It's Not You, It's Me

• Posted by Derek
• on November 3rd, 2009

At one point in our career, we’ve all felt we might be better off pulling a “Costanza”. But to be successful, a speculator must maintain perspective. We are not as smart as we think when we’re printing money, nor as dumb as we feel when things aren’t clicking. Note I use the term think for success, and feel for struggle. The illusion of control causes us to think that our actions drive the outcome, when they are really just one part of the equation. At some point, we need others to love our idea in order to profit. How can we balance the opposing forces of long-term success and short-term struggle? At one point on Monday, Brian Shannon said he was “not in tune with the tape”. Was he off his game, or was the market just not embracing trends that day? His best friend is price, and it wasn’t following through. If he were a guy that constantly changes strategy, we wouldn’t know if it was him or the market. But because his methods are consistent at exploiting trends, we could assume that it was the market that was a little “off”. Not a trader? How about Warren Buffett, or any of the value managers whose clients fleed in 1998-99 because their style was so out of favor? Had they lost it, or was the action elsewhere? Because this group bases its approach on the fact that styles come and go, there’s no question they would stick to their guns. A little extra research and soul-searching perhaps, but confidence that the robust methods they had applied for decades would eventually come back into play paid off when the NASDAQ bubble burst. How long do we allow struggle before reconsidering our methods? These are crude estimates, but to me a daytrader should always be within one great week of making all-time equity highs. At the other end of the spectrum, a deep value player should be able to overcome his largest drawdown with one great year. Anything beyond this, and all bets are off…we need to consider “Is it me?” No matter the style, we all share a desire for an equity curve traveling from lower left to upper right, and P/L can be both a measure of success(durable) and a reflection of the market’s appreciation(fleeting) of our style. To repeat from my prior post, know your spot on the curve. Expect to feel “off” at times. What youmay gain with style diversification, you lose by lacking the deep experiences to compete amongst the sharks. There are options for diversifying your assets, but it should involve letting an expert run with that chosen style while you stick to your bread and butter. I like how value maven Todd Sullivan responded on his show a few weeks back to a question regarding the level of the indices…to him, the only thing that mattered about the rally was that it shrunk his universe of candidates. A trend follower needs to have the same discipline in recognizing when the universe of trending candidates shrinks. Our style is personal…realizing the context is universal.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

blog comments powered by Disqus