Herd still sour

I don't mean to sound preachy or smug with this post or any of my posts.  I make these kinds of posts not so much to try to smugly educate people about my beliefs but more so for myself - to reinforce what I know, bringing out the savvy, inner spok within me so that when the emotional, impulsive and paranoid George Costanza in me tries to take over, I can go back and use these posts as a way to talk to my cool, calm and collective self.

I went to Chapters yesterday to buy some books and magazines for my upcoming trip to Korea. When I visited the economic/business section I noticed an overwhelming theme from the book titles. Doomsday books like I.O.U. and books that talked about the crash and why it happened were dominant. I don't think I saw one book that had optimistic overtones...at least from the titles that were visible to me as I was browsing. 11 years ago, books like "DOW 36000" were the dominant theme.  The contrarian implications of these doomsday and  "after the fact" books that talk about the crash are quite bullish for the long term especially because of the fact that the stock market has recovered so strongly and yet these books still take up the most space on the shelf. You think the bull market is going to end like this? Highly doubt it.

On these pages I've been showing example after example of how the herd is still dancing to an old tune that no longer plays on the radio. Mind you, observing these kind of things won't help predict where the market will be in the next few weeks or months. Think bigger, think longer term....I tell myself this all the time. I know, I know...it's hard to do that given all of the shit that's going on in the world. But you know what? Look at history to see when it was the best to be a long term bull...it was always during times of uncertainty and gloom like now. Would you rather wait until the unemployment rate drops to sub 5%, the government is running surpluses and consumer confidence is high? Ok fine...you do that. But if you think the stock market won't advance substantially before that happens you have another thing coming to you. Unfortunately, most people chose to be bullish when everything is peachy like this which often coincides with the next bear market being around the corner. Guess when was the last time the US had sub 5% unemployment, consumer confidence was at all time highs and the government was running surpluses - 1999.....a great time to be invested long term for "Dow 36000"....not.

I should also say this...don't think I don't have the same worries and concerns as the next guy out there about today's problems. Although it's my belief that they will somehow get resolved or at the very least get pushed back for several years based upon the action of the stock market for the past 2 years, anytime the market does drop sharply I can't help but get concerned. When the market corrects for a prolonged period like it did in the summer, deep down I can't help but have nagging doubts about the LT bull case even if I was expecting such a correction. It has taken a large of leap of faith to be bullish, it takes courage and it feels somewhat uncomfortable. But ironically, I know from experience that if I feel this way I'm probably on the right side of the market. Back in early 2001 I felt the exact same way when I was bearish. Being a bear back then was very difficult. After all, the 10 years that preceded 2000 were glorious bull market years and anyone who was bearish got absolutely crushed over and over. I remember when the fed did a surprise rate cut in January of 2001 and the financial media trotted out statistics that showed every time the fed cut rates the market was up a year later with one exception....1930. These kind of stats made bears sweat I'm sure...it certainly made me sweat.

Back then in 2001 I was still fairly new to the market and although I avoided going long stocks except for some gold stocks (which I sold waaaaaaayyyy to early...don't even go there....I bought them right at the beginning of the gold  bull market), I didn't have enough confidence in myself to short stocks and make money from my bearish convictions. This time around as a bull I had more confidence in myself compared to 10 years ago and I've done well, but I could have and should have done even better if I had complete confidence in myself...not to the point of hubris but confident to the point where I where I should have been able to just "let go" and pull the trigger aggressively (but not recklessly) every time I had a strong inclination and be confident enough to believe that if it didn't work out, I would be able to eventually make up it for and more. At times I did do this but at times I didn't.

I'm still struggling to get to that point where I believe I'm operating at the most optimal level. It's very difficult if not impossible to get to this point because it requires you to be maitain multiple delicate balances simultaneously in 1)self confidence  2) perception and 3) discipline vs conviction.


1) It's neither good to have low self-confidence or too high self confidence. The optimal level is to be high but just below the level of hubris. And that confidence has to be earned. A newbie can't have high confidence in his abilities to play the market because he doesn't have a track record of success and therefore should play small. The worst thing a newbie can experience is to have big initial success. That results in a false sense of confidence which leads to bigger, bolder bets ultimately ending in big losses and the humble realization that their abilities were't as good as they initially thought. When you've earned your stripes, you can be bolder.

2) You need to see the market for what it really is without ego, bias, anger and resentment focusing on what counts while ignoring what doesn't. Do you avoid taking a loss because it will hurt your pride too much? Did you get burned by the market in the past and have been bitter ever since? Are you angry at the economy because you lost your job? Are you trying to "push" the market up or down with your positions because you personally believe the economy/stock market "deserves" to go in that direction? If you answer yes to any of these questions your perception of the market is impaired and your performance will suffer...potentially fatally similar to the driving performance of a drunk.

3) Where do you optimally draw the line between giving your position time to be profitable and cutting losses short?  What is the optimal degree to which you "let winners run" as opposed to taking profits? There's no way to determine for sure what is optimal.

If any one of these 3 above factors are out of whack it will contaminate the other ones... and there's really no way of knowing for sure whether you are in perfect harmony because you can't quantify these things like you can with your body temperature for instance. Plus, how do you quantify how much luck played a part of your performance? Again, you can't know exactly.

It's a fascinating game isn't it? The fact that there's so many unquantifiable variables at play makes it impossible to know if you have truly mastered it. Although I know that I can never master it, I love the challenge of trying to do so anyways, constantly trying to improve myself. It's like trying to fully understand women. The room you have for improvement is infinite.