The Long, Hard Road
By Todd Harrison
7/15/01 5:47 PM ET
As this week marks my first anniversary on RealMoney, the nostalgia of this past year strikes a cord within. I remember, with great clarity, when Jim Cramer peered over our trading desk last July and asked me if I wanted to fill in for him "for a day" while he took a much-needed respite in Amagansett. "Sure," I replied, "Why the heck not?" At that point, my writing experience consisted of letters I'd written to my mom (years earlier from camp!) and a handful of emails I'd penned since the advent of America Online. Still, I wanted to give it a try. Four seasons, and countless market swings later, our journey together continues -- and what a journey it's become!
We've walked down many roads together and learned lessons that, while difficult to digest at times, have taught us to become better money managers. My primary role, as that of a trader, dictates that I try to be more of a navigator and less of a prognosticator. In other words, while curious as to where this market ultimately lands, I'm more concerned with the path that we'll take to get there. I've often opined that, as a dynamic force, the market's script is written with each passing day, and as such, we must continually augment our approach if we hope to stay in the game. Obviously, this doesn't mean we can't have an opinion, but inherent in any thesis is the understanding that nobody can know, with any certainty, where this beast will go -- and we must play our hands accordingly. With that said, I felt it might be useful to share some thoughts with you as we enter this seminal juncture for the tape.
Traders are curious types, tending to vacillate between the bull and bear camps as a function of price. Readers of my diary are aware that I've tended to be bearish since last year, but if we played purely from the short side, tremendous opportunities would have been left on the proverbial table. Is it realistic to expect to catch each nuance of the price action? Of course not ... but successful trading dictates that we continually weigh our metric base as we grind our way toward profitability. Along the way there will inevitably be times when we're dead wrong -- but the goal of any trader, or investor, should be that while we're bound to trip, we must not fall.
Why am I stressing the importance of taking our journey one step at a time? Well, while I've intimated my long-term thesis before, I've never flat out communicated it as I will here. My sense is that, before all's said and done, the stock market is going to get a lot worse. I'm not just talking about price levels, per se, but the entire dynamic that is trading. My belief is that we're still in the early stages of a bear market, one that will continue to frustrate the masses, wring out the excess, and befuddle the professionals. How long do I feel this will last? How about five to seven years for starters ... or enough time to wring the instilled expectations out of us all?
Looking back at past bubbles, whether they involved tulips or Japanese equities, the excess (in both prices and expectations) took years to filter through the system. With the parabolic rise we've witnessed in the Nasdaq, it would be unprecedented for a recovery to begin quickly and for the worst to be behind us. Remember, grizzlies tend to frustrate all trading styles, whether they involve directional bets (long or short), volatility plays or risk arbitrage, so the pain and frustration will likely be widespread and pervasive before the skies clear.
Now, please don't misinterpret what I'm saying as a recommendation to sell everything and buy guns and food. Bear markets take their sweet time to evolve, and are often littered with false hopes and broken promises. As a matter of fact, I've been weighing the potential for a summer rally (based on perception, more than anything), and will enter this week relatively balanced, open-minded and ready to swing the bat. My point, and I say this with the humility that is necessary to flourish in our business, is that a decade from now the charts of the major averages could look like a scene from the movie Flatliners -- and understanding the potential for this could help us prepare for it.
The first step, which ironically is often overlooked, is to ask yourself what your investment objectives are. Are you an investor, or are you a trader? What is your horizon, and how much are you willing to lose to attain your goals? These are questions that should be answered before you enter the market -- otherwise, it's akin to starting a race with no destination in sight. If you're attempting to navigate this market as a trader, you must ask yourself what edge you have. Professionals, with all their tools, relationships and focus, are being twisted around. If you're having difficulty making money, you've got to be realistic about your expectations. Honesty is the best policy, particularly when you and your family's fortunes are at stake.
If you're confident in your abilities and determined to forge a living from trading, you must understand that, while there will be opportunities to profit, the game could be a low-scoring affair for a while yet. As such, Jeff and I have adopted a "tighter" approach to trading, one that will underperform if the market parabolically races to new highs, but will invariably edge us up the performance ladder if the fits and starts continue. The best way to describe it is to use one of our favorite football analogies. We're happy to pound the ball up the middle, trying to grind for three yards and a cloud of dust ... until we see the safety cheat, and then throw deep. It's certainly not the sexiest approach to the tape, but sexy trading could be a thing of the past. Going forward, "good" returns could assume the form of capital preservation, or, more likely, muted profitability, so manage your expectations (and risk profile) accordingly.
As we forge ahead, perseverance, discipline and patience will be words you'll likely hear often from me. It's very easy to feel flummoxed in this environment, particularly after getting "caught" or missing a move, but we must continue to keep our emotions at bay if we're to find our way through the muck. Consistency will dictate who makes it to during the easier times, and the process will be a difficult lesson for most. Stay ahead of the curve, manage your expectations and prepare yourself for a war of attrition. It's going to be a battle.
Trust me when I say that I hope I'm mistaken. Nothing would make me happier, my friends, than to write a column on my second anniversary admitting I was completely wrong. However, I would be doing you a disservice if I weren't honest and forthright in divulging my thoughts -- if for no other reason than I have a forum in which to express them. When I started writing, I assumed a responsibility to RealMoney's readership, and it's something I've taken very personally. It's not about my reputation or gaining notoriety, it's about giving something back and utilizing this cathartic release to synthesize my thought processes. I will be right at times, and I'll surely be wrong as well, but I will always have your best interests at heart.
With that said, I wanted to take the time to thank those of you who have been walking at my side during this past year. We've certainly experienced our share of drama, and I think we've all learned a lot about ourselves along the way. The myopic world of money-making has a way of diverting our attention away from the more important aspects of life, and I've become a better person as a result of the friendships and experiences derived from this site. I would particularly like to thank everybody who took time from their busy lives during Ruby's prolonged battle to offer words of encouragement. It meant the world to my family and reawakened my belief in humankind. It's a beautiful world out there -- even if it's going to be more difficult to make money in it. No worries though, my friends, we'll get there together.
One step at a time.
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Todd Harrison is president and head trader at Cramer Berkowitz, a New York-based hedge fund. At the time of publication, the fund held no positions in any of the stocks mentioned. Harrison's fund often buys and sells securities that are the subject of his columns, both before and after the columns are published, and the positions that his fund takes may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Harrison's writings provide insights into the dynamics of money management and are not a solicitation for transactions. While he cannot provide investment advice or recommendations, Harrison invites you to send comments on his column to Todd Harrison.
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