Thursday, October 29, 2009

In Retrospect....

... keeping those SPY calls and that large batch of TNA ETF (3x long small caps) that we sold off at 3:35 PM yesterday would of been a massive win right about now.  However, you have to have a master plan and be rather systematic in your trading or else you have nothing.  You are flailing around with no structure and the house will soon have your money.  Been there, done that.  No system works all the time, and just be cognizant there is always a new opportunity around the corner and job one is to protect capital.  Missed opportunities are far less hurtful than missing capital.  Put another way - if your "mistakes" have you missing opportunities rather than taking hulking losses - you're on the correct path.

I often say, when you are new(er) to the markets you wake up each morning thinking "how can I make money?" ... when you've been at it for many years you wake up each morning thinking "how can I not lose money."  While a broad generalization - especially with the casino mentality many Americans seem to have, the latter thought process will serve one well over the LONG haul.  Maybe not in 2 hours, 2 weeks or 2 quarters.  But over 20 years... yes.  The best long term records are not built just on the big wins but sheltering against the big losses.  Take care of the downside, and the upside will take care of itself over the long haul.

If you ever doubt it, look at all these mutual funds gaining +30% Year to date (with financial media fawning over them!), and then look at their 2008 record.  Then calculate how much you need to gain to simply break even after a 40% loss... I'll do the homework for you: 66%.  The term drawdown is very key in hedge fund world, but appears to be nowhere in mutual fund world... it's important.

One reader asked in comments yesterday - why would you sell (those calls and ETF) when the market is so oversold?  Certainly I look like a rampant idiot to said reader today, trust me.  But my answer was essentially " I saw many markets 'oversold' in 2000, 2001, 2002, late 2007, 2008, early 2009 that only went on to become more and more oversold."  I don't like those labels ("oversold", "overbought") and try to not use them much at all on the blog - they mean little ... any of you who just lived through 2008 or Jan/Feb 2009 know what I mean.  As for today, we had a specific news event that changed the entire complexion at 8:30 AM today but those who gambled (and won) buying into the close yesterday afternoon took a large risk in my book.  It worked, so kudos there.  However it is akin to piling into a stock ahead of earnings - a binary outcome.  I'm not sure if at 8:29 AM the trade felt quite as good.

So as we discussed yesterday we watch yet another V shaped "buying panic" ... we're in a white noise area but heck within an hour or two might be back over S&P 1070, and off to the races to S&P 1200 by year end.  Or is it 1800... I can't recall.  Either way, we missed this first part (except with our core equity positions of course)... I so did want to wear a bear costume for Halloween.  Over 1070, we have to dust off (ok technically it's been in storage a whopping 4 days so there is no dust on them) the bull horns.

Seven more S&P points to go, and we're back above the 20 day and this was all a bad memory.  Yet another 45 degree angle rally after a selloff?  Was I only off by 1 day? [Do We Rally Sharply on Wednesday?]  Is it really that cut and dry?  Buy every dip is now a national ethos?  Market participants will play a pattern until it stops working... eventually it will break down, trap many people and cause severe losses.  But until them, be one with the lemming.

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