Interesting how quickly the psychology changes.
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January 14, 2002
Jack be nimble, Jack be quick, Jack jump over the candlestick!" Just like our nursery rhyme friend who managed to leap over the flame without getting burned, traders had to be nimble this past week. Even Mother Goose glanced at her portfolio late Friday to see just how much heat it had taken! With the Dow, S&P 500 and Nasdaq down for the week, there's a pretty good chance that she will now call Father Goose to find out what he is doing to protect their investments - after all, the market has been in very nice rally the past few months. Unfortunately, the odds are that he doesn't use money management at all. Let's hope that Mr. Broker doesn't call first and inform the kind hearted couple that their margin account must be attended to immediately. After all, the LAST nursery rhyme character that received a margin call is STILL upset. Not even the King could help poor Humpty Dumpty put everything back together again.
No, I haven't fallen off my rocker, just trying to make a point. Some investors live in a fairy-tale land where they expect others to look after their portfolios for them, yet never really check to be sure that all systems are in place and working properly. It's easy to assume that someone else is taking care of the devilish details, but more times than not, little things like risk control are forgotten. No one wants to find out that it's "too late" to prevent a substantial loss, and the best way to avoid this sort of ugly surprise is too make sure a foolproof plan is in place - a plan with risk control built into the foundation. Just a small amount of work in this vital area can save you years of grief AND provide plenty of happy money moments in the decades ahead!
Short sellers were among the few happy faces on Wall Street this past week, but hardly anyone paid them any attention. After all, only a small fraction of the public really knows what shorting is. This is probably due to the old myth that shorting is very dangerous and difficult. In reality, that's just another scary fairy tale. This common perception goes way back, and is very likely rooted in the early thirties when crafty stock traders made tons of money shorting companies and cleaned out the general public's accounts. The activity was lucrative, and some trader's believed that this "gold mine" should be kept confidential. Maybe that's why the shorting ghost story evolved - to keep the public from knowing the truth about the "Great Depression." Well, that is another story, but regardless of whether some type of "conspiracy" existed or not, eventually shorting became known as something that only Wall Street insiders understood. Another tale loaded with lots of fear and superstition.
In reality, shorting is just another skill that traders can quickly learn and add to their toolbox if they want to. Some of the most successful "mutual funds" are hedge funds, who often hold both long and short positions at the same time. Of course we love to see the markets go up instead of down. Everyone enjoys a rally. The sun shines, investors feel confident, and Wall Street becomes a playground of winners. But markets rise and fall in natural cycles, and it's wise to know how to make a profit even when the market is trending lower. Of course shorting isn't the only option when the markets move lower. These pullbacks offer great opportunities for buyers who use stops and solid exit strategies to lock in profits when the dips do occur. Shorting isn't for everyone, but sometime when it's raining outside, and it seems like everyone has a case of the "investment flu," take a minute to pull out your old nursery rhymes and read the poem about Jack and Jill. You know, the two young kids who went down the hill just in time for Jack to fall down and break his crown. Only this time imagine two happy traders with smiles on their faces, successfully sledding down a snow-covered hill -- over and over!
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Enjoy the weekend,
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