Insights Into a Rough Month of Trading -- Like a Botched Football Game
By Alex Salomon
Columns & articles on the “positive” tips and lessons for active investing are common. I have written a few and they are actually quite abundant. They offer valuable lessons into the positive side of being an independent investor. These columns help create a foundation for one’s trading style by covering important topics such as discipline, respecting price action, and not having to invest at all times. In short, you can frequently read about winning seasons and Super Bowls.
Less frequent columns describe the fumbles, interceptions and muffed punts of trading. My trading since Sept. 28 has felt like an entire season of Chiefs and Panthers combined so I wanted to share. It has literally felt like one of those games where the viewers gasp, asking how can a running back fumble 3 times in the same game?
Allow me to review the play-by-play before we draw some conclusions and lessons on “What Not To Do!”
For the “First Quarter” (before I joined Twitter), I have my own time stamped proof that I had caught the Dec. 15, 2011 rally into February. 14-0.
Then I came Twitter and “time stamped” tweets from @Alex__Salomon: the “Second Quarter” included an “all cash” message on May 17: 17-0. Then the “I am all in against most of the world’s doom” tweet on June 4: 25-0 (yes, going all in on June 4 was akin to an 8 point TouchDown!)
The “Third Quarter” started with a good possession: on Sept. 28, I went “all in bearish” and actually wrote about it on October 1: “Apple, Fruit of Doom then Bloom.” All of my indicators were flashing red. Yet the market grinded higher. And when the October NFP came in strong, I was stopped out of my position for a loss. It was not a big loss; the S&P had only moved 20-30 points, or roughly 2%. So, call it a FG against me: 25-3.
When I got stopped, I took another look at my signals. They were still flashing “red” but that small loss left me smarting a bit and had me doubting my signals. So I failed to act! The market did grind lower, and I left money on the table despite clear indicators. Another FG for the bad guys! 25-6
That brings us to the middle of October and against conventional wisdom, I’m feeling like I need to be a hero: I want to call a tradable bounce. The markets are heavy, and looking oversold. On October 15, I penned another Trading Ideascolumn about positioning for a bounce.
I take the bounce in 2 different ways:
1) I load (TWICE!) on calling a tradable bottom, I make money (TWICE!), I then get greedy and “loose” and get cut for a loss in the following day(s) (TWICE!). Interception!! Another FG! 25-9.
2) I then load up on Apple (AAPL) before earnings. I take an approx. 0.5% portfolio position on naked calls. Apple fumbles and my calls are (for now) worthless. The notional value is very small, but the loss is still complete: 25-12.
The last week of October does not get better: I call another bounce and Hurricane Sandy intervenes. I think I am going to be stopped, but I don’t. Instead, we bounce and I make money… but the bounce only lasts one day and I get stopped. Third time of the month!! 25-15.
1) The reason the market only scored “Field Goals” on my mistakes is because the total losses represented just a small portion of my yearly P&L. I actually even made some money in October (on Apple bounces, on Eni (E), and on Emerging Markets (EEM) or was flat in other areas) but that is exactly my “first mistake:” I came into September with massive P&L profits so I justified giving some back (by taking losses) because it was still going to be massive.
In short, I made the mistake to justify losses because I could afford them.
2) All my indicators were flashing red (still are, as of November 2) and yet, I flinched. I didn’t doubt them, but I was flimsy. I made most of my 2012 returns from the long side and I became a hesitant, fearful bear.
I pride myself in being able to make money both as a bull and as a bear, but after 9 months spent with a bullish mindset, making the switch was more difficult than I realized.
Tuning out bearish noise when I am bullish is as difficult as tuning out bullish noise when I am bearish.
3) I have been investing for 16 years and yet I still made rookie mistakes … in the same way that Peyton Manning still throws INTs: I tried to call a bottom – in spite of my indicators not flashing for one.
Simple, good old Greed. BIG MISTAKE!!
The same greed pushing a QB to squeeze a ball when he shouldn’t animates the trader to call for bottoms or fast gains when he or she knows better.
4) I got stopped a lot, for small losses and also some small gains. All in all, I was 90% in cash at many critical junctures and yet, I felt the anxiety of missing out.
Even on Friday via Twitter, when Peter Tchir (@TFMkts) and I were conversing about fading the NFP bounce, I felt the anxiety of having missed the bounced and then missed the fade. Again, the mistake here is good old Greed: The anxiety of greed and of not participating. It takes serious nerves and discipline to be out and stay out.
5) Lastly, as mentioned, I bought some naked bullish $650 December calls ahead of Apple’s earnings. I had defined my risk and size and knew I could lose. The earnings came out, they disappointed, the stock tanked then recovered. I had the chance to take a much smaller loss; the market gave me an early out, a 35% haircut. Instead of that, I kept the calls, justifying them by “it’s Apple after all, it can bounce to 650 in 50 trading days.”
I justified the loss, the position, and the risk because of the company behind the stock. Yet I would have cut any other company (Google, IBM, any other stellar performer). I made an emotional call linked to an irrational appreciation of Apple as “The Winning Stock.”
It is a huge mix of mistakes: Greed (again), an emotional call, an exception to the rules, and a “casino-style” position.
But I did get something out of it: a reminder post-it note! It’s glued to my monitor!
This list, in a nutshell, is the dark side of investing. It covers a lot of less frequently covered “Investment Lessons for Life”: avoid greed, don’t rationalize losses, stick to “positive rules,” and remove emotion!
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