I USED TO BELIEVE that being a good trader meant that I’d always be correct in my analysis of the market. Now, after trading everything from stocks on the screen to futures on the floor, I know better. As I’ve learned, just about anybody — from pundits to politicians to portfolio managers — is willing to chime in with an opinion of where the economy or the stock market might be heading which is all well and good. But while the talking heads will yak for hours about corporate scandals and Saddam Hussein, they are conspicuously silent about the act of trading itself. There’s a reason.
Trading isn’t black and white, it can’t be bundled up into a nice package, and it rarely makes for a good sound bite. Let’s be frank, no matter what size account you’ve got, trading it is filled with uncertainty. But while investors might hate uncertainty, markets can’t exist without it, plain and simple. Although we attempt to put the odds a little bit in our favor through diligent analysis, we can never eliminate the risk involved in any investment decision. After awhile, even when you’re right, it can really start to get on your nerves.
Up until a couple of years ago, the biggest risk in the market seemed not to be losing money, but losing out on the seemingly limitless upside of growth stocks. Like a roller coaster, many were expecting a bumpy, albeit ultimately profitable, ride. Then the bubble burst and the major averages nose-dived. Reality reared its ugly head in a painful reminder of the market’s inherent uncertainty.
Despite the recent 20% rally in major indexes, risk is still more prevalent than ever — both within the market and in our portfolios. What if the stock market continues to rally? What if it falls? What if we go to war? What if we don’t?
When it comes to your portfolio, uncertainty usually leads to frustration. Indeed, before there was Moore’s Law there was Murphy’s, and whether I’m too greedy or too fearful, overweight in value stocks or still loaded up on growth, it always seems as if the market is, well, out to get me. Indeed, as Gilda Radner famously said, “It’s always something.”
And although many investors are beginning to question their allocations to passively managed index funds, even more are discovering that, generally speaking, actively managing your investments is kind of a drag. When we make money, we could’ve made more. When we lose money, we should’ve lost less. When you do well, someone always did better. No matter at what level you play the game, the stress of trading can become rather, well, grating.
And if you think Teamsters have lousy job security, try being a trader, where you’re only as good as your last (quarterly) performance. Bernie Ebbers might not be accountable to his shareholders, but you need to be especially if you’re the only one. We can pontificate until we’re blue in the face, but at the end of the day it’s all about absolute return. Everything else is conversation.
Trading isn’t about eliminating uncertainty, but dealing with it — and as strange as it sounds, when it comes to soliciting outlooks about the market, I’ve often found that less is more. There’s always a bull and a bear argument for every stock under the sun, and too many opinions, even from reputable sources, can be more of a hindrance than a help. Stock tips, like caffeine or carbohydrates, are an ultimately debilitating habit in which we often just can’t resist the urge to indulge.
But the truth is that nobody knows exactly where the markets are going. If you’re bullish then be bullish. But don’t second-guess yourself every time someone offers an opposing viewpoint. Let the market prove you wrong — as it inevitably will at times — not Barton Biggs or Abby Joseph Cohen. You’ve got to approach the markets with the realization that no matter how airtight your analysis, something is always going to go wrong within your portfolio. Every trade can’t be a winner.
And because it’s always going to be something — the trick is to make sure that a soggy trade doesn’t sink your entire portfolio. Trading the appropriate product relative to your capital, and the right position size relative to the product, ensures that the inevitable losing trades are an annoyance, not a death sentence.
Finally, realize that while your positions might not be there for the long haul, as an investor, you are. And although it’s easy to get depressed after a big loss or missed opportunity, cut yourself some slack and get back to basics. A winning strategy is less focused on making money than not losing it, and because you can’t invest in everything, you’ve got to pick your points. For both your portfolio’s and sanity’s sake, if you aren’t 100% confident in a trade then don’t make it.
– Originally on Aug 26, 2002 by Jonathan Hoenig
