The Mental Strategies of Top Traders: The Psychological Determinants of Trading Success

4.9. CASE STUDY ON EXPECTATIONAL ANALYSIS

Greg is an aggressive high-risk-taker. He is inclined to keep barreling forward, and this shows up in his propensity to keep buying momentum in growth stocks. In this dialogue, I am discussing with Greg how he can develop a differentiated view and identify the path to getting paid. The dialogue outlines some critical points for understanding expectational analysis and the kinds of distinctions that a PM must make.

Greg:

I have been trying to build concentrated positions to improve my profitability. Obviously, I am taking a lot more risk there. Basically, four names all went against me on the same day. What did I get wrong? They were all earnings-related calls. What I got wrong was the expectational side of the analysis. I was expecting that they would do badly, but the market didn't really appreciate that, and one stock went up twenty percent. A crowded position had become a consensus position, and I didn't realize that.

The other ones that went against me were situations where the EPS weren't great. They weren't big beats, but they were essentially in line or better. The stocks went down ten percent each.

Kiev:

Is there any lesson to be learned from this?

G:

The first lesson is that I am now set up. You know I have spent the last couple of days setting up an expectational model. All the warning signs were there; I kind of ignored them. I didn't have a systemized method to say, "That's a warning flag. Therefore, going into earnings I ...