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A Disciplined Trading Rule


What I have learned is that good rules are even better and last much longer than good ideas.


I wrote about a possible paired trade against my long Las Vegas Sands (LVS), to add a short Station Casino (STN), here on October 27th after returning from a STN property. I had put on the long in the middle of September, and as food for thought while I dined on some Green Valley sushi, I mentioned its owner as a possible short to pair it with.

Ultimately I decided STN would be a poor short based, as I wrote, on a terrible reason (subjectivity) - that the STN property was my favorite place to stay, by far. According to today's bid, apparently I'm not alone. The second reason not to short it was based on a much more sound reason – a disciplined trading rule.

In rallies be net long or neutral.
In corrections be net short or neutral.
In either, don't be a hero and fight the prevailing winds.

Do I believe the consumer is as strong as some of these remarkable bids indicate? No. Were there some awfully compelling fundamental reasons to put that short on? Yes. I had done a lot of work on the name making a do-nothing-decision even harder. Thankfully, I know when to respect my rules over my ideas.

I think good trading is a wicked brew of two components which are very difficult to combine:

1. Setting a course on an un-crowded path based on original thinking and calculations,
2. But adjusting your sail (net positioning) based on the prevailing winds whether you agree with 'em or not, so that you have a hard time being wrong for long.

I liked the idea of pairing my long with a short but ultimately I didn't do it because the winds (stock action) I carefully monitor told me to be long or at least neutral (and certainly not short.) The risk was to the upside. The agreement at the time was on the consumer's demise setting up only one possible surprise. Even though I would have been among those surprised, acknowledging this and making a rule was a lesson I had learned the hard way.

Macke, quicker than most, correctly pointed out several weeks ago I believe, that it wasn't only a risk being short in his space (a call he nailed) but it was becoming a unique risk where some of the best short candidates might be the ones receiving surprise bids.

The nice thing about relying on your own research, and a pairs trade, is that you don't have to be right twice. Even had I put that disastrous short on, I would be down 40% on STN as of today, after the explosive bid, from the day of that article. My LVS long is up 50%. Not a bad way to live in this kind of market (up 10% while the market is up 5% since that long went on) – and that's including one of the worst shorts you could have put on recently.

What I have learned is that good rules are even better and last much longer than good ideas. All of my rules were born from mistakes so I've had numerous christenings. Each were tuition payments to the college of trading I once was told. I've paid for more semesters than Tommy Boy. "Helen…you look like a Helen…well, let me tell you why I suck." -TB. For me, that kind of acknowledgment of a weakness is more important to find than working on a strength.

If (when) the trade winds shift, I will be much more interested in pairing 'em up, but until then the risk has been to the upside.

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Position in LVS
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