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Tuesday, February 27, 2024

Don’t Just Do Something, Stand There!

"I will not fear
Fear is the mindkiller,
Fear is the little death
That brings total Oblivion
I will permit my fear to pass
Over me and through me
And where it has gone
I will turn the inner eye
Nothing will be there
Only I will remain."

I posted this quote on Wednesday, August 1st, when the market was reeling from shocks and I mentioned that we needed to get to cash, get analytical about the market and avoid complacency in either direction.

It is with tongue firmly in cheek that I title this article the opposite of Sage's last post as I mentioned in last week's wrap-up that I followed his guidelines on Vacation-Proofing my portfolio prior to my trip (going quite well, thank you!).  What I have seen this week though, is a lot of fearful behavior; by retail traders, by pro traders, by the Fed, by World Banks… pretty much by everybody!

One thing I learned as a CEO, as a consultant, as a trader and as a parent is that, while there is certainly a time for action, there is also a time for inaction – a time in the early stages of a crisis to asses a situation calmly and rationally in order to determine a PROPER course of action.  There is an expression that goes: "fools rush in where angels fear to tread" which I have always used to illustrate the value of good due diligence to my M&A clients but it is also very appropriate for this kind of market.

Once I lost $45,000 while flying from NY to Houston on a market dip but worse than the fact that I had arrogantly not hedged my positions was the foolish way I overreacted and tried to "win it back" once I got to Houston, far away from my regular trading desk and most of my notes.  I quickly doubled my losses and had a very gut wrenching plane flight home, with my portfolio in turmoil – left to the whims of the market.

I often tell members that I don't mind losing money as long as I learn something but that's total BS when it costs you $90,000 to find out your positions aren't as strong as you thought they were.   The lesson I did learn from that trip was not how to hedge, that cost me many, many thousands more, but at least I learned that I SHOULD hedge – and now I do it well enough to teach it to others.

Sage said (just below this post!): "Trade the stock market cognizant of the sentiment shifts that will inevitably occur yet with the conviction to trust your own judgment. If you get pulled from pillar to post by the media injecting fear on the down days and complacency on the up days, you will be trading on emotion with little certainty as to what action to take, when to take it or why to take it.  So, take charge of your decisions and remain alert and flexible to the shifts in sentiment. And, when sentiment shifts occur, whatever you do, don’t just stand there!"

My only addition to that is to emphasize that you FIRST let your fear pass over you and through you, THEN take measured action.  As I'm on the Disney cruise, I have had occasion to watch all 3 Pirates of the Caribbean movies this week and you see many Captains acting in a time of crisis.  While you are unlikely to be attacked by zombies, skeletons or sea monsters in your average trading day, from the actions of the investors around you, you might think that's the case.

One thing you'll notice about the Captains in this movie is that they DO NOT immediately give orders.  When a storm hits (or monster, or whatever) the crew tends to scurry about madly ATTEMPTING TO STAY THE COURSE (ie. stick with your investment plan) and, in short order, the first officer will come up to the captain, apprise him of the situation and then says "Orders Captain?" at which point he WAITS FOR ORDERS!  Why does he calmly stand next to his captain while the deck is burning and the crew is in chaos?  Because he trusts the decision making ability of the man in charge (this should be YOU!) to assess the situation and come up with the PROPER course (not a random course) of action.

Once the captain gives an order (you decide to rebalance your portfolio) there is a flurry of activity as the first officer puts 100% into making sure the captain's orders are met.  When you think about all the effort (and cost) that is involved in changing course, it is no wonder that we should be willing to sacrifice, to take a few blows, to let the FEAR pass over us, before we commit to a new action.

A ship that does nothing more than react to each wave that hammers its sides will simply turn and turn and turn, taking blows until it is torn apart.  A decision must be made, a course laid in and a plan must be followed or your crew (your individual positions) one by one will be washed away with the sea.

Hedging is the tool we use to prevent that from happening.  If we are properly hedged, a few moves against us may sting, but they shouldn't wound.  This gives us time to calmly assess the changing market, understand the new paradigm and gage our own preparedness (our investment mix) to deal with it and to choose the course that will best get us to our goals.

I love choppy markets, I get to see how my various positions handle up days and down days, I get to see which of my callers get taken out and which ones fly into the money faster than I like – it makes me a better sailor because I learn the waters under the harshest conditions, giving me great confidence when the storm subsides (and they always do) and I can sail in calmer seas.

In an experiment this week (which I was able to do as I am ridiculously ahead) I left my positions 100% untouched for the whole week.  I did not trade when we were up 400, I did not trade when we were down 400 – I stayed the course, my first officer is still standing by my side waiting for orders and I have had a great chance to see how my crew acts under pressure!

I'm very pleased to say that all went far better than I expected:

  • The Short-Term Virtual Portfolio gained 7% for the week, finishing up 451.7% in total.
  • The Long-Term Virtual Portfolio lost $95, still up 173.5% for the year.
  • The $10,000 Virtual Portfolio gained 14%, now at $14,366

The other virtual portfolios did quite well too and the full report should be on the member site by Sunday.  There were two points that I wanted to illustrate by doing absolutely nothing this week.  1) That hedging works, it is a wise strategy that has value in every market.  2) That there is no need to panic when a day or two goes against us – if we are prepared for a storm, we may end up with a favorable wind to tilt our sails into – but we'll never have the chance if we are dashed on the rocks by the first wave!

Trade carefully out there – Captain Happy has been flawless this week and I cannot thank him enough for stepping up and taking the helm in this amazing week.  Option Sage has also been dead on with his analysis and, as much as I'm enjoying my vacation, I can't wait to get back to my own crew as it looks like we all have one hell of an adventure ahead of us!

I won't be around tomorrow but here's what I see from the big picture:

  • The CBs jumping in this quickly blows their credibility.  Bears must be freaking out that, effectively, the market is very openly rigged for the bulls. 

    • What kind of BS free market system bails out investors on a pullback of less than 10% after 60% gains over the past few years?
    • While the ECB can afford to keep this up, we can't, already our Fed's bailout pails in comparison to Europe's $130Bn injection (the first since 9/11)
  • IKB is a HUGE mess.  It seems they need $12.5Bn to keep their heads above water.
  • Commerzbank had a great quarter but got killed anyway (it's a BUYBUYBUY on the way down for EU investors).
  • BNP's sell-off is also ridiculous – all this leads me to think Europe could get  a huge financial bounce IF the US starts to stabilize.
  • Fortis (Dutch bank) had a great Q, and is still happy to be taking over ABN.
  • BID's amazing quarter shows the rich are indeed getting richer (and don't mind spending it!).
  • EADS is selling off plants and BA is down???  BUYBUYBUY BA!

    • The Augsburg facility is their single largest aerostructure supplier, it would take years for them to rebuild capacity to match BA.
  • Warren Buffett is still my hero – he owns Brock Grain Systems, they make grain silos, which are in huge demand as farmers have planted record amounts of bulky corn crops.  Good sector to look at long-term as ethanol plants don't have a lot of storage facilities — yet!
  • Hurricane forecast lowered again – ROFL!
  • We need a European recovery in the morning as those indices are leading us downhill.  I hope someone took those FXI calls I suggested on Friday!

Have fun tomorrow, looks like another fun day ahead,

– Phil


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