For those who haven't had exposure to this side of Wall Street, I'd like to give a short primer. Sales & Trading consists of various salesmen and traders who cover most sectors, like analysts, and provide vital services to institutional and individual clients.
There are typically three types of traders at bulge bracket firms: 1) Position, 2) Liquidity and 3) Proprietary traders. Liquidity traders have a very very short-term holding span, usually seconds to minutes and they provide liquidity in various stocks the firm makes market in and client positions.
Position traders are those who work with salesmen to take positions on behalf of the client. For example, if a Hedgie wants a position in AAPL stock, the salesman relays that to the position trader who utilizes his/her skills to take positions in a nimble way to obtain the best price possible, without giving away the trade.
AAPL has lots of liquidity so its not a problem, its the small to mid-cap stocks where the trader has to be very careful about, as liquidity is a lot smaller. If a trader was taking a position in small to mid-caps on behalf of a fund like Fidelity's Magellan, it could easily take months to obtain the best price.
Proprietary traders are the creme de la creme. These traders get to trade across a multiple array of products thanks to their superior skill. When you hear Goldman or Morgan's great trading revenues, its usually thanks to Prop traders who are part of the Principal Investments division.
Alright, so now you know the basics of how S&T operates. Now, how do you get an edge like a salesman? As someone who's worked as a sales guy for RBC DS and interned alongside 'em, I'd like to share the "inside scoop".
Its actually quite simple, not easy! but simple. What most of them do is learn one story (usually more than one) and learn it very well. Say for example, I'm selling Tech stocks, I have to know EVERYTHING (almost), not only what analysts at my firm are saying, but all across the street, about that stock. Once I know close to everything about it, it becomes really easy to sell that stock.
But I guess you already knew this, right? That's not an edge. Here's what I like to do, an approach I adopted from what I saw firsthand.
Assumptions:
1) We have a growth philosophy towards investing (i.e. GARP)
2) For the sake of this article will keep a long-only approach
3) You're a long-term investor (though even short-term traders can benefit)
Each week I look at the Investors Business Daily's IBD 100 list. This list contains stocks which are witnessing accelerating growth and have the best underlying fundamentals in their sector.
Next, I like to keep a watch out for stocks witnessing secular bull-markets. In recent years this has been exchange stocks, routers/chips (thanks to online video growth) to name a few.
Once I've narrowed the list down to 10-20 names, I like to read AT LEAST two previous 8K, 10Q and 13F SEC filings and conference call transcripts. This tells me very important aspects of the firm's business- from their operating activities and industry trends to institutional ownership and recent company changes. I like to compare the company with at least two competitors mentioned in the IBD's Stock Rating, this way I know X isn't better than Y in the same sector.
Once I've selected the stocks I like to look at charts of various time frames, from 2-5 year to 2-5 months. Also, I like to look at the options volatility, implied vs. historical 30-day. This tells me when its a good time to take positions and what to expect from the market.
Next, I like to position size by taking a 25-30% position and wait for the market to validate my thesis. When it goes up, depending on if its just a trader or an investment, I like to average up. For long-term stocks, its usually when it rises more than 5-7% and for short-term trades its anywhere from 1-2%. Only in very unusual circumstances that I average-down, otherwise always averaging up.
Lastly, I always like to keep track of "whats up" with my position, as anybody would do. I like to operate a concentrated portfolio consisting of the best secular bull-market stocks which I've high conviction in. Diversification maybe great, but I agree with Warren Buffett that, "diversification is protectionism against foolishness".
Quick Recap:
1) I look at the IBD 100, narrow down to stocks witnessing secular bull/bear markets, usually its 10-20 stocks. Then, I like to know "everything" about at least 5.
2) I've learned this tactic from salesmen I've interned with. If you know the story inside out, your ability to invest and trade around increases a lot more.
3) Like AAPL, SHLD & GS. I almost know every fact about 'em and understand whether dips are to be bought and/or new highs are to be averaged up to.
4) For intra-day trading I rely heavily on technical analysis and have developed a small edge with a few Fibonacci extensions.
I like to KISS: Keep It Simple, Stupid.
I hope this helps.
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