Taking time off regularly has been one of the most rewarding parts of my professional life. This is especially the case in recent years now that I’ve finally recognized its true value. Besides the obvious fun and relaxing parts about a vacation, it’s more about the results of that experience that I’m most concerned with. A lot of us work very hard and we spend an inexplicable amount of time and energy trying to solve the always evolving puzzle that we call the stock market. It’s easy for us to get lost in the madness. In fact, as humans, we’re built to get lost in it. So it’s important to recognize that this flaw exists within us so we may act accordingly to counter that trait as best we can.
The harder we work the easier it is to get stuck in a specific mindset. The deeper we get involved emotionally, in this case over (too much?) time, the harder it is to visualize the environment from the outside looking in. One of the ways that I try and avoid this common mistake is buy cleaning out all of my charts and starting from scratch to rebuild my entire chartbook. Remember, my book consists of well over 3000 charts in total and I run through these religiously on a weekly basis. Normally I leave my annotations and comments for future review, but once per quarter I wipe them all out completely and start all over again.
I’m going to tell you a little story about what happened to me exactly one year ago. I went on vacation for about a week or so last June. And it wasn’t just about going on vacation. The point is to get out of your element and go do something else. Anything else really. I don’t have kids yet so this year I just came to Hawaii for a few days. It’s easy for me to fly here from Northern California, where I’m currently spending most of my time (I’m working on a few projects and it’s in my best interest to be out here for now).
Last year for a similar occasion we went to Cabo San Lucas, which was amazing. We left to Mexico in mid-June and at the time I was extremely neutral towards equities and even bullish of bonds as I thought rates would fall. This came after a period of being very bullish of stocks since late January of last year. So I was heading to Mexico during a time where I thought a cautious stance towards equities was best. This to me is the best time to get out of town, but it obviously doesn’t always work out that way.
My bearish case at the time had more to do with interest rates and weak European Banks. These had been a couple of huge drivers for my bearish thesis throughout the entire second half of 2015. It was fresh in my head. Shame on me….
So here I am leaving to a beautiful hotel in Cabo with some fairly pessimistic views of the world and the overall direction for risk assets. I had been incredibly bullish since early in Q1 but I thought the higher likelihood was that the rally had already run its course. Anyway, that week in Mexico I had a chance to read one of the new Jack Schwager books (I recommend them all by the way) and Wall Street – A History by Geisst. After a week of too much sun and most likely too much tequila, I came back refreshed, more educated and open minded to whatever may happen next in the world. It’s a very refreshing and cleansing feeling, I promise.
That following week was July 4th weekend and we had some guests over (that tends to happen often when you live in the middle of wine country). By that point I still had not dug down to where I really needed to be to in order to feel confident about putting together a much broader thesis towards equities and interest rates. I historically don’t trust the action just before long weekends. I want all the important data to have finished a full cycle. In this case, the end of the month and the quarter as we were entering the second half of 2016. So once all of the closing data came in from exchanges all over the world, I sat there and literally built over 3000 charts. Remember, the point is to do this while keeping a completely open mind about what your thesis might look like once you’re finished with the entire process.
After a few days of good music and more charting than most people can comprehend, what was my conclusion? Amazingly I can’t remember another time where I was this bullish towards stocks, both in the U.S. and abroad. Interest Rates bottomed and it became clear that money was going to come out of bonds in a very fast way and it would most certainly be allocated in the stock market instead. The stocks that looked the most attractive were in Technology, Financials and Transportation. As it turned out, the trade was NOT to be long of bonds at all. It was to short them as aggressively as possible. The overwhelming amount of evidence globally that had suggested a more cautious stance over the prior couple of months changed in an instant once European Banks and US Interest Rates bottomed in early July 2016, right after I got back from a week away from markets in Mexico.
I’m not sure how much of a squeeze it would have taken for me to come around had I not taken that break and started from scratch completely refreshed and open-minded. That shift in mindset at exactly the right time really helped make my 2016. Some people who followed my work contacted me relentlessly telling me I was way too optimistic and they could no longer justify buying my research. I may even share a few of these emails with you at some point simply as an academic exercise. It’s funny to go back and read some of those. The effects of human emotions are fascinating to watch, particularly when it comes to money.
People who watch too much TV and read “news” written by people in media with conflicted interests were missing the bigger picture. The gloom & doomers worrying about things like “Brexit” or “US Elections” completely lost track of what we were trying to do here in the first place: make money in the market. Emotions in the summer of 2016 were running high. Meanwhile, I was busy in Mexico clearing my head and ruining my liver with cactus poison.
So for those of you who are unaware, US and international stocks exploded higher over the next 8 months in one of the most historic stock market rallies of all time. Go run the numbers. Some of the irresponsible members of the media and sell side analysts who prey on the ignorance of their audience call it a “Trump Rally”. Funny, these were the same clowns telling you that a Trump victory or a British Exit would cause mayhem in markets. But nope, it actually preceded one of the least volatile periods in the history of the U.S. Stock Market. The narrative being told/written could not have been more wrong. As historians, we can see this rally started well before any election, U.S. or otherwise. They won’t tell you that because they have different objectives that we do.
I’m writing to you from the bottom of my heart guys. Taking a week off and coming back with a clear head and brand new charts is one of the most valuable parts of my process. I wanted to share this one story because it’s fresh in my head and was exactly one year ago. I’m so grateful for that week off and hope to benefit in similar ways during the second half of this summer and then into the Fall. I will be putting out my Q3 Playbook next week!
The time I spend away from the screens for an extended period of time is extremely rewarding, both physically and mentally. I work out as much as I can, mix in some yoga, and obviously the food and beverages that come along with friends and family on vacation. The working out part might be the most underrated part of that time off process. What I find works best is one week off in the Summer and one week off in the late Fall or Winter. That’s usually Thanksgiving and/or Christmas for me. In between I also like to take 3-4 days off at some point in the early Spring and again in early Fall. It’s usually Skiing for me in Q1 and a road trip for a college football game in Q3.
I don’t have kids yet, but some of my friends who incorporate a similar habit go on family trips or take time off just with their spouse. In many occasions some of my colleagues don’t even go away. A “staycation” where you stay at home and enjoy your local area in ways that you don’t normally as a resident also does the trick. The one issue I have with staycations is that you really need extra discipline to not jump on that computer and do what you told yourself you wouldn’t be doing. This sort of behavior can potentially be disastrous. So if you’re going to take time off and stay local, be mindful of that. I don’t trust myself so I have to leave.
Once you’re back at the office, starting from scratch is really hard to do. Many of us have spent hours, days, months if not years annotating charts and writing comments to review once again in the future. When you go back to your chartbook, you already have the previous annotations and comments to guide you. So it’s easy to get caught in a particular mindset when you already have a bias coming in. So once per quarter I clean them all out and start all over again. I have my lists saved on an excel spreadsheet and can replicate the charts one by one. I build them each on both a weekly and daily timeframe so I get both structural and tactical perspective. It takes a lot of time, certainly, but that’s what I’m here to do. You’d be surprised how a few days of good music and 3000+ charts can change your views about the world.
Many of you don’t have the time to do this but you can be sure that I’ll be there plugging along for many decades to come. I’m lucky that I really do enjoy this process. Seeing the fruits of that labor is always great of course, but it’s the voyage for me and less about the destination. Digging deep into the market using my top/down approach gives me incredible perspective on the world, human psychology, fear and greed. It’s difficult to explain. I think many of you have pointed out my passion for markets and I would agree it’s certainly there. This is a puzzle that is never complete. To me there is nothing in this world more fascinating.
Premium Members feel free to go back and read old posts from last summer or go watch archived monthly conference calls. I find it extremely valuable to review what happened in the same way that a professional football player or basketball player watches game footage. The difference is that I do it quarters later instead of on Monday morning, for example. This exercise is for the same purpose and provides similar benefits. I encourage everyone to regularly audit their brains and execution at a later point in time.
I wanted to share this story with you because if I can get you thinking about yourself and your personal behavior patters, then I’ve been able to help. That’s my goal here.
Thanks for hearing me out