'Buy High Sell Higher' - A Review Of Joe Terranova's Cutting-Edge New Book And His 2012 Outlook

by: David Alton Clark

"For 365 days a year it's game seven!" says Joe Terranova, "That is my mantra for 2012. You must remain focused at all times."

Joe Terranova is Chief Market Strategist for Virtus Investment Partners and a lead panelist for CNBC's Fast Money program. Virtus Investment Partners is a Hartford based asset management firm with over $30 billion dollars under management. Prior, Terranova spent 18 years at MBF Clearing Corp., rising to the position of Director of Trading for the company and all of its subsidiaries. In this capacity, Joe managed more than 300 traders and support staff for MBF, one of the New York Mercantile Exchange's largest firms.

During his tenure with MBF, Terranova is perhaps best known for his risk management skills, honed while overseeing MBF's trading operations during some of the most calamitous times for the US markets, including the first Gulf War, the 1997 Asian Financial Crisis and 9/11. During those times there was never a loss. In fact, the firm grew profits. Joe graduated from the Peter J. Tobin College of Business at St. John's University in 1988 with a B.S. in Finance.

Terranova recently penned a book entitled, Buy High Sell Higher. The book reveals counterintuitive methodologies empowering main street investors to think and execute like professionals. Here's a short video highlighting the essence of Joe's trailblazing approach detailed in his book.

I followed Joe for many years as a viewer of Fast Money and began following him on Twitter at the beginning of 2011. (His Twitter handle is @terranovajoe.) Joe provides amazing highlights of his daily trades and expert insights regarding market dynamics. I began corresponding directly with him on Twitter and this was the genesis of our acquaintance. Joe provides expert market analysis in his Virtus investment blogs as well. The following are few excerpts from Joe's book to whet your appetite. We'll be having more from Joe soon, including his 2012 Outlook, an interview, and monthly updates of his thoughts on current events and recent trades.

The following is a short excerpt of Joe Terranova's forward look at the markets for 2012. The full version located on his blog covers the following tickers: iShares Barclays Aggregate Bond (NYSEARCA:AGG), SPDR Dow Jones Industrial Average (NYSEARCA:DIA), PowerShares QQQ (NASDAQ:QQQ), SPDR S&P 500 (NYSEARCA:SPY), iShares FTSE/Xinhua China 25 Index Fund (NYSEARCA:FXI), iShares S&P India Nifty 50 Index (NASDAQ:INDY) and iShares Barclays 20+ Year Treasury Bond (NYSEARCA:TLT).

From Joe's blog entitled Guilty Until Proven Innocent:

The crisis of confidence within the global capital markets that began last summer grew in intensity over the second half of 2011, forcing money managers to favor defensive positioning. Going into 2012, political gridlock, fiscal constraints, and monetary missteps remain strong headwinds. Student council-like decisions from policymakers on both sides of the Atlantic continues to frustrate investors, and I expect risk assets will continue to be viewed as "guilty until proven innocent" for the time being.

For the first quarter, I see no reason to switch gears from the defensive strategy I have advocated since the fall. A year ago, I was excited about the opportunities presented by the first and second quarters. This year, I fear the greatest risk for a capital markets decline will be in the first quarter. "Risk off" remains the trade (possibly for the first half) based on my expectations for further volatility surrounding both the European debt crisis and lead-up to the U.S. presidential election.

Sometime in the second half, if not sooner, I expect China's monetary easing tailwind to hit stride; Europe's debt situation start to sort itself out (perhaps with the help of an ECB-led large-scale sovereign bond purchase), and the outcome of the U.S. election to be priced into the market. As market sentiment improves, I expect a historic reallocation trade out of safe-haven Treasuries into risk assets. I also expect equity markets to end the year higher in 2012 than they started.

Historically, in the year of a presidential election, the equities markets have done well. In the election years between 1932 and 2008, the S&P 500 produced an 8% average return. That sounds promising for 2012 until you consider that the third year of the presidential election cycle has historically been the best - and that clearly was not the case for 2011!

Investors today need to understand that we live in a different world. Statistics such as these have become meaningless. The markets and how we respond to them have changed dramatically. For example, one of the unintended consequences of Dodd-Frank reforms is that fewer market participants are willing to physically occupy a trading desk. This has led to an increase in high frequency trading, where computers are significant contributors to daily transactional volume. Consider that in my early career in the oil trading pits, the Iraq invasion of Kuwait in August 1990 caused the price of oil to rise $7, from $34 to $41 -compared to the dramatic rise in oil prices in July 2008, when trades were mostly machine-led, oil spiked to $147 because there was no one to lay off the risk.

What will this mean for investors in 2012? Expect excessive volatility to continue and for the Dow to hit more triple-digit historic high days. It is a time for all investors to approach the market like professionals, actively manage risk and protect the downside first. If you are not comfortable in that role, seek out a financial advisor who can help you achieve your goals.

The following are impactful investing extracts from Buy High Sell Higher. The book is divided into two parts, Part One Think Like a Professional and Part Two Execute Like a Professional. I highly recommend this book. This is a MUST READ for all serious investors. Some excerpts:

Part 1 THINK LIKE A PROFESSIONAL Pages 34-35 Last Paragraph

The last concept I want to discuss here is "maximize winners, minimize losers." What does that mean, exactly? In essence, it's one of things I think investors don't do enough. It's about setting priorities: first, protect the downside and recognize that when you have a winning stock, you need to stay with it and not sell it too early (you want to maximize the amount of your gains). Most people, when they have a profit, like to immediately sell the stock and ring the cash register. The key is recognizing how to stay with your winners. Most people take their profits way too soon. That's one of the key issues that I've found in dealing with other traders.


One of the greatest mistakes investors make is trading first and rationalizing the trade later. If I asked a hundred investors how many of them have a written investing plan in place, I am confident that at least seventy-five would have to admit they didn't.


Keep an investing calendar. Just like your spouse and you may keep a social calendar or a calendar showing when the kids have to be at soccer practice or guitar lessons or whatever, your monthly economic calendar should become the business calendar for your investing plan.


Every investor should form some sort of a small investment-type club, whether a two-person team or a five-person team.

Someone who can serve as a devil's advocate and someone with whom you can share ideas. You team helps you implement risk management strategies, which are critical to successful investing. They act as a safety net, a small group who takes the other side of the argument when it is most critical to get another point of view. The exchange of ideas can only make people better investors. If you work in isolation, and it's just you and that screen, there's no exchange of ideas and no one to watch out for you and your interests.


When it comes to timing, you also have to create a ticking clock for each investment. How much time will you give a certain stock to hit a certain price? Part of that decision process involves understanding the value of "dead money" and how dead money can be toxic to your portfolio.


The most profitable position should be the biggest, which is the complete opposite of what most people do. Most people have a losing position as their biggest position. In order to create alpha, you must add to winning positions.


Mark Fisher taught me a valuable lesson that to this day helps me minimize my losses: always use stop loss orders when entering the market. That is, always place two trades at one time: the entry price and the reference price point that we would use as a stop loss order.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.