The New Year had not started the way that I hoped. I had planned to hit the ground running (literally) with two resolutions that are important to me. The first revolved around beginning a nutrition plan which I could live with in order to meet the second resolution which is to begin training for the New York City Half Marathon. I have run the race before, but I would really like to crack the two-hour mark. I was all set to wake up at 6:00 am for the first training run of the new year; my clothes were all laid out and ready to go and the weather looked like it was going to be on my side. I told everyone at New Year’s Eve dinner that I was going to break the two-hour mark this year. I was ready!!!
Fast forward to 10:00 am on January 1st and I am on my way to a doctor.
So what happened? I woke up with a fever and needless to say, did not get out the door for the run. The following day I was not feeling much better so was off to see the doctor again. I was completely let down because I have not been able to begin training and I have no idea what I am going to report to my nutritionist about my food diary over the past week . . . How many times can you possibly eat chicken soup in a week?
Disappointed with getting a late start on the “New Year,” I went out for a run yesterday, determined to make up for my lost time. Let’s just say that that I did not turn in the type of performance which will have me below the two-hour mark. As I returned home, visibly upset, my fiance snapped me back to reality (as she usually does). “Dan, you were sick! Who cares if you couldn’t start on January 1st, start now!”
That got me thinking about the market and the start of the year. We have already seen a fair amount of volatility, in both directions, during the first three trading days of 2019, but does that mean it is too late to come up with and implement some investing resolutions for the remainder of the year? The answer is no and here are three which I think can be immediately impactful:
Stop Resulting. In her great book, Thinking in Bets, Annie Duke (a champion poker player) highlights the key difference between process and outcome. The main point is that we can control the former but not the latter. To illustrate, she uses the much-criticised decision by Pete Carroll to pass the ball from a second and goal situation on the opponent’s one-yard line. We all know what happened, the pass was intercepted and the Seattle Seahawks lost Super Bowl 49 and Pete Carroll is widely recognized as having made “the worst” call in the history of sports. This story has been told numerous times and I am most likely not going to change your mind if you believe that this was not the right call. But if you look purely at the odds and all of the possible outcomes, Pete Carroll made the proper call . . . he just got a bad result.
A good trade can lose money and we should not become discouraged because it didn’t work out on this this one occasion. On the flip side, a bad trade can be a winner but the result can be attributed to luck. If we have a proven process which we follow on every trade/investment then every time we implement it, it is a good trade by definition, regardless of the outcome. The point is that if we follow the process over long periods of time, we are likely to come out ahead in the long run. However, if we negate our process to enter a trade based on the latest tip or fad, it is a bad trade even if we make a profit on it because those results are likely not repeatable in over an extended time frame.
Wait for Premium Set-ups. Legendary investor Warren Buffet is famous for saying that “they don’t call balls and strikes on Wall Street. So you don’t have to swing at everything—you can wait for your pitch.” I have attended presentations by members of the team at Fidelity Investments who refer to “the Fidelity Fat Pitch.” At Chaikin Analytics we refer to it as the “ideal set-up.” The name is not what’s important. The concept is everything. Many traders have a need for action or feel like they have to do something . . . you don’t. With the swings in the market in 2018, it was very easy to get chopped up trading on a daily or intraday basis. This is a recipe for disaster for most investors in the long run. A better process is to wait for the premium set-ups that fit your time frame and style. At Chaikin Analytics, this means focusing on Very Bullish and Bullish Stocks (based on our 20-factor model) in leading segments of the market which are outperforming. We want to buy these stocks when they become oversold while the Chaikin Money Flow Indicator is bullish. Essentially, we want the strongest stocks which are being accumulated by institutional investors at the most opportune time.
Manage Risk. I can’t stress this enough. It is that important. The best traders and investors in the world are wrong a lot. The biggest difference is that they lose much less when they are wrong than than make when they are right. This is possible because they manage risk with a rigorous process.
I would say that risk management is the most important thing to be well-understood.
This line comes from an investing legend, Bruce Kovner, in this article which I shared on Twitter last week. This is how the best investors in the world think. They manage the downside so that they are always in the game. We have written and spoken on this topic numerous times but we still receive a lot of questions about what to do with a stock that is 20%, 30% or even 50% below the purchase price.
How you choose to manage risk is unique to you and your timeframe but I find that many investors are not thinking about it at all and that is a mistake.
If a change or a resolution is going to help you become a better investor, it does not matter when you start, only that you do start!