The Key to Success: Staying Involved
Good Morning, Team. That old Chinese saying, “May you live in interesting times….” seems appropriate these days.No question that these are interesting times. On the policy front, I have never seen Washington so polarized, and so much vilification of the high producers in our economy. Such is life. Simply put, the entire nation is polarized by very strong and passionate feelings on the left and the right (there is also a third group that is sailing right through life, blissfully ignorant of present circumstances and just happy to assume that “Lord willin’, everything will work out.”)
The increasing frequency of comments/questions in the media about the absence of fear in the equity market is an attention-getter. It should get your attention because those questions will ultimately be answered. We just don’t know when.
At some point (and that point may be today…and most certainly occur before 4 pm on Friday) there will likely be a flight to cash/safety. Bottom line is that the equities market is slowly and surely catching up to the idea that the debt ceiling may indeed not get raised. The unknowable is NOT whether your social security checks will be sent out. They will. That’s kind of fun to talk about and raise some hackles, but the real unknown is the stuff that we deal with every day as traders: How will investors behave? It’s not a structural thing; it’s a psychological thing. Will there be a big massive selloff? If that’s what the Crowd thinks, then we will see a slow trickle lower (as we’re seeing today) as traders try to get ahead of the big selloff. They’ll be liquidating early, and that liquidation will push the market lower.
Then, at some magical moment that is unpredictable (at least I sure can’t predict it), we’ll see a big rush to the exits…and that rush will present a very significant buying opportunity. Why? Because the market will go too far. It always does. Ultimately Debtmageddon will be resolved and that will give some relief to the market. Earnings have generally been pretty good, so investors will certainly want to be long…they’ll use any big selloff to buy stocks.
But I guarantee you this: If you are reading this and you are one of those undisciplined traders who’s main trading strategy is just watching what others are doing and posting, but who have no plan yourself, you will be hurt and hurt badly. If we do get a big selloff, you will not know what to do, and your posts asking for help will likely be ignored–at least for the moment–because the more seasoned traders are executing their plans and are not reading the Forum.
If you are one of those guys…well, don’t be that guy! Avoiding being that guy is easy. It is SUPER easy.
Here’s how:
Go through all your positions. Are you TOO exposed? Do you have a plan for managing a market decline? Do you have adequate cash? Have you eliminated the “disaster” scenario from your portfolio so that if the market does indeed sell off, the losses you incur will be manageable and you’ll be able to more than make up for them with the cash you use to buy big bargains! (Will anyone NOT buy AAPL if it spikes down to $380? You’d better move fast to get in front of me!)
No one here has to be a victim. I often say, “Trade like a Victor, not like a Victim”. (Some would say that I’m referring to Trader Vic. LOL. So be it — I just might be!)
Take control. Be the ball. Set some levels that you will live with. Don’t set stop levels that you will ultimately pull (i.e., disregard) when they are hit because you “can’t afford to take a loss.” That’s what losing traders do. That’s what victims do. Don’t be that guy! Good traders take losses all the time. They have no problem taking a loss when they are wrong…because in taking that loss, they become right.
Now, I am NOT saying, “Look out below!!!!!!” Not at all. Rather, I am doing my job as a mentor, and am trying to help you prosper. And part of prospering is staying out of trouble. Don’t try to get it all. If you’re profitable, take some of that profit. (I was selling some positions last night, and the reason I am posting a bit late this morning is because I was lightening up just a bit at the open today. Now I’m positioned so that I can go to the gym and have a good workout without having to look at quotes every 15 seconds).
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THIS IS IMPORTANT….
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You will find that you make the bulk of your profits in any given year on just a handful of days (or short periods). Many come into the market saying, “Golly gee. I just want to make 2% each month. Not much at all…just 2%”. Well, if you can do that, then you need to start a hedge fund. You’ll be a legend. The truth is that you will be down some months (but should never be down a LOT), and you will be up BIG a few months…but most months you’ll just be hanging around. Maybe up just a bit; maybe flat; maybe down just a bit.
But you will make the bulk of your gains during a finite, countable number of periods. If you look back at last year’s trading activity, you’ll be able to point at times in the calendar when you made the big bucks. You’ll be able to do the same thing at the end of this year.
But sadly, we cannot predict when those times will be. This is why you have to be involved at all times. With rare exceptions, those times when you wind up really ringing the register start with small profits…that then seem to get bigger than you originally planned for. You are happy. You see more opportunities and start building small positions. You make a bit more money. Everything seems to be working pretty well and for a fleeting instant, you think you’ve got the market wired. You think you’ve made some magical transition to “super trader”. Then you remember my admonitions about this rabbit hole. The truth is that, during bull markets, you are not nearly as smart as you think you are. And during bear markets, you are not nearly as dumb as you think you are.
But as your position start to work, you gradually realize that “THIS IS ONE OF THOSE TIMES!!!” You realize that this is one of those finite periods that you will look back at and say, “Yep. That’s where I made the bulk of my gains last year.”
And once you realize that this is one of those times, you pile it on. You strive to maximize the move. (Again, discovering this was not an epiphany; it was a gradual realization as a consequence of holding many positions that were working.)
And as you maximize the move, you also understand that the move will end abruptly — because they always do. So almost as soon as you have everything in, you start lightening up. You start ringing the register and taking some profits. You accept the fact that you will NOT catch it all. You will not reap the MAXIMUM reward from the move…rather, you’ll just get the meat of the move. You won’t give too much of your profit back (though you WILL give SOME of it back).
And as the market comes back down, you’ll start feeling pretty good about your behavior. You’ll reflect on your actions and decisions and discover that you could have done a few things differently…but overall, you did OK. And in doing “OK”, you’ll be reinforcing good trading behavior because your profits will be adequate confirmation that you are on the right track.
THEN….you’ll settle back into the period where the market is not particularly user-friendly. In fact, it’s kind of tough. Why has the market become tough? Because it takes time for a market to work off excesses — you know, those same excesses that you have just finished pouncing on and reaping big gains.
Now, the danger is in giving those profits back….one bad trade after another. Why? Because you subconsciously yearn for the good times that just netted you so much money! So you try to force it. You are trying to “make something happen!”
That’s the dynamic that most traders experience at some point in their career. Ultimately, the self-aware ones figure out that the best part of making a bunch of money is the little vacation from trading that you have earned after making all that money. (OK, maybe the vacation is not the BEST part of making a bunch of money…but it’s still pretty nice). Those that are not self-aware gradually give back all their profits, one ill-advised trade after another.
Where they had been trading aggressively in a strong market, they are now trading aggressively in a weak market.
Be the guy who takes the vacation. Don’t be the guy who gives it all back.
If you’ve made money on a recent big move in some of the fast movers — AAPL, GOOG, LULU, ZAGG, CALM, etc. (Many of the stocks we have been trading lately) — then protect that money. It’s yours! It’s not “the House’s money”. It is truly yours. You’ve earned it.
Enjoy knowing that you have just come through a very favorable period in the market and have capitalized on it.
Enjoy it. You’ve earned it.
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And if you have NOT profited from this move, don’t get down on yourself. Instead, read this missive again and again…particularly the part about the big profit periods starting with seemingly insignificant profits that seem to get better and getter. The BIG period does not begin with the retort of a starter’s gun. Instead, it just gradually begins with a slow stride that ultimately transitions into an all-out sprint. And like all sprinters, the run will end a lot quicker than it started as the sprinter gets tired.
But STAY INVOLVED. I don’t care if you own one share of Alcoa. Just STAY INVOLVED. Don’t give up on yourself, and don’t give up on this market. You can do it if you apply yourself.
I have lived my adult life according to this pledge: “If I am willing to do what other people won’t, there will come a time when I can do what others can’t.”
Most people won’t work hard. That’s the truth. They wander through life with a sense that things will ultimately work out. I don’t just want things to “work out.” I want more than that…and I am (and have consistently been) willing to do the work to make that happen.
You can make it happen too. You’ve just got to do the work…and have some faith in yourself.
Have a good day. Make this a great day…when you made a bunch of good decisions!
Dan
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