‘We have two classes of forecasters: those who don’t know – and those who don’t know they don’t know.’ – John Kenneth Galbraith
The year of the American contagion, the year of chickens coming home to roost, the year of the bailout, 2008, went into history as a momentous time of tumultuous market moves in stocks, commodities, currencies and interest rates.
The year witnessed the onset of a worldwide economic panic with an assault on the global economic system and our form of democracy. The forces of deflation and inflation continue to slug it out in a titanic struggle for dominance. We’ve managed to navigate the stormy seas with a steady hand on the tiller. One of the keys to our success is keeping a sense of perspective.
I’d like to share some seemingly impracticable musings you may find useful.
Some Cautionary Tales on the Market
In 2008, volatility skyrocketed beyond belief. Most market participants, even professionals, were caught by surprise. Big money was made and lost, both up and down, with astonishing speed.
It’s long been known speculators make their fortunes from changing prices, and leverage is an important tool for speculators. Leverage involves using OPM (other people’s money) to try to make more money than you can with your own funds.
Using OPM may augment your reward when you are right, but it may also greatly accelerate the risk of additional loss when you are wrong. That’s the aspect of leverage that so many forgot during the heady times of money trees growing to the sky.
Even some of the market’s smartest participants are done in by blind arrogance. The famous story of the 1990s rise and fall of hedge fund giant Long-Term Capital Management, excellently chronicled in Roger Lowenstein’s When Genius Failed, comes to mind.
That cautionary tale is particularly apropos to today’s enduring financial crisis. Successful trades blinded the firm’s brilliant partners to the possibility of failure, ultimately sealed their fateful demise and threatened the stability of the entire financial system.
Leave Your Ego Behind
In this business, I believe you are better served by checking your ego at the door. Having a complete game plan includes preparing for the worst in every trade. Remember to always speculate based on what you can lose, not what you can gain.
Applying sound money management principles (such as never adding to a losing trade) allows you to stay in the game and avoid being knocked out through inevitable times of losing trades.
If you have anticipated the possibility of loss and are prepared to withstand it, no matter the severity – because you positioned always with known and completely limited-risk vehicles – never be surprised when the market moves against you.
People invariably ask me what I think the market is going to do. I always say that if I knew what the market was going to do, I wouldn’t have to work. Use technical levels of support and resistance to set your exit strategy for each trade.
Make sure that you or your broker monitor your positions closely. The market doesn’t ring a bell when it’s time to get out. Have your plan in place ahead of time and you can smile, laugh, take your profit a step ahead of the crowd and enjoy your accomplishment with a sense of wonder. No matter your success, always be surprised when the market goes your way.
So, like me, never be surprised and always be surprised. Don’t forget that forecasters, even those with good reasoning and strong opinions, are practitioners of uncertainty. That view will serve you well. I hope you found the above mentioned thoughts helpful and wish you all good fortune as you vie for fun and profit for the rest of the year.
Steve Sarnoff
Contributing Writer, Money Morning
Publisher’s Note: This article originally appeared in Penny Sleuth
From the Archives…
Why the Stock Market Boom is on Pause
8-03-2013 – Kris Sayce
Why the Dow Jones Record High Doesn’t Matter
7-03-2013 – Murray Dawes
Taking China’s Economic Pulse from Hong Kong
6-03-2013 – Dr Alex Cowie
Buy Gold When They’re Crying…Sell Gold When They’re Yelling
5-03-2013 – Dr Alex Cowie
Do You Want to Be Right About Investing, or Do You Want to Make Money?
4-03-2013 – Kris Sayce
