estate, telecommunication, properties and hotels, retail and energy that had business dealings in 54 different countries, with many of their business dealings concentrated on the fastest growing countries in Asia.
So because I had applied rule #7, Think Ahead and Stay Organized, I knew a correction in the markets was coming. I waited for a significant correction, then purchased the stock. So perform KIM exercises, become more observant, and you’ll uncover great opportunities you would not otherwise. I guarantee it.
J.S. Kim is the founder and Managing Director of maalamalama, a fiercely independent research, education and consulting firm that focuses on providing intelligent wealth preservation strategies.