CNBCfix review: Joe Terranova’s
Buy High ushers in austerity
to the thrill of trading
Posted: Friday, January 20, 2012
Many people on CNBC have proclaimed since the 2008 financial meltdown that "buy and hold" investment strategy is dead.
Joe Terranova, a trader on the network's "Fast Money" show, is the latest to spin this thesis into a book, Buy High, Sell Higher, but this one would be more aptly labeled Don't Try This at Home.
The first thing one might question is whether "buy higher" fits the market outlook Terranova describes. "Buy higher" in fact sounds like the ideal strategy for a buy-and-hold market, not an unpredictable or unreliable one in which time horizon supposedly guarantees nothng.
And one might also wonder why Terranova needs the first 2 words of his title when "Sell Higher" alone would seem to suffice for anyone.
But first things first. Terranova's book is short on gimmicks and long on work. That is admirable, to a point. Rather than celebrating the joy of stocks, his book is equally if not more about restraint, caution, emotionless Spock-like trading. Who knew playing the market could be such drudgery and so little fun?
The advice and anecdotes of Buy High are so sprawling, it's unclear what Terranova views as his reader's goal. Apparently, according to Chapter 7, it is to beat the "benchmark," presumably the S&P 500, by an undetermined amount, and "get that extra alpha that you want;" in the Conclusion he suggests it "makes sense" to seek a steady 5-10% a year regardless of benchmarks. It's right to conclude Terranova wants his readers to succeed but also fair to infer that most, given his prescribed workload, would be better off forgoing the excitement/angst of stocks in exchange for an extra day a week of free time and a boring market return.
As with the titles of far too many investing books, the implication of Buy High, Sell Higher is not supported by its content. Terranova's opening pages on the arrival of Katrina in 2005 have almost nothing to do with buying higher but merely avoiding volatile markets. Readers expecting secret sauce about scooping up stocks and commodities at 52-week peaks instead get little more than a homework assignment. Lots. And lots. Of homework. "Perhaps fifteen to twenty hours a week," Terranova writes, and all of that work doesn't guarantee market-beating profits, but merely the ability to "make good investment decisions."
Uncertain of his readership from the start, Terranova wanders between passages written for experienced traders (200-day moving average, PMI, ISM, ROE, ROI) and people born yesterday (the "TV magazine show 60 Minutes"). Buy High may be about making money, but a big part of the appeal of any book is how good of a "read" it is. It feels fair to say that Terranova, though articulate, does not write for a living. The (way overdone) acknowledgments suggest first-time author. The book is too long. The editor needed a much heavier hand. The author comes across like a big-league coach too-patiently instructing amateurs, confident in his advice but implicitly skeptical of his students' ability to hit like Barry Bonds.
A clue to the author's expectations rests in his hypothetical examples of account sizes. Terranova in Chapter 2 speaks in terms of "allocation," as in, someone may decide to "allocate" in a given year a minimum of $50,000 and a maximum of $100,000 to his portfolio. Later there is a reference to a $60,000 account with 4 holdings — all of which maybe implying that those with no more than $10,000 to allocate should stick with an index fund.
Readers of any investing book should rightly seek the author's credentials. Determining Terranova's job description from this book is remarkably difficult if not impossible. It takes 42 pages before he mentions his "current firm," Virtus, and a "team," without explaining his title as listed on the book's flap, "chief market strategist." People who don't know what "60 Minutes" is might wonder, for example, whether a chief market strategist does the firm's trading, or advises traders on market trends, or both, the difference equivalent to whether Terranova is the outside linebacker or the defensive coordinator.
Curiously, Virtus is not celebrated in the book nearly as much as Terranova's old firm MBF, where he describes his title ("director of trading") and duties in 2005 this way: "One of my many responsibilities was to manage risk and to make sure that we never bet the firm on a single trade or event. ... I was dubbed 'The Liquidator' because everyone knew that when I showed up on the trading floor ... my job was to get a trader out of a particular position by selling large blocks of a particular asset. ... Mark entrusted me to see the big picture and to ensure that the firm's risk was properly allocated." Terranova writes movingly of a relative's tragedy and of getting a dog but somehow doesn't find it necessary to detail his educational and professional background, the career decisions he has made, and how he acquired the skills he possesses.
Instead, readers get the most predictable of Street-cred claims: that Terranvoa called the massive stock-market bottom of March 2009. He writes that he concluded a market bottoming based on a Warren Buffett interview March 9, 2009; a Ben Bernanke "60 Minutes" interview on March 15; resiliency of emerging markets, and pessimism that had "reigned supreme" in Q1. He later adds that he detected the momentous market U-turn in part from a tightening of bond spreads and outperformance in big tech such as IBM. Terranova says he devised a bullish plan in an April 2009 blog post called "Embracing Pessimism," yet curiously, his postings on his Virtus blog go back only as far as August 2009, which means the June 2009 update he also writes of posting is apparently not available either.
And, disconcertingly, in a seriously mixed message for what is otherwise a very conservative investing book, Terranova briefly preys upon the Masters-of-the-Universe mentality of many traders and would-be traders, suggesting in his opening pages that the rewards of successful investing are in the fast life: "My colleagues and I celebrated a very profitable 2005 with the ultimate holiday party. We rented out the nightclub Crobar and spent many hundreds of thousands of dollars on a party that I'll never forget. We had such a great year that we were able to hire three pop stars that night: Reina, Rihanna, and LL Cool J. Things just didn't get better than that in the trading game. We had such a great year," he writes.
Learn to trade hurricanes, attend a Rihanna show. For those who question if Wall Street is in synch with life's priorities ...
While some notable pundits appeal to retail investors by insisting the retail investors are being screwed by the Wall Street establishment, Terranova implies individuals should be more like the 1%. In multiple sections he says institutions more than individuals know when to get in and get out. In this book, hedge funds are not, as some people believe, greed merchants sticking it to the little guy, but merely the smart people who "recognized the winds of change."
None of that is to doubt Terranova's credentials as a market professional worthy of distributing advice. The question is why a reader needs this advice over someone else's. Readers are best served interpreting what this book says between the lines (which is, essentially, be careful, and know that this is virtually a full-time job). It's too difficult trying to absorb the occasional quality suggestions that are buried in years-old stock-price anecdotes (the Chapter 1 monstrously endless Continental Airlines technical example is a prime culprit) and another Achilles heel of finance books, endless reading lists (mostly online material). Buy High is equal parts a celebration of Terranova's old firm MBF, the features available at Yahoo finance ... and the art of not trading.
Terranova, a down-to-earth good guy on what can be an ego/testosterone-fueled "Fast Money," in Buy High is far more about trading lifestyle than tactics. Numerous passages are devoted to keeping emotions in check and avoiding trading when they're not. There are interesting warnings about the dangerous solitude of computer trading and losing touch with a team. Anecdotes abound about not being in the right frame of mind for making buy-sell decisions. He recommends "shifting allocations six to eight times a year," but not day-trading. This is not about scoring touchdowns, but avoiding the interceptions and punting. It's steady as she goes, pace yourself, the villain/victim being the aggressive types who plunge into stocks without recognizing the potential loss.
To his credit, Terranova completely spurns any get-rich-quick advice. Unfortunately he goes too far in the opposite direction, conveying that successful trading is hard work and requires trusty associates, something the vast majority of his readership has little time for and virtually negates the need for his book. Often, including in his opening passage, the suggestion is to get out of the market entirely. His most curious advice is to avoid markets on Mondays and basically any day(s) known for unnatural trading activity. While more aggressive investors might tend to view those days as producing the most temporarily mispriced assets, Terranova seems to think most retail investors just get it wrong and that the downside risks of a bad bet are too great.
He also rather curiously claims "Investors should dollar cost average with their stocks as well, especially when the price of that stock is appreciating in value," which seems to actually be a bet that the stock will dip and flies in the face of 1) the "buy high" plan, and 2) the notion that if the stock is rising, it's best to get in as early as possible. (Terranova does offer at least a handful of technical and seasonal trading tips, which resonate as reliable but will not be revealed here out of respect to the author and the acknowledgment that this is a book for sale.)
In some of his strongest passages, Terranova regularly decries what he perceives as the investing quotient of the typical amateur, sentiments that are undoubtedly accurate. He concludes that few have a written investment plan and most can't name the CEOs of the companies they buy. One of the most important paragraphs unfortunately is left to the "Conclusion" chapter, Page 235, where he says 15 to 20 hours a week is "perhaps" all amateurs need to make good investing decisions.
For most amateurs who would like to be more involved in the stock market, probably their biggest obstacle is being at work while the stock market is open. But while chiding investors who don't know the CEOs of the companies they own, Terranova does not actually recommend people use or inspect the products/facilities of said companies or speak to people who work there. Instead his guidelines are technical and macro. He recommends people keep a notebook of important statistical releases and analyst upgrades and earnings reports, but never acknowledges the difficulty most amateurs will have of playing catch-up in the evening and trying to determine what happened in real-time when the ISM number came out.
Terranova, unfortunately, never opines as to the merits of amateur investing. Should most of them be doing it? The gut feeling is probably not, they're unlikely to beat the pros, and their money should be in a CD or Treasury bonds or a conservative index fund. On the flip side, Terranova almost never acknowledges the fun, the free-spiritedness, meritocracy and exhilaration of successful trading. There's a reason people do it, despite strong evidence suggesting they shouldn't, and that's OK (within moderation), a fact Terranova (like his CNBC colleague Steve Cortes in Cortes' own book) should be celebrating.
Terranova may be a panelist on "Fast Money," but the statistical samples in Buy High suggest the book came together at any speed but "fast." Most of the market data and examples Terranova cites are from 2010 or earlier. The book was officially released in 2012. It appears the latest trading activity he references occurred in summer 2011, before European headlines began to drop banks like an anvil. He is most obviously lagging in his chronology of Hewlett Packard, the last price he notes being $43 in March 2011, and there is no mention of the slide to the low $20s, then the HPQ revival spurred by the hiring of Meg Whitman.
The lagging statistics are a sign this book might've struggled coming to market. Most of the greatest advances in human history involve speed. Were Terranova more of a visionary in this effort he might've attempted to give readers a more user-friendly blueprint. What's the fastest way I can tell people how to double their money. Can I give people a book that's readable in 2 hours that helps them beat the S&P 500 with only an hour's worth of work a week. Evidently the answer is no, as he opts for labor-intensive recommendations in a book that ultimately proves a laborious read. Fortunately the editor did try to condense a few tips with breakout boxes and chapter subheadings, but those straightforward recommendations are minimal. Meanwhile, the editor was allowing passages such as this, in Chapter 7 (the boldfacing is done by this page, not by Terranova):
When we talk about weightings, we're looking at two things: a market benchmark (like the S&P 500) and your own portfolio. You always want your overall portfolio to beat the benchmark — otherwise you might as well just be investing in an index fund. Your portfolio as a whole needs to outperform the benchmark. You can tell whether you're beating it in an overweight position by determining whether it is, in fact, beating the S&P 500 (or whatever market index you're using) and asking whether a particular holding is an all-star in your portfolio. You want the biggest holdings in your portfolio to be the best performers. Your overweight holdings should be the all-stars, and the all-stars on your team should command the biggest percentages of your salary cap.
Everything in bold is redundant and should've been deleted. The 4th sentence (it's in bold) either makes no sense or is uproariously simple (you can tell whether you're beating it by determining if you're beating it), and who exactly are you "asking" about the all-stars?
In Chapter 3, readers learn that Ben Bernanke is "chairman of the Federal Reserve," 12 pages after they were told about "Fed Chairman Ben Bernanke."
Someone let the 2005 natural gas chart somehow get broken into a 7-month view and a 5-month view, pages apart.
Despite the shortcomings of Buy High, Terranova, as on "Fast Money," offers something important here — honesty. The easy money of the buy-and-hold days is over, he argues, and most people are going to sell lower. It's no gimme for even trained pros. "I was a failure as a pit trader," Terranova refreshingly admits, and those warnings are worth knowing. Buy High, with tighter editing and a sharper hook, could be half as many pages and half the title. But it's not half-bad.
Buy High, Sell Higher: Why Buy-And-Hold is Dead And Other Suprising Investing Lessons from CNBC's 'The Liquidator' " (2011)