Morning Market Thoughts (It’s a long one)
Good morning. Futures are up a bit this morning, and Chairperson Powell is due for yet another round of titillating testimony where he shares his prescience and insight with our leaders, assuring us that money will remain nearly free for as long as any of us, our kids, or grandkids shall live. Beyond three generations…well, he’s not sure. But he will repeat what he said yesterday — that “the way to grow ourselves out of this nearly $30 trillion dollar debt will be to grow the economy…so darn it, let’s get started! To you unwashed masses, do not fret. Stimmy checks coming soon.”I suspect that we’re going to have another day of reversion, where the oversold stocks will retrace a bit more of yesterday’s selloff. But from the looks of various stocks in pre-market trading, I’m not expecting much. The trading activity over the next three days will tell us a lot about the current state of the market. Many stocks fell below prior support and are not trying to regain those levels. If the majority of stocks are indeed able to recover, we’ll see this week as a “shot across the bow.” It will raise the yellow flag…but it will also reveal that the market is still attracting money and it’s right to be long.
But if stocks stall out, then it’s really time to pull in your horns and focus on protecting capital. If you are a long-termer, really pay attention to your positions, and make decisions about what your acceptable risk will be if your position declines…and stick with it.
If you are losing sleep over your risk, and over the state of your account, then you are trading too big…or you are holding positions that are simply not working.
This leads me to something I’ve discussed on a few occasions recently.
One of the biggest mistakes made by traders of all experience levels is related to diversification.
Some traders just swing for the fences. “Let ‘er rip!” They’ll put all their eggs in one basket and then watch that basket very closely, cheering with every rally and crying on every selloff. They’ll sometimes catch stocks like GameStop ($GME) or Riot Blockchain ($RIOT) just right…and make massive returns. But they can also get whacked the other way, piling into a “can’t miss” stock…only to see that stock get slammed when it turns out that the stock is a witches brew of hype and hope rather than the next big thing.
This type of trader is a gunslinger. And the thing about gunfights that bothers me is this: They are all binary events. Somebody walks away…and somebody doesn’t. There’s no such thing as a tie…because even the wheel guns have 6 bullets. Miss on the first one, you’ve got 5 more shots to get lucky and hit the other guy center mass. And when you trade like a gunslinger, it’s only a matter of time before your the bulls-eye painted on your chest has a hole in it. You’re done!
Don’t be that guy.
The opposite approach is similarly flawed. Do you try to catch every move on every stock? Are you constantly scouring our awesome trading forums on the alert for the next big thing? You’re afraid of missing out, so you wind up buying everything in sight, and end up with a big vat of alphabet soup. You’ve got more tickers than a clock factory.
This is what I call destructive diversification. You are so diversified that you never make any money. Oh, you might not be losing much either…though my bet is that your account is slowly draining value. Why? Because the winners aren’t big enough to make a difference; and the losers are just enough to drag the account equity down as gravity takes hold of your account. Your account is just “heavy.” I’ve been there. It’s heavy. Period.
When you read that last paragraph, did it remind you of…you? If so, you’ve got too many positions. You’ll never be able to keep track of ‘em all. And if you don’t know what you own, you are just a horribly bad trader. Not knowing what you own is like owning a used car lot and just buying and selling blindly, without looking under the hood, without opening the door, and without keeping track of your inventory. When the lot gets full, you just start selling cars on a first come, first served basis…without even remembering what you paid for them. This is not the kind of volume business you want. Trading is no different! If your inventory sucks, you suck at trading. Period.
As a trader, you must decide how many stocks you want to own. With a small account, you should be in single digits, with a few fingers left over. A larger account can hold more…but you’ve always got to remember that you want stocks that are rewarding you…and you want as much of them as possible.
Your stocks are employees. They are your business partners. If they are not holding their own, you’ve got a problem. If they are costing you money, you’ve got a problem. As an employer, you have two alternative solutions; while as a trader, you have only one.
If you employ people or have partners in your business and you’ve got a lousy one, you can either:
1. Train that individual. After you’ve completed the training, that individual had better improve. If there is no improvement, the second alternative has to come into play.
2. Fire him (or her, or whatever the chosen gender is. Doesn’t matter to me.). The employee/partner is costing you money — and you are in business to make money, not to lose it.
If you are trading, you have only one way to address a lousy employee. Termination. Simply put, you were wrong in hiring the employee. If you want to be right, give the employee the pink slip, clean out the desk, and show him the door. Period.
But if a stock is working for you, that’s another story completely.
I’ll put it to you this way: Last week I was talking with my wife Jennifer about an investment we have in Bitcoin ($BTC). We are HODL-ers. We’re not selling. The volatility over the last few days doesn’t bother me a bit, because we have a plan. In fact, I have a GTC limit order to buy more at a much lower price, and I’m hoping that the volatility gives me a gift when I wake up one morning. But Jennifer said something pretty simple and straightforward when we were discussing it. “We bought it because we thought it was going higher. It’s going higher. We’re not going to sell it because it’s doing what we thought it would do. We’re going to hold it until it stops doing what we thought it would do. We knew it would be volatile. So none of this is beyond our expectations.”
Seems like a pretty good trading plan to me.
And I’ll be honest — my wife is a lot smarter than I am. She really is — I’m not making a joke or blowing smoke. She’s got a very quick mind and is growth oriented. She has been listening to me blather on for the past six years and has picked up a lot of things about trading through mere repetition. She hears me say the same thing again and again, even though I’m not aware of it.
She says that my biggest mistake is that I always sell too soon.
She’s right. I’ve got to fix that.
See you in a couple of hours at the training session.
–Dan
Market Update