When I was younger I would fight trends a lot. I was that guy regularly betting on mean reversions.
Then over time I realized just how stupid that was.
I was actually a permabear in early 2013. I admit it. It was a great lesson that will help me for the rest of my investing life.
We all have to learn somehow.
But that’s the point. We need to learn eventually.
For me, the problem stemmed from some of the success I had in 2008 when the market was crashing. I nailed that one. And it felt nice to have people much older and more experienced than me tell me how great I was. That was cool.
It was too cool. I wanted to have that feeling again. I wanted to call the next great crash. I “knew” it would happen in 2013. Or even just a mean reversion. I don’t remember my reasoning, but I do remember not wanting to buy new all-time highs and kept fighting that trend.
It took a few months, or maybe even a couple of quarters, to finally get it.
Just stop it, stupid!
And so I did. It wasn’t a fun experience, but it had to happen. I needed the market to slap me in the face. I had to learn for myself that an ego has no place in this business.
This has served me very well ever since.
Living a life of mean reversion can be painful. Following trends is a much better way to live. Trust me.
So if you’re going to play for a mean reversion, which we do, by the way, I think you really need to be sure. The weight of the evidence has to be clearly pointing to a mean reversion, so much so, that it would be irresponsible not to execute in that direction.
But again, you better be sure. You better know what will prove you wrong. You better stay disciplined. And I would even incorporate the “Chicago-Stop-Loss”, as I call it.
This one is old school and comes from the Chicago trading pits. It’s a time stop on mean reversions trades. In other words, if you’re purposely fighting a trend, and the trade doesn’t turn around and start going your way within a defined period, all bets are off.
Aside from some exceptions, we would rather be trading in the direction of the underlying trend. In the stock market, that trend is usually up.
Permabears Sound Smarter
The Bear case always makes you sound smarter. And the best and most egotistical permabears sound the smartest. That’s always been the case. Their arguments have more drama to them. And humans love a good story, no matter many times the storyteller has proved to be just that: Someone who makes up stories.
As my friend Morgan Housel writes,
“In investing, a bull sounds like a reckless cheerleader, while a bear sounds like a sharp mind who has dug past the headlines.”
And the permabear gets high off that feeling of sounding smarter. They’re poisoning themselves. And what’s worse, they’re doing a lot of harm to as many people as they can convince to believe their trend-fighting conspiracy theories.
You might be a Permabear if….
Here is a short list of questions to ask and see if you’re one of these people poisoning yourself and others around you:
1) Do you ignore arguments that you don’t agree with?
2) Do you regularly stay wrong well after the market has proven your thesis to be invalid?
3) Does it bother you to be bullish of equities?
4) Do you ignore price in favor of conspiracy theories?
5) Do other permabears look up to you as some sort of cult leader?
6) Do you block open-minded people on twitter because their logical arguments make your brain hurt?
7) Do you wake up looking for reasons to be angry?
8) Do you find yourself blaming others, instead of your own ego? Common examples include the Fed, ETFs, Trump and Fiat Currency.
9) Do you pivot to other asset classes in an attempt to make everyone forget just how wrong you were about everything else?
10) On every down tick in the market do you pound your chest, and then go back into hiding and change the subject when they break out again to new highs?
11) Do you believe that a higher high is most likely the Head of a Head & Shoulders Top?
12) Do you use arithmetic scale charts irresponsibly to make your charts more dramatic?
These people are a real problem. They do harm to themselves, their families and unfortunately anyone who they can get to listen. It’s a sickness.
I was once sick like that. I know the feeling. It’s not fun. It’s a very sad place to be in.
Don’t poison yourself. Don’t let these sick individuals into your life.
Stay open minded.
Don’t become “Mr. Mean Reversion”.
Be responsible when trading against trends.
Markets trend. That is a fact.
There is a much higher probability that a market will continue to trend in the direction it’s going than for it to completely reverse and do a 180. Besides, when that does happen there are usually plenty of warning signs to warrant that.
And finally, be smart.
Don’t be stupid.
Hope that helps.