The Swinger’s Lifestyle Explained – Part 2

By Gil Morales, Managing Director
MoKa Investors, LLC

Another current myth about swing-trading is the idea that it is only applicable to the current market environment. My own experience proves this to be wrong. In 1999 I was running only two accounts, the internal William O’Neil + Co., Inc. account where I was paid 10% of the profits as a bonus, and my own personal account. For the record, at the time I was a Vice President and Manager of the O’Neil Institutional Services group where we advised over 700 of the world’s top institutional investors and also served as an internal portfolio manager responsible for managing a portion of the company’s own money.

The O’Neil company account was much larger than my personal account, which meant that I did not have the flexibility of swing-trading around core positions. However, I was easily able to employ this idea of actively trading my stocks while holding core positions in my own account. In late 1999, this proved very effective, as I was able to achieve a return of 1,001% in my own account vs. a 516% return in the O’Neil company account.

What accounted for this difference? Simple – the ability to actively swing-trade around core positions enhanced my returns to the tune of about twice, or “2x” as we might say today, what I achieved in the much larger company account. In this case, the proof is in the pudding, and that was during late 1999, perhaps the most strongly-trending bull phase in modern market history.

I often hear from individual investors who try to make the case that sitting and holding positions is optimal, but in practice, when done right, active trading around core positions can materially improve performance. This, of course, is not without its risks, and does require a certain amount of trading skill.

I must chuckle when I hear or read someone say that “if Jesse Livermore were alive today he would be sitting with stocks like Amazon.com (AMZN) and Nvidia (NVDA).” This is sheer speculation at best, and utter nonsense at worst since we cannot know with any certainty what Jesse Livermore would be long in today’s market. But what I do know from having read just about everything I have could get my hands on that has been written by or about Jesse Livermore is that he employed a variety of techniques, both long and short.

He did not always buy stocks with the idea of playing an intermediate trend (and we certainly know that he did not use CAN SLIM(R) rules). In fact, the essence of what I have called “Jesse Livermore’s Century Mark Rule,” derived from his discussion of his own trading in Anaconda Copper back in 1907 in the book, Reminiscences of a Stock Operator, is that it was a swing-trading type of set-up. He used this rule in an established leader for the purpose of scoring some fast points in a stock as it was first moving above a key round century-mark number like 100, 200, 300, etc.

Livermore also made reference to “taking some points” out of a stock’s short-term thrust, either long or short. He often bought reversal patterns, and did not buy breakouts, average up his positions, and then sit with them for the “long-term” every time. As a talented and capable tape-reader, he remained flexible and attuned to whatever opportunities were at hand in real-time. He then played them as best he could, whether it meant sitting tight and being right, or simply extracting a good number of “points” out of the position before closing it out, long or short.

So, while we can debate the merits of swing-trading, or active trading around core positions vs. “sitting tight and being right,” my own experience bears out that the former, not the latter, can produce bigger returns. And this is precisely what I did in the last 2-3 months of 1999, achieving a return in my own account that was 2x what I achieved in the O’Neil company account simply by adopting this swing-trading or active-trading around core positions approach.

But as I said, it is not for everyone, particularly those who do not have the time or ability to watch the market as closely as I am fortunate enough to do. We also know that Jesse Livermore spent his entire day locked away in his trading room, in isolation, standing next to his ticker-tape machine as he deciphered the price/volume action of stocks and the general market in real-time each and every market day.

So, those who believe that swing-trading or active-trading is somehow in violation of some virtuous investment ethic of “sitting tight and being right” are simply thoroughly ignorant of the process. But for those who have the skills and the time to do so, such an approach can be quite profitable, and my own experience is living proof, both in the “parabolic 90’s” as well as in the current choppy QE-infused market environment.