The beauty of the global markets is that we’re always learning. There isn’t a single person (or machine) who knows everything and always gets it right. That doesn’t exist. Believe it or not there are people out there who actually think we are supposed to get it right all the time. I guess they’re still learning too. It’s about risk management and positioning yourself in a way that you know you’re wrong as quickly as possible. This is really important not just to save you money, but the opportunity cost has to be factored in as well.
So now that we’re clear on the fact that we don’t always get it right and we know this going into every day, let’s ask ourselves: what have we learned recently?
I’ll go first.
Momentum can persist longer than most people can expect. It was Keynes who taught us that markets can remain irrational longer than you can remain solvent. I’m not a value guy and don’t care about your price to book and PEG ratios, I’m a price guy. So regardless of whether or not you can justify the price action in names like $TSLA and $NFLX – the market participants who drive these markets have found a way to justify their purchases. The reasons can vary from pure momentum trades to shorts having to cover in order to unwind their short positions. But regardless of those reasons, it has nothing to do with your income statements, so don’t bother worrying about them. Lesson: Don’t fight the momo names just because you think that they’ve gone too far too fast. The market doesn’t care what you think.
When everyone hates something, and it becomes a consensus sale, start looking to take the other side. We have seen some epic reversals in fortune recently in names like $BBRY, Coffee and Commodities as a group. Shares of Blackberry are up 90% since this extremely bearish magazine cover in December. By the time the publishers, editors, and graphic designer all agree that this is the cover that best describes this particular security, chances are it’s no longer a secret that the stock has been getting crushed. The result: rip-your-face-off rally. Lesson: Don’t short overextended names that everyone already hates, especially with such a high short-interest. FYI – 20% of the float is still short $BBRY. Look at Commodities (equal-weighted) – nobody cares, nobody likes them. I do.
We have our targets for a reason. When your targets are hit, stay discipline and do what you said you were going to do. Natural Gas is a perfect example. We’ve had $6.40 as our final upside target for most of last year. On Monday, natural gas hit those targets and quickly reversed lower crashing 25% in 24 hours. Lesson: Stay discipline and don’t be greedy because this is what happens if you are. Take profits where you said you were going to take them.
Don’t assume correlations. Lately I’ve noticed more and more talking heads and journalists assuming that certain commodities move stocks in their space. What do Agricultural commodities have to do with Ag stocks? Nothing. I’ve run all the numbers. There’s nothing there. What does the Energy sector have to do with Oil futures? Nothing there. Natural Gas and Natgas stocks? Nothing. Lesson: If you want to buy a commodity, buy the commodity. If you want to buy the stock, buy the stock. Don’t assume correlations because some guy on tv said it exists. Trade the name you’re looking at.
Know where you’re wrong. Before we enter any trade, we know exactly what needs to happen for us to admit that we’re wrong. If we can’t define the risk, we can’t enter the trade. It’s that simple. And we’re going to miss out on opportunities in order to maintain that discipline. And that’s okay because defense is always our number one priority. Lesson: Do not enter a trade where you don’t know the risk.
So that’s what I’ve been thinking about lately.
What about you? What have you learned recently?
Tags: $BBRY $KC_F $NG_F $XLE $USO $CL_F $UNG