dude, did you finish your message, LOL
SmartMoney.com
A Mind Is a Terrible Thing to Lose
Monday August 4, 12:57 pm ET
By Jonathan Hoenig
This article was originally published on SmartMoney Select on 7/28/03.
WATCH RUKEYSER, CAVUTO or any other investing-related television show, and you'll notice that most prognosticators aren't merely confident — they're downright cocky. No matter how volatile the market might be, their forecasts are always infallible.
Although I'm usually opinionated, I'm never overconfident. In fact, I sometimes feel so completely out of touch with the market that I don't know what to think. Sorry to disappoint you folks looking for a quick tip, but when it comes to the next move in the market, I often don't have a clue. Considering the wild swings we've seen this year, perhaps in your weakest moments you can admit to the same.
As we often point out, a trader's biggest strength isn't necessarily finding winners, but dealing with losers. Still, feeling lost and unsure about an investment approach can be extraordinarily frustrating — and mighty expensive.
It usually starts innocently enough. A few favorite trades fall apart. Then sectors you had previously dismissed seem to spring to life virtually overnight. Your buy list gets smaller, more erratic. And the trading strategy that only a few weeks back seemed foolproof now seems foolhardy. You're not just losing...you're lost. We've all been there at one point or another.
The trick to trading sometimes boils down to avoiding dumb moves. It's never easier to self-destruct in the market then when we feel lost, or panicked, or begin to lose money. Every wrecked account begins as a tiny loss and a stubborn trader who goes berserk. So let yourself off the hook and keep a cool head. On the road to consistently superior returns, even the best and the brightest occasionally lose their way. But disciplined technique always gets them back on track.
As we've often pointed out, trading is first and foremost an exercise in observation. If you're unsure as to what's going on in the markets, a good place to start is by recommitting yourself to watching the markets more than even trading them. Because as much as stocks often seem like unpredictable chaos, the truth is that markets, like life, tend to move in trends that persist over time. For example, the recent strong performances in Latin American and Internet stocks are simply continuations of trends highlighted a number of months back. Again, trends tend to persist, and you can't trade a move unless you spot it first.
The problem is, traders sometimes get into the lazy habit of watching only their own trades rather than the market as a whole. So when their own positions putter out (cough cough, as mine in the bond market seem to have done), they find themselves lost at sea, flush with cash and no idea where to put it.
By regularly monitoring the market, even without actually trading in it, you won't feel lost once the time comes to put capital to work. And because trends take time to unfold, you'll often find that a particular stock or sector will perform well over a period of weeks, not days. By consistent observation, you can maintain an awareness of what's leading the market, so even if your trades aren't working, you'll have a sense of which ones are.
In the market, the "fight or flight" response is dangerous. Fighting the market — that is, engaging in dangerous habits like doubling down or refusing to set stops — isn't the best course of action. But neither is fleeing from it.
When traders feel lost, confused, panicked or paranoid, an all-too-frequent response is to flee to safety, dumping an entire portfolio for the soothing safety of cash. While such dramatic moves can calm nerves, they'll also wreak havoc on a portfolio, where a crucial component of good technique involves keeping what's working, not throwing it away.
Finding a profitable trade isn't easy in any market environment. Yet holding on to winners, especially during periods of stress and mental anguish, is often harder than picking them in the first place. Human nature prompts us to want to sell winning stocks and wait for the losers to "come back." This is how you lose. I know — I've made this mistake myself.
Even when it seems as if your account is falling apart, there are likely to be a few positions that aren't only profitable, but are still holding their own. Protect these like the family jewels. Because while every position should have an accompanying stop loss, you can't blindly sell your winners just to feel safe and expect to make money. When you feel lost in the market, prune from your portfolio what's not working — and difficult though it may be, do your best to keep what is working.
As we've written before, you only need a few good trades a year to put together an exemplary return. And because you can't bet on everything, the trades you do make shouldn't be passing fancies, but rather your cream-of-the-crop ideas. Trading huge positions in subpar ideas is dangerous — and all too common.
Although the trading high is a hard habit to break, it's better to preserve capital than to trade it on anything less than your best ideas. There's something about a trade that should compel you to make it. If you're unsure about it, don't do it. We only get a few opportunities with our precious trading capital. It's best to wait for the perfect pitch before taking a swing.
Jonathan Hoenig is Managing Member at Capitalistpig Hedge Fund LLC.
I am still waiting for the perfect pitch before taking a swing ... will it ever come ??? |
