StockTickr interview with Bill Cara [Redux]

For the eighth interview in the StockTickr Interview Series (RSS feed), we spoke with Bill Cara who has had a lifelong career in the markets. He maintains an excellent site where he tirelessly posts insightful commentary usually several times a day that educates us all.

Bill has had a diverse career in the financial industry ranging from large institutions to building trading business from the ground up. Bill exudes intensity, a quality that you can’t help but admire.

Read on to see how Bill approaches the markets, why he doesn’t need stop losses (he watches his trades so closely that he doesn’t need them!), and how his mental trading zone makes market data dance in front of him.

StockTickr: Tell us a little about yourself, Bill.

Bill: I’m retired now but preparing to return for one final project – to develop a “Trader City” in Freeport, Bahamas. I want to build an international trading community on a 500-acre campus, away from the problems of the world and the politics, where a couple thousand of us will just focus on trading global markets. Details will soon be released on my blog (www.billcara.com).

I presently live on the Lake Ontario waterfront, to the west of Toronto, where I trade and blog when I feel like it, which I do most days. I don’t do much else.

In the 1980’s I founded, built, and managed the Eastern Canada office of Canaccord, which is Canada’s biggest independent full-service broker-dealer, and was the key behind the trading terminals called Star Data.

I left Canaccord to set up my own Limited Market Dealer where I financed Star and took it public. I did the same for Genesis Microchip, which started in my office, with $800,000 capital from me and three or four associates. Genesis is now a major player on Nasdaq.

Then I built a trading business in Nassau Bahamas in the ’90s before coming back to Toronto, where I designed the technology and business plan for what became Canada’s biggest independent electronic broker, Qtrade Canada. As CEO, I moved to Vancouver and hired the team, built the systems, etc. Six months later, from having no office or telephone, we were fully licensed across Canada, except Quebec, and had agreements with over 60 other financial institutions to be their broker of choice for several million Canadians. The man who at the time was Chief Investment Officer, Global Asset Management, Deutsche Bank – about $750 billion AUM – was a personal investor and director. Later after his company made a big investment in us, I was told I wasn’t needed. So I retired, still as an investor there.

But, when I start something, I finish it. I’m intense, and I work hard.

And, because I am intense, and have a background of considerable success in financial services, people at Barron’s wonder why I offer my knowledge free. But I’m at that point in my life where I want to help others – people who share my values. So what I do in the blog is free, and I’m doing it for My People. In doing so, and having fun, Forbes called me “eccentric” – but they did give me their ‘Best of the Web’ accolade for each of the two years I have been blogging. And my blog numbers are phenomenal – even if Alexa says they aren’t. Alexa is another joke from Amazon.com’s Jeff Bezos, by the way. I’m averaging 10,000 hits an hour, from about 40,000 unique servers, in 139 countries.

StockTickr: How did you get started trading stocks?

Bill: My Dad was an electrician whose hobbies were golf and trading. I liked hockey and trading better and took the Canadian Securities Course for the first time at the age 16. At university, I wanted to be a doctor so I started at the University of Toronto and was captain of the hockey team at New College. But I decided to switch to business school in Waterloo and at WLU I won the Wall Street Journal Student Achievement Medal. That gave me the background.

But I never felt comfortable going into the securities industry until I first got to understand myself, acquire some business experience and skills, plus self-confidence. I became a professional accountant first, with CA and CMA designations, and then started my own company in consulting. I had accounts with a couple of brokers. Later, when I was 38, I started at Dominion Securities in another career switch. Intellectual curiosity is what drives me.

I made sure I went through all the departments, from retail and institutional sales, fundamental and technical research, corporate finance, and executive management. I got to see it all, until 5 years later, I was building out the penthouse floor of the Toronto Stock Exchange tower for Canaccord on a personal contract with Canaccord’s Chairman Peter Brown. Along the way, I saw how stocks were bought and sold, and what were the drivers that moved prices.

StockTickr: What is the most common, but easily correctable fault you see in traders?

Bill: This is important to me. I am passionate about trading and teaching others how to go about it so they can succeed on their own. You know, anybody can beat 90 percent of the best of Wall Street if they just run their portfolios like a business – be aware, acquire skills, use common sense, and trade decisively. But they make too many mistakes, not just one.

Too often trading is the result of being impressed by stories from the sell-side. It’s like traders just let somebody else run their business. You do that and other people will get ahead and you won’t. Just remember, the world is built on b.s. for a reason. In trading, it’s actions, not words, that count.

Traders must learn that they trade prices – which could be prices of stocks, bonds, forward contracts, physicals, currencies – but they don’t invest. They are not going to buy a company like they buy a home or a car. They may buy services of professionals who trade in securities, but those are financial products like mutual funds, and they buy these products from a salesperson.

In the market, they buy prices, which is not too hard to accept once you think it through.

StockTickr: Most traders have a horror story about losing their shirts when they first started trading. What’s yours?

Bill: I once lost the value of shares – over a million – when a broker-dealer closed down and I didn’t get my positions for over a year. I’ve also lost a few physical certs over the years, which doesn’t happen today. But in trading, there were all the usual b.s. stories from salespeople that I listened to until I figured out what they were doing. It’s all part of learning, and it can be expensive, and was. I lost $115,000 in a film deal, and $60,000 in a small tech company – the biggest one I won’t even talk about – but I knew all those people personally, so today I won’t invest where I know the people. Never. I need to be totally independent and objective — and I guess I’m too nice to people I know.

StockTickr: What single lesson did you learn along the way that has helped you the most in your trading?

Bill: I watched traders place their trust in systems like Elliott Wave, and go broke until they realized that the Fibonacci concepts behind EWT must be studied as much for qualitative reasons — as part of an overall study of fundamentals, quantitative measures, technical indicators and macro-economic forces that come to bear on share price movement.

StockTickr: Describe your style of trading. How long do you typically hold stocks?

Bill: I manage a portfolio of positions in a core group of what I call quality companies. These are the ones that are financially strong and have industry peer-beating metrics, like earnings and dividend growth rates, profit margins, etc. Then I study the drivers of the price of their stock – which I already mentioned.

Probably the key is to study trends and cycles of the price series data – from long-term, say 4 or 5 years, to intermediate-term, say six months to a year, to short-term, say 1 week to maybe a quarter year.

The average hold for a stock is probably a month. In my books, the word “overtrading” does not exist. We all should trade to have more wins than losses, and the average win should be bigger than the average loss. Taxes should play a zero role in decision-making.

StockTickr: What’s your exit strategy for winning and losing trades?

Bill: I use an options strategy called “overwriting”, which simply means that for your core portfolio, you write calls when the price gets into what I call a Distribution Zone, and write puts when it gets into an Accumulation Zone.

I let the stock be taken from me – at a profit of course – when the stock is called away at prices that exceed where I think they could top out, and I let the stock be put to me at what I think is a fire-sale price. If I’m wrong, I simply take the option premium and apply it to my cost base for those core positions.

All the time, my objective is to lower my cost base. That way, for the dividend payers, my cash on cash return becomes impressive – like with an incredible real estate deal.

I don’t use stop orders because I watch positions like a hawk, but many traders ought to. If I miss a top, I figure if it is off from its peak more than say 6 percent in four months, I made a mistake. But that’s a judgment that could change from stock to stock.

StockTickr: You’ve seen a lot of traders in your day. Do you believe good trading can be learned by anyone or does it take a special type of personality?

Bill: There are some cultures of the world where trading has been ingrained – people in Lebanon for example – but for the most part trading is an acquired skill. Most people can acquire it if they go about it seriously and they’re humble. In trading, arrogance kills.

No matter what the skill level, effective trading can only be done by people who trade within their limits – psychological, emotional, financial, general awareness, and time. We all have limits. If we stay within them, we can succeed. Traders who fail to recognize their limits, who aren’t humble, become losers for sure.

StockTickr: What 3 books do you recommend traders read?

Bill: Pring (an old friend) for understanding technical analysis and Graham and Dodd (the book I learned from) for understanding how to relate corporate fundamentals to market prices, are good ones. For an understanding of quantitative analysis and macroeconomics as it pertains to market prices, there are some good websites.

StockTickr: Other than your own, what are your 3 favorite blogs?

Bill: Every day, I refer to Econoday.com and the economic data and reports from Evelina Tainer. Here’s the link to the Nasdaq site.

Other sites I use daily are amex.com for ETFs, adr.com for foreign stocks, investertech.com for charts, INO.com for commodities and futures, and ADVFN.com for a number of things. In every case, I’m looking for data.

Blogs, however, are personal, and I’m the last person in the world who would go to someone else.

I am my own person. I never would have advertising on my blog, just like I won’t ever take a pamphlet from somebody in the street. It’s just noise, and none of us need noise. For years I could never wear any clothes that had corporate names even.

I don’t want to be influenced by anyone because I know the only thing that is important to me is the current price of what I am trading and the trends and cycles of the price series.

The rest I leave up to my own wits, and I know I need to be clear-headed to succeed. Nobody is going to do it for me.

StockTickr: What is your typical R-value per trade? i.e. what % of your portfolio do you risk with each trade?

Bill: Probably about or less than one percent. On occasion, it could be up to 3 percent. I have enough self-confidence to not worry about the number of trades I do. But I figure if you bet the farm on one trade it could be a disaster.

StockTickr: What technical indicators could you not live without?

Bill: RSI probably. I use it across industry groups, sectors, and countries. I’d rather put my time looking into nuances of RSI than trying to study a large number of indicators. Granville talked about the weight of the evidence, but frankly, he was loading the scale with much the same rationale. Stochastics for example is almost the same as RSI.

It makes immensely more sense to put your time into studying change in price action across the whole market than using all the available indicators on a single price series. Prices don’t happen in a vacuum. It’s up to us to find the drivers.

StockTickr: How do you think the market has changed over the last several years? How have you adapted?

Bill: There are so many traders of derivatives today that volume studies have become meaningless for the most part. Also, algo trading probably accounts for 75 percent of all NYSE trades, and computer algorithms come up with new decisions every few minutes, so I’m left wondering how anybody can think that ‘buy and hold’ could be effective.

But the fund managers who have access to all these black boxes aren’t beating the market, for the most part, so they are missing an understanding of the big picture.

Markets emulate life. Things happen faster today. We all have to adapt.

StockTickr: Do you recommend that traders backtest?

Bill: A trader who won the U.S. Trading Championship once told me that he had tested every back-testing system available, and none worked.

Traders have to focus on how the usual drivers are affecting prices. Each driver is changing constantly.

We’re not dealing with a game that has a finite structure to it where game theory can be applied to the variables. What we are dealing with is nature – the balance of nature – and too many things change to tell us for example when the next hurricane is going to hit, and why, and how bad, etc. The biggest computers in the world can’t do that, and neither can all the academic researchers in the world, using all the computers of all the universities of the world, be programmed to win all the time in the market.

In fact, like Long Term Capital Management, which was supposed to be the ultimate perfect technology from academia, I believe all academic approaches are losing ones. It’s all marketing b.s., just like all the different “investing” styles – GARP, value, etc.

StockTickr: What advice can you offer traders who are just starting out? Should they paper trade for a while or dive right in?

Bill: I don’t see how paper trading helps a trader other than teaching them how to use a particular trading platform. And the best technology in the world doesn’t teach you how to win either. Michael Schumacher won his last two car races. Most of us can drive but put us behind the wheel of Michael’s F-1 car and into a race and basically, 100 percent of us would fail. And the ones who operated outside their limits would kill themselves – sitting in the best systems the world has built to this point.

Take it slow, make it small, build self-confidence, find a broker who is a good advisor and talk to the person. Learn as much as possible from as many sources as possible and then talk to your advisor. If you can’t find a firm that wants your small account, speak to a branch manager at one of the big ones, and ask for a nothing personal reference to a smaller company with good advisors that may take small accounts. Maybe the manager will see you are serious and will assign your account to a junior broker. But be square with the advisor and direct the discussion in ways you feel most comfortable. Over time, you’ll become more active. Later you can do the trades yourself if you have the time.

StockTickr: What do you like best about trading?

Bill: Everything. Once when working at Dominion Securities Investment Management I once never left the office for three days until late Sunday because I had to go home to change before my colleagues came in on Monday.

I get more intense at trading than probably anybody you’ve met. I’m not talking about emotional intensity like throwing phones, etc, – but intellectual intensity. What I love about it is that you get into a zone – a mental state – where you start to hallucinate in a sense, balancing more inputs than anybody thinks possible.

But to me, it’s a dance. All that data just flows.

StockTickr: Thanks, Bill!