Buy High, Sell Higher: Joe Terranova on Individual Traders in the New Market Environment

Sam Mattera: "You are listening to Benzinga Radio. I'm your guest host Sam Mattera, and today we're talking to Joe Terranova, frequent contributor to CNBC Fast Money and author of the new book, Buy High, Sell Higher. How are you doing today, Joe?"

Joe Terranova: "Sam, I'm doing great, and I thank you and Benzinga for the opportunity to have me on the program. I am a long-time fan--I follow you guys--and I really think you guys do excellent work. You really provide market content that is top quality."

Sam Mattera: "Thank you so much. Tell us a little about the book."

Joe Terranova: "Sure, the title of the book is called Buy High, Sell Higher. The title stands out, it really grabs you: why buy and hold is dead, and other surprising lesson from CNBC's "The Liquidator". And I think most folks kind of make a general indictment on the book just by [the title] Buy High, Sell Higher.

But once you get inside the book--once you get the content of the book digested and you find value in it--you find what it's all about is investing with confidence. It's about providing real case studies over the 20 years that I've been around, for myself and for many of the traders that I've managed along the way.

It all is trading and investing with confidence and learning to execute like a professional. And that's something that Main Street America, unfortunately, is not proficient at doing. And, in essence, the marketing material of Wall Street the last 20 years doesn't want them to do it."

Sam Mattera: You said investors and traders--but you did say it deals with the death of buy and hold. Is it orientated towards more people that like to day trade and swing trade? Who is the general audience for the book?"

Joe Terranova: "You talk about day trading, and I talk about the difficulties of day trading in particular in 2011, and now the 2012 environment. In 2011, much of the investment and trading community was introduced to the phrase “high frequency trading.” And that's the evil enemy, I think, of all of us.

Unfortunately, much of the volume that's transacting right now is high frequency trading. So those trying to execute as day traders are finding it gets much more difficult than they did in the past. I think day trading right now is like trying to fight Muhammad Ali with two hands tied behind your back.

That being said, it works for some people. It does not work for me. Buy and hold--the Warren Buffet type of investing--again, it works for some people, [but] it doesn't work for me, and it doesn't work for most people. What you have to understand is that Buffet has a tremendous balance sheet. He has a balance sheet that the majority of America doesn't have, and without that balance sheet, you cannot invest like Warren Buffet does.

So, what's the new world, what's the new paradigm? It's a hybrid. It's a hybrid between day trading and buy and hold. It's a hybrid that becomes, in essence, a call to be far more active--to be like the guy sitting in Goldman Sachs's prop desk; to be like the guys sitting at Paul Tudor Jones's hedge fund; to be like we are on Fast Money, where we are far more active in the markets.

We're taking positions, we're trading around positions--something that investors don't do, [and] traders really don't do. So there are times where you may be overweight, or underweight, or market weight in a particular asset. No one talks about that. And I think it's a new, novel way to approach the markets."

Sam Mattera: "There's been a lot of volatility. I watch news all day, and I see all these mutual fund outflows--people bailing out of mutual funds, the retail guy getting out of the market. You talk about a new paradigm. [Do] you see this lasting for a while? Do you think this is something that traders are just going to have to come to terms with? Or do you think this is just a temporary phenomenon, maybe for just the next couple of years, given all the economic uncertainty in the globe?"

Joe Terranova: "Sam, the candid answer is this: I've been doing this for 20 years, and what I will tell you is if you don't do your homework, if you don't treat trading, if you don't treat investing--and I don't even know what to call this new hybrid--but whatever we are going to call it in the future, if you treat it like a hobby [and] don't treat it as a business, then you're going to fail.

Whatever the conditions are going forward--successful investors, they are able to change to the market environment. The market always changes, and successful traders and successful investors know how to change along with it. So wherever we're evolving to, the person who reads the book, the person who stays in the market, needs to understand [that] they need to become more organized.

So the concept of--we talk about it in Chapter 3, keeping an investment calendar--why wouldn't you do that? You do it for the rest of your daily activities. I know my wife has one in our kitchen. You've got what the appointments are for the doctors, the dentists, when's the kids soccer game and lacrosse game.

Why don't we do those same types of things with investing? We talk about the introduction of high frequency trading and the impact of volatility. Do you have an investing team? Do you have others around you, or are you doing it by yourself? If you're doing it by yourself, you're going to be unsuccessful. It's a way of looking at the market, and I think it's a call to action to be more active [and] more understanding of the new world.

There are no barriers to entry, unfortunately, in our business. It's not like you have to go and pass the bar exam like you do to become a lawyer. Basically, you can pop $25,000 in any brokerage account you want and start trading away. That's the wrong approach.

You need to be like Derek Jeter. Think when he got back, when he got his 3,000th hit. What did he do first? He got injured. That was the best thing that happened for him, because he went down to Tampa, he worked in the cage, he worked on his hitting stroke, he practiced--and that's what investors need to start doing. Practicing more, and then going trading. They need to be armed with far more tools in their disposal than they have in the past."

Sam Mattera: Do you lay out any specific tools?

Joe Terranova: "Absolutely, absolutely. First of all, right now, and this is something I have done over the course of the last 20 years - once Thanksgiving hits, I'm working with my team, to getting... to have a strategy in place for 2012. Most people don't have a strategy for 2012. They're just going to change it up on the fly as conditions warrant.

Well, I spoke before about changing to the market environment. That basically means understanding your strengths and weaknesses and where you want to invest in a particular asset. But as Europe evolves, as conditions in China evolve, [and] as conditions domestically evolve, you have to know well in advance: well, if China's going to have a tightening policy, or China's going to have a monetary easing policy, what assets do I want to look at? What time, seasonally, do I want to be invested at an Overweight structure to those particular asset classes?

Again, it's about organization. And it's about treating your portfolio - and I talk in the book about how I treat my portfolio - so, I make sure it's structured. I hold no less than 9 positions at any particular time. And I determine at the beginning of the year that I'm not going to do that. I hold no more than 22 positions. I talk about that in the book, and I think for those who try and hold more than 22 positions, it's a struggle. It's too much information flow to digest.

I talk about, in the book how I don't like to make big decisions in the market on Mondays. You talked before about mutual funds. Mutual funds, basically automatically on Mondays, go into the markets, right?"

Sam Mattera: "Yeah."

Joe Terranova: "I want investors to digest the information over the course of Tuesday and Wednesday, and then maybe by Thursday, you got all the information that you need to make good decisions. My traders that used to trade in the oil futures pits... on Mondays, they understood. They took the lightest positions possible, and then they basically put the pedal - you know, they hit the gas pedal Wednesday and Thursday - and they want full throttle, because they had all that information at their disposal, by Thursday.

Sam Mattera: What do you... I mean, what's your approach in terms of conflicting information? Like, I think it was last week we had job numbers came out [and] they looked a little bit better than what was expected. But the GDP was a little bit worse. How do you digest - you know, do you have like a personal setup for what information you put [up], in terms of priority?

Joe Terranova: Trust yourself and rely on your instincts. At the end of the day, you're going to take the loss. No one is going to bail you out. You're the one who incurs the loss. So you work with your team, you have a playbook, you have a strategy in place, and you understand that some times certain conditions are far more impactful to the marketplace than in the past. So you talked about GDP right now. And it's now a known variable that the U.S. itself is the best block on the house. That's the term that we hear all the time. Right, Sam?"

Sam Mattera: "Yeah, yeah."

Joe Terranova: "U.S., the best block on the house."

Sam Mattera: "Yeah, the cleanest shirt [or] whatever."

Joe Terranova: "Right. Yeah, there you go. The cleanest shirt. But, you know, our GDP growth is going to be better than every one else. OK. Is it good enough? Is that good enough to this environment? So much of what I'm doing right now is a defensive type of strategy. So, a defensive type of strategy, except at owning at an Overweight position, oil. Of which I'm a big believer that, you know, the conditions currently warrant being Overweight oil. And then, some select technology names. But overall, it's all about owning these big, large cap names - and tell me where you can get dividend growth, and tell me where we're going to get EPS growth going forward into 2012.

You can't dismiss the concept of globalization when it was so important to the investment world prior to 2011. Now, in the 4th quarter of 2011 - OK, we all get it. The U.S. is the best block on the house. But I don't know necessarily that's going to be good enough. So you have to have a fundamental understanding of the conditions as they potentially may change, and go back and rewind your playbook. And really, it's about identifying tailwinds, and what potentially the headwinds are going to be. So, GDP resurgence: is that a tailwind? I think it's a known entity. That tailwind has probably diminished. And I'm just using GDP as an example for you?"

Sam Mattera: "Well, what do you... you talked about oil. You're bullish on oil in 2012. What do you think about different ways to play oil? I guess there's been some controversy to an extent lately, with like these triple leveraged ETFs, and you brought up high frequency trading. What do you think about different ways to play oil in 2012?"

Joe Terranova: "First of all, and I'll be candid once again. And most people that know me know me to be that way. Most of the information that you get on the oil markets - the people that are providing it don't know what the heck they are talking about. They don't actually understand oil. It's a complex market. It's a global market. It's a physical market. So Sam, I ask you, how would you know what's going on in the physical market? How would you know how many cargos are being lifted out of the Middle East, and where those vessels... what's the destination? Are they going to China? Are they going to Japan?

That information is not readably available, except for the professional trader. And that's, by the way, what I'm suggesting what folks that read my book do - is seek out that information and be more like the guy at Goldman Sachs. You know, the evil empire. But what I want is for you to be like those proprietary traders on Goldman Sachs, because they understand the physical market.

So if right now, if you were to assess - and this has been the condition over the last 12 weeks - there's a tremendous amount of physical oil, [or] cargos, being lifted out of the Middle East. And the destination appears to be that they're going to Asia. So, historically, somewhere around 30 to 35 vessels, and I've mentioned this on Fast Money frequently... that's the 5 year average. And I think it's 30 to 35 - somewhere in there - vessels [that] have pulled out of the Middle East. And we saw this surge where you got above 50. I think there were a couple weeks in October where you were close to 55 - and into November - vessels being pulled into China.

Keep the approach in thinking simplistic. Why is that happening? You have all this concern with what's going on with Iran right now. You have the global superpowers that at some point are going to have to make a decision on sanctions with the Iranians. Well, before you make those decisions, they want to make sure that they have that ultimate asset that everyone needs in place, which is oil.

Black gold, which is what I like to call oil, is far more desirable right now than the yellow metal - itself - gold. And you see it within the European market, the fiscal market itself. Over the last couple of weeks, gold is going down. And I truly believe the reason why gold is going down is because [of] European banks that have to have 9 percent capital on their sheets by June of 2012 because of bailout three. I truly believe they're selling holdings of gold, but not many people are selling oil.

Oil is the last thing you want to sell because it's the one thing you want to own the most. So I think oil is at an Overweight. I think you're 100 percent right that it's been difficult to understand how to play oil. I think the simplistic way is to benchmark it against Brent Crude oil, because that's the global barometer for what oil really is - that it takes the temperature of the sentiment of oil itself.

I think you look at those who have proven reserves. I think clearly those types of names work in this environment. I think when you look up north and understand the capabilities of Canada - look at the Chinese doing another acquisition up in Canada - once again, I think you begin to have a real clear understanding of how powerful this oil trade potentially has been. Very quietly, you've got Chevron and Exxon Mobil up over 15% for the year. There's a reason why for that.

And you know, obviously the oil service names - that's more of a higher, beta type of play. But I think you just go straight OIH OIH on that, and that's the best way to get the exposure. This way, you don't have to get into the difficulty of trying to pick which on in particular you want to own."

Sam Mattera: "Ok, well, you know, next year starts the beginning of a new trader year. What's your outlook overall, then, for the global economy? I mean, do you see a slowdown in China having a negative affect? What do you think..."

Joe Terranova: "The slowdown has already happened."

Sam: "OK, so you think we're already priced in?"

Joe Terranova: "No. Well, here's what I think. I think the world right now suffers from the second crisis of confidence. This time, it's a global crisis of confidence. I think the last crisis of confidence, you know, was back in Jimmy Carter's days. This time around, on both sides of the Atlantic - in the U.S. and in Europe - the student council is making the decisions. And that's the worst possible condition.

So domestically, here, think about when the market last fell apart. It fell apart when Boehner and Obama, on a Friday afternoon in late July, you know, just said, ideology has become a religion, and we're digging our heels in. And we'll decide this, and we'll let Americans decide this in the 2012 election. That's the wrong thing for the country at this time. You look at the direction of this country, most people... I think somewhere around 17 - one seven percent - are actually happy with it. So, there's a tremendous amount of frustration, and I think there's a tremendous amount of ineptitude on the part of our policymakers here in the U.S. The only person that I think has actually done a good job has been Bernanke.

Then you go across the pond, and you look at what Europe has done. And in keep in mind and remember, Europe told the rest of the world that U.S.A. didn't know what they were doing with quantitative easing. Jean-Claude Trichet fought that throughout 2009. He didn't want to ease like Ben Bernanke did. In fact, people don't even realize this. In April of 2011, the ECB raised rates. When you think about that, with the environment we're in now, that is just a classic policy mistake, along the lines of what you saw in 1937.

So, all for one, one for all. That's what Europe needs. Obviously right now, it's not all for one, one for all. It's all for one, one for one. I think, at the end of the day, you've got bond vigilantes going after Italy's bond yields. And I think the ECB has to be the barrower of last resort. They need to do, in essence, what the Swiss National Bank did with their currency and cap the bond yield, and tell the world: this is what the cap and the bond yield is going to be, and they'd actually have to buy less bonds if they do that. So with all that crisis of confidence in place, I still think the right portfolio strategy is to be defensive, to go defensive. So I said before - and I talk about it in the book - I have a minimum of 9 positions, maximum of 22 positions. I hold, right now, 9 positions, and I'm looking to add risk. And I'm looking to add risk when the tailwinds emerge in 2012.

What are the tailwinds going to belie? You mentioned before, China. China went through a tightening cycle beginning in November 2010. Right now, China is easing. They're beginning the process of easing. It generally takes 6 months for global demand to pick up based off of an easing in China. So, my expectation is somewhere around the middle of this year, that will evolve into a tailwind. I think, domestically here in the U.S., at some point we'll begin to price in the eventual outcome of the election well ahead of that. And I think when you look at labor conditions in the U.S. right now, you're beginning to see the suggestion that it is beginning to improve, and I think that provides a tailwind.

But there's no reason why right now - and I talk about this in the book, and it's what people don't do - focus on how much you can lose, and not how much you can make. And that's what I'm doing right now. There will be plenty of time to chase and go Overweight, after a lot of the high beta, go-go type names. But I have to have the confidence - and the understanding - that the all clear is set into place before I get after those asset classes.

And I don't feel it's there right now. I'm not short. I'm not positioning for the short side. I think December 31, 2012, the markets are higher than they are December 31, 2011. But, right now, I'm holding a defensive strategy."