ZF Capital

There is no rule that says you always have to have action; yet that is perhaps the most disastrous of all the common errors we noticed. Rather than continually confronting the market on its own often inscrutable terms, stop and ask yourself what you know, whether what you know is enough to act upon, and how you are relating to it.

Maybe it is a period when the market’s personality conflicts with yours, or something in your extra-market life is hampering your ability to view stock action objectively, or, simply, perhaps it’s a time when the markets course isn’t clear to anyone. Then it is best to step aside. You owe it to yourself to find out exactly how ready and able you are to play, because it’s yourself you end up playing against.

– Justin Mamis, When to Sell

Given ample opportunity to rise during a bull market, the failure of a particular issue to move upward in gear with the averages can be warning enough in itself that something is wrong. Laggards are losers.

Speculative flings in search of “something that hasn’t moved yet” can sometimes sweep up a laggard issue or two, but by and large, the hope is that what did not happen yesterday and today will happen tomorrow– only because the market seems so marvelous– and as the bull surges on without that stock, the reality becomes progressively more urgent: a stock does not have to go down first to show that it is becoming weak. Merely not going up is, under most bullish circumstances, a sign of trouble brewing.

– Justin Mamis, When to Sell

But we must remember that there are times when the market, or life itself, is incoherent, unclear, and/or conflicting; times when it isn’t us, it’s it.

– Justin Mamis, The Nature of Risk

Because the market anticipates, the more you know, the later it is. The later it is, the greater the risk. There is no safety to buying on positive information (or shorting on bad news). Thus all information has a negative bias against the price trend.

– Justin Mamis, The Nature of Risk

We have to understand that all stock market decisions– each and every one, including doing nothing– involve risk. Some people believe they can minimize their risk by relying on the cop-out “risk/reward ratio” cliche: “Ten points potential reward compared to 5 points potential downside” becomes “okay to trade” without even the slightest consideration of what the chances are that the stock will actually move in the undesired direction.

It is the risk itself that needs to be analyzable, not the potential reward. The stock might already have moved extensively; the reason might already be known; support underneath might be flimsy; the stock hasn’t moved yet even though the market is already up a lot; and so on. Not until we grasp the extent of and kind of risk should we consider the degree of reward. Hope has never kept a stock up when it doing things wrong.

– Justin Mamis, The Nature of Risk

The question “Why does a chicken cross the road?” is no joke on the Street; when someone asks, “Why is that stock going down?” the objective answer is, “More sellers than buyers.”

Therefore, if the law of supply and demand– the one thing you can keep track of objectively, the one tool that is devoid of emotion– tells you you’re wrong, it’s wise to accept it. You may think Kodak is going still higher for all those “becauses,” but if that support level gives way in the marketplace and the price falls to 125, don’t fight it. “Can I bear to take yet another loss?” “Suppose I sell and the stock goes back up?” “How can I sell such a nice company?” Can’t you just hear those echoes? But the rule is as applicable to the stock market as it is to real life: Do not rationalize failure.

If you root for stocks in the market game, there is nothing wrong with being a fair-weather fan. The decisive act of selling may turn out , with hindsight, to be a mistake, but the indecisive act of not selling can turn out to be a disaster.

– Justin Mamis, When to Sell

Indeed, the market often does look easy in hindsight. Tops are made as everyone rushes to buy what has been profitable already. At that point, to the astonishment of those who’ve missed it, the cliche becomes: “The easy money has already been made.” But while it is happening no one realizes it; investors are caught up in the classic “wall of worry” instead. It never can be easy because the rule of the market is that you have to act before you know enough. Because it is a process, there is no one moment, or single point, at which one can make an obvious “sure” decision.

– Justin Mamis, The Nature of Risk