There’s this common misconception out there that just because you like something and think it goes higher, that you have to own it or do something about it. Same thing to the down side. If I think a stock goes lower, I don’t necessarily have to be short. These decisions really depend on your time horizon and risk parameters. And they’re different for all of us.
This is something that I think is really important to understand. The first thing we all need to do is define how much risk we are willing to take on any given trade or investment. This also ties in nicely to what your timeframe might be. Are you a long-term investor? Are you a day-trader? Or are you somewhere in between? Where exactly in between those two are you? I personally tend to look for major themes (i.e. lower interest rates) for a given quarter, and then figure out ways to make money around that premise. If the data changes to the point where I need to reevaluate that thesis, I do.
The most important thing for me is to find a favorable risk/reward opportunity. More often than not, unfortunately, these favorable risk/reward entry points are difficult to come by. So I tend to sit on my hands a lot and do nothing, no matter how much I like or hate the security in question. $TSLA is a great example. I loved it all of last year and didn’t trade it once. The risk was always too difficult for me to define. Sure, I watched it go up and all my friends made a killing on it, but I didn’t. I have to live with that. I can’t get mad. It’s not my style to chase something like this. So I didn’t.
We are all different. Some of us our sell side analysts, some are just tv pundits that don’t manage any money, others are journalists, or economists, etc. None of these people manage a penny. And not that there’s anything wrong with what they do. They have their job, they serve a purpose, and a lot of them are some of my best friends. But they don’t take any risk. They can always have an opinion. In fact, that’s what they’re often paid to do. But if you’re managing a portfolio, risk management is priority number 1. A lot of people don’t have to worry about that. As market participants, all we do is take risk. So we need to manage that wisely and be responsible with it.
Getting back to my original point, there is a huge difference between having an opinion and initiating/maintaining a position based on that premise. For example, I think the US Stock Market sells off, but I’m not short S&Ps. What’s the risk here to be short? I don’t know. So that’s too much for me. Again, I think the market goes lower, but so what? There’s nothing I can do about it here. So I just won’t buy it. There are plenty of other markets and asset classes with more favorable risk/reward ratios.
I think Bank of America gets destroyed. But so what? Last week I saw an opportunity for a little rally (see here) and now I don’t anymore (see here). I look at this as just a counter trend rally within a larger downtrend. But there’s nothing for me to do about it right now because the risk/reward is not well defined, at least not to me. It’s no where near as favorable as it once was when I first thought it was a sale. This is just another example of the difference between having an opinion and having a position. If and when this sets up favorably, perhaps we’ll lean short again. If not, then who cares. There are an infinite number of stocks and asset classes all over the world. Bank of America is just one name and three letters, regardless of how emotional people get about it.
So just to reiterate, having an opinion on something and initiating or maintaining a position are two completely different things. I will write blog posts about what I’m seeing, thinking and/or doing. But this is for me. I use this as a diary to go back and see what I was writing about during different times in the market. I’ve received millions of page views and get some of the most amazing emails from readers all over the world. That couldn’t make me happier. If this helps you, that’s great; incredible in fact. I had mentors coming up in the business as well. But as selfish as it may sound, I promise you that I get more out of this personally than you could possibly imagine.
I often repeat some of the same things over and over again. The more times you tell yourself something or preach it to other people, the harder it is for you to ignore it and do the opposite. So that helps me with my day job.
Feel free to have an opinion. I think a lot of things. I think bitcoin goes into the thousands, but so what? I don’t own any. I think the 10yr goes under 2% but so what? I don’t own bonds anymore. I think the S&P500 goes under 1600, but so what? I’m not short $SPY. I think the Heat win the NBA Finals. But so what? I don’t gamble.
Having opinions and doing something about it are two different things. We have to define our time horizon, figure out how much risk we’re willing to take, and then maybe, just maybe, we can then find a position to possibly initiate. It’s okay to say no. It’s also okay to say I don’t know. We’re not analysts. We’re not journalists. We’re market participants. All we care about is making money. We just want a favorable risk/reward opportunity. Leave the rest to those who don’t take on any risk.
Tags: $STUDY $TLT $SPY $BAC $TNX