What Is The Crowd Thinking?

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  • on June 8th, 2011

I’m in a drawdown of 3% since our accounts hit highs on May 10.  For a conservative allocator who guards every fraction of a % like it’s the last dollar a client has, that feels like a crash.  It’s not, and history tells me that with or without the market we’ll get back into record high ground sometime in the next 2-3 months.  In 2010, it was 3.5% and we went just over 3 months without a high.  In 2008, it was 6% and the recovery period was 6 months.  It happens, I won’t write a drawdown analysis piece because Peter Brandt wrote the quintessential one here.

We all have stupidity lurking; a shift in market phase is great at bringing it out and giving limited opportunities to fix mistakes.  The market pullback is nothing, barely 5%.  Where I’ve been hurt is in implementing the last piece of my strategy toolkit.  I know from the past that the extra focus needed with adding a strategy is such that all other efforts get overshadowed…I did the same thing in March and lost my sea legs for a couple of weeks.  Combine that misplaced attention with a slow grind lower, and there’s your drawdown.

Staying balanced has helped, even as the hindsight trader in me looks and wonders why I bought anything.  Sorry, this is real-time and I execute on the evidence at hand.  When I review my actions since Memorial Day, the role of trend makes itself obvious:

In a game where all I can control is my actions, I stayed fairly balanced with 7 bull actions and 5 bear actions(the $DIA calls were .15 and I cover those automatically due to risk/reward).  A look back at the market outcome says 12 bear actions was the play, but that’s not how I roll.  Alternating between bull and bear actions is what I personally need to keep myself open to accepting the next great trade, whenever it comes.

I wish I could say handling other people’s money doesn’t affect my actions, but that would be a lie.  I’m not afraid to fail unconventionally, but deep down I know(like every other money manager) that we’re graded on absolute performance in a bear market but relative in a bull.  I can’t stress enough how this plays into collective psyche of markets; in my eyes, career risk plays as large a role as fundamentals when allocation decisions are made.  Think real estate, emerging markets, commodities, whatever…how many billions trashed the initial rally but found themselves with an allocation much later after competitive pressure demanded it?

I find it more realistic to assess what the crowd is feeling than to guess what that small group of bankers in a room is going to do, and I think I know how the majority are feeling right now.  Never underestimate the dislocations that can come when the elephants realize they have positions they don’t really want, and be ready to pounce when they get sloppy…they may be big money but that doesn’t make them any smarter.

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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