A WORD TO THE WISE: STAY OUT OF YOUR OWN WAY
The recent death of volatility, which I outlined in detail last night, has some very real consequences for active participants within the marketplace. Being on the short-term side of the trading equation is certainly going to become a lot more difficult going forward. Yes, there will be profits to be had. Forget, however, about the 30 or 40 percent gains in leveraged ETFs over a few week time period.
The question then becomes how to best extract the type of gains out of the market that will line your pockets in gold, while making sure that you aren't going around harming small animals and terrorizing convenience store owners? In other words, you want the strategy best suited to creating the greatest gains while maintaining the least amount of stress.
The good news is that with the annihilation of volatility from the marketplace, the ground may be fertile enough to plant some seeds with a long-term time horizon. This is assuming that volatility will remain contained. According to the study I posted last night, volatility shouldn't return until the latter half of 2012 at the earliest. Volatility very rarely jumps off a cliff as it has recently only to climb back up a short while later. It takes its time in reemerging onto the scene. I don't expect this time to be any different.
The bad news is that this process takes patience. 99% of investors get in their own way when it comes to making the type of money that they should out of intermediate to long-term investments. I am not immune from it and I know that you aren't either. I have met numerous professionals who have a difficult time with it. Your skill level, education, social status or number of times you've been divorced have absolutely nothing to do with the fact that you are human. It is in our nature to fear what we have (short-term profits) being taken from us while hoping what we don't have (a situation that you knew would be profitable but has turned into a loss) turns out as expected.
As Jesse Livermore pointed out, instead of fearing you must hope and instead of hoping you must fear. You must fear that everyday you are sitting with a loss that the loss can grow into something larger. And instead of fearing your profit will turn into a loss, you must hope everyday that it grows. I am quoting loosely here from memory. But that is the gist of it. It's the long way of saying, "allow your profits to run and cut your losses short."
2012 may end up becoming a period in time when sitting back and allowing your money to work for you may be the best thing you can do. With that said, I have started the process of finding names to invest in with an intermediate to long-term time horizon. I typically like to find no more than a handful of names to focus on within a portfolio. Most investors don't need anymore than a dozen names within a portfolio...that may be even be a stretch. 9-10 portfolio positions is plenty. Otherwise, you are basically emulating the S&P 500 and should just simplify things by purchasing SPY.
I should have a list of names to purchase by this weekend. I will still be trading the leveraged ETFs. However, I will have a majority of the portfolio allocated to a longer-term strategy.
As of now, I have roughly 25% of the portfolio in SCO and the remainder is in cash.
Bottomline: With a complete 180 in the character of the market and the very obvious exit of volatility, short-term strategies should be traded in for intermediate to longer-term stock picking strategies. An effective method of buying and holding names over a period of several months will outperform nearly all short-term strategies without all of the headaches that come with attempting to grind out short-term profits in an environment devoid of volatility.
