Interview with Roger Nusbaum, a.k.a. Random Roger

September 28th, 2006

For the next interview in the StockTickr Interview Series (RSS feed), I spoke with Roger Nusbaum, a financial advisor who builds diversified portfolios for individual investors as well as some institutions. Roger maintains a popular site where he ruminates about the markets. Oh yeah, he’s also a wildland firefighter! I love that in a time where most money managers would put on their Sunday best for a photo, Roger’s image on his site is of him eating an ice cream cone – in mid bite!

I think it’s also worth noting that Roger gave me responses in record time – much faster than anyone else in the series. Bruce Brotnov was a reasonably close second, though.

Read on for how daytraders should approach diversification, the growing importance of foreign markets, and how having 10 stocks each with 10% of your portfolio is not diversification!

StockTickr: Tell us a little about yourself, Roger.

Roger: I have worked in the investment industry since 1984 which includes when I was still in college. I have had brief stints as a file clerk and as a cold caller, I worked for most of the 90′s until 2001 as an institutional equity and options trader and for the last few years I have been managing separate accounts at Your Source Financial in Phoenix. We are a small financial planning firm and for clients that have investible assets; I manage those assets.

My wife, Joellyn, and I have been married for 13 years. We live on a mountain just outside of Prescott, AZ about 90 miles north of Phoenix.

StockTickr: How did you get started in stocks and the markets?

Roger: I believe it would be right to say I have had some interest since 6th grade; we did a project in math class involving stocks, I think my pick was Exxon.

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

Roger: I don’t have a horror story from starting out. During the bubble I was still working as a trader. I had too much of my skin in the high octane four-letter stocks but the damage, although significant was not as bad as other people’s horror stories I’ve heard.

StockTickr: What’s the most common mistake investors make with respect to diversification?

Roger: In my opinion having ten stocks with 10% each is a biggie. If your one materials stock was Anglo Gold (AU) and you bought it at the start of the quarter or the start of September you have dug yourself a noticeable performance hole to dig out of.

Just as big is ignoring foreign diversification or diversification in cap size, style, volatility, sector and there are probably a couple I’m forgetting.

StockTickr: We know diversification is important long term investors, but you don’t hear it discussed much among short term traders. How should short term traders plan for diversification?

Roger: Take advantage of where the tailwinds are and favor those areas but don’t completely ignore the parts of the market that are not working. Tech was given up for dead early in the summer but has, for the last few weeks, provided leadership. If you’ve been bearish on tech but did not ignore it you have helped your returns for the summer, just by staying diversified.

StockTickr: What do you think traders can learn from investors and what can investors learn from traders?

Roger: Investors can learn about exit strategies from traders. Not every stock decline should be sold but recognizing an over-reaction versus a broken stock is something that many investors need to learn. I tend to be more concerned about a stock rolling over for no explainable reason than a stock that drops 10% in one day on news. Historically V shaped tends to be less damaging than U shaped.

Interestingly I would not say the same is true for traders. When you enter a trade you should have a clear and simple point planed to exit above and below your entry with some sort of time frame in mind. If one of those points is triggered, you sell, period. Ideally whatever process you use to derive those entry and exit points works more often than not.

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

Roger:

StockTickr: Do you find that most investors risk too little or too much in their investments and how can they find a happy medium?

Roger: First I tend to think that too many investors have no real concept of what risk means which is worse that knowing about risk and just being wrong. The new clients we get tend to say they tend to have a lower tolerance for volatility yet their portfolios will be overweight volatility. It seems when in doubt people take on more risk and volatility than they should.

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

Roger: I think that returns will generally be a little lower in the US for an extended period of time, not talking about anything dramatic. There will still be some big years in both directions but they will average out a little lower than we are used to.

If this is correct it will require learning more about foreign markets and investing overseas more than we do now. Currently I have about 35% of equity exposure in foreign stocks but I could see being closer to 50% toward the end of the decade.

StockTickr: What advice can you offer investors and traders who are just starting out?

Roger: Read as much as you can; websites, books, magazines, whatever. Also get a copy of Trader’s Almanac and study the market’s history. By knowing market history you will avoid a few bad decisions.

You will get some things wrong in your investing life time. This is a matter of fact; you will get some wrong. You will also get some right, just as much fact as getting some wrong. There will be years where you lag the market and years you are ahead. Both are guaranteed to happen.

By knowing this as fact hopefully you can be less emotional in your decision making. Making decisions from a point of logic is likely to yield better results. If you know getting some wrong is an unavoidable fact there does not need to be a whole lot of emotion tied in.

StockTickr: What do you like best about the markets?

Roger: I can continue to learn and be challenged. In the media they will say something about issues being resolved after such and such when in fact nothing ever resolves. Markets are dynamic and this is work I can do for the rest of my life with genuine purpose.

StockTickr: When did you start your site and what prompted you to do so?

Roger: This is funny (to me anyway). I downloaded Mozilla Firefox and Blogger was included in the bookmarks in the version I downloaded. I thought it would be kind of fun to write about stuff going on in my life – we have crazy dogs, live in a quirky community and I volunteer as a wildland firefighter – but I ran out of of things to talk about after a couple of days and started writing about the market and other related topics.

My blog seemed to be popular fairly quickly, I started in September 2004, and it has picked up some steam from there. I enjoy the writing and that I get to help some people become more knowledgeable investors.

StockTickr: Thanks, Roger!

Roger: Sure, Dave.

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Previous interviews in the StockTickr Interview Series (RSS feed):

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