What the market SHOULD be doing article
Why Prices Should Be Higher!
By Nick Perry (regressionchannels@sir-inc.com)
9/11/2002 1:15 PM ET
I need to vent for a moment. The catalyst for today's digression is an article I just finished reading. In it, an analyst was justifying why his year ago forecast for a higher market was "right" and why the market should be higher. This was so vexing that I immediately began to write this observation. The analyst and the publication will remain nameless because this is a theme that's seen everywhere. There's no reason to single out just one person. Besides, everyone is entitled to at least one mistake.
First, let me say that I am not faulting the analyst for making an incorrect forecast. I've made more than my fair share of incorrect calls. If I have learned nothing else through trading, it's that the market will humble even the smartest traders. As I've said in the past, you do not make money by being right. You make money by knowing when to run away. So, I would be supremely hesitant to condemn another for not being "right."
I do, however, take issue with someone who tries to explain why the market is "wrong" and why they are right. Regardless of your market view and feelings, trading is about protecting what assets you have and finding ways to increase those assets. It's not about justifying your views. You can make any argument you want about interest rates, earnings growth, technicals, etc., but the fact remains that the market is where it is. For perspective, call your broker and say, "Given the Fed cuts, I think the losses in my account are too much. Go ahead and erase some of those losses since the market should be higher." I don't mean to be flip about the losses that have occurred, but it makes my head hurt to hear analysts make essentially the same excuse.
Markets can remain irrational longer than you can remain solvent
~John Maynard Keynes
More than once, I've mentioned that this quote hangs on the wall next to my desk. It serves as a constant reminder that, no matter what I think the market should be doing, I need to be cognizant of what it is doing. I'm not suggesting that you constantly question your view or change your opinion depending on the most recent tick. I'm saying that it's important to differentiate between your opinion and reality. Arguing that the market should be doing something else is a warning sign that you have let ego override the goal of protecting and making money.
Since I know many of you use technical analysis, think of it in these terms. A stock approaches an oversold or an overbought condition and you believe the stock is going to reverse. You can either trade it now before the turn or wait until it does turn. If you wait, you may miss part of the run, but you will have greater conviction that the move is occurring. If you trade it now, you get in earlier but may have to endure a prolonged congestion or even a blow-off move against you. With the proper stops, either strategy can be successful. The dangerous situation is one where you put the trade on and then refuse to protect yourself from losses because "you are right." Ultimately, you may indeed prove to be correct. But will your account still be around at this point?
Consider the situation with companies like Enron and WorldCom. Undoubtedly, some investors bought shares of these companies because of the growth and earnings potential. Analysts maintained buy ratings based on balance sheet projections and fundamentals. They had data to back them up and stuck to their guns. But the stocks kept going down. There was something wrong. Unless you had inside knowledge, you didn't know what it was, but the stocks kept declining despite what the holders of the stock said "should" be happening.
It's not just buyers who fall prey to this. Back in 1997 and 1998, there were plenty of traders who shorted Internet stocks because many had faulty business models that would not survive. While the shorts were ultimately correct on many of these stocks, the shares went on to double and triple from those levels before peaking. Not many accounts can stomach that sort of move against you.
The driving force for my writings is a desire to share, what I believe, are important lessons I've learned. This one is paramount.
(Side note: Got gold?? ) |
