My (Non)Outlook for 2014

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  • on December 14th, 2013

“To the extent that we can control the future, we don’t need to predict it.” Saras Sarasvathy via Decisive 

This UVa professor is speaking of the entrepreneurial mindset here, noting how CEOs love to forecast market conditions while entrepreneurs just attack each day knowing they’ll have both successes and failures. As a market speculator, to me that control means carving our market niche and acting confidently when given an opportunity to “make a sale”.

This is the time of year when year-ahead forecasts are prevalent, a harmless but (for me) useless exercise. I put hours/day into assessing how things are evolving now, and how it fits with my attempt to make money; I’m quite pleased with my growing discipline in phasing out prediction and see no need to change that.

That’s me. It’s not my job to tell anyone else what they should incorporate in their approach. When I read posts from smart guys like Dash of Insight or Calculated Risk or David Schawel, I think two things:

1) If I were to forecast, this is the exact methodology I would use…broad, dynamic, systematic, and empirical.

2) I have no business attempting to forecast when others are this thorough about it…stick to what I do best.

I see my trading(and writing) as both the maximum of narcissism and minimum of ego. The former because I have to be in love with my own process to the exclusion of everything and everyone around me. The latter because despite experience and my constant effort to gauge the pulse of the market, I know little about what may happen tomorrow. And definitely nothing about 2014 except that my process will drive my decisions.

Are there a few common themes that bind us together amidst our variant approaches? I think there are, though this list will be quite a bit shorter than the typical “cut losers, hold winners” type that dictate my own trading. How about the following as universal keys to successful market speculation:

1) Know your timeframe- a constant struggle for everyone between HFT and a Ben Graham cigar-butt investor, but I can’t stress enough the importance of matching the frequency of observation to the duration of the idea. So many opportunities for trend relativity errors when watching more closely than the idea dictates.

2) Make asymmetric bets- to be a winner at this, we have to land some big winners and avoid big losers. Since we rarely(never?) know which ones will move the needle, it’s imperative to only accept trades whose win potential far exceeds loss potential. Use options, deep value, pivot stops, whatever…those Market Wizards we love got there with positive fat tails, not 90% win rates at a nickel apiece.

3) Manage inventory- we’re no different than a merchant with a plan to meet future demand . The value player might stock up on unsold Christmas ornaments on December 26, knowing that he/she can sell them to a wanting audience next fall. The momentum player might load up on club seats for the Super Bowl knowing that limited supply means no price is too high. There is no right or wrong way; there is our process, and how true we stay to it.

My own aversion to prediction does not have to be yours. If I say “Don’t predict”, what I’m really saying is “My predictions have not made me money”. If I say “Don’t pick tops or bottoms”, what I’m really saying is “I’ve never developed a consistent way to profit from tops or bottoms”. As Dr. Van Tharp is famous for saying, “You don’t trade the market, you trade your beliefs about the market.” Best to you in 2014 to both understand those beliefs, and execute in harmony with them.

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.

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