CONSTANTLY ATTEMPTING TO AVOID RISK IN THE FINANCIAL MARKETS IS A FOOL’S GAME
I draw on experience quite a bit since I have been at this since the mid-90s. The only time I have been away from it is from 2006-2009 after I closed the doors to my hedge fund and decided to take my professional life in a completely different direction.
The entire time I have been trading I have been public about it. By public I mean that I have a need to share my thoughts and analysis with whomever will listen.
When I was working on an institutional trading desk I would share ideas with those around me.
When I stopped working for Wall Street firms I would talk shop with friends who were also involved with the market.
I started a blog in 1998 before blog was a word. I simply began typing ideas and posting trades.
As a result of these experiences and interactions with all types of investors I have drawn a distinct picture of what each period was like.
In the 90's you couldn't get a single trader to even consider hedging. It wasn't a consideration in the least bit at that time. There wasn't a need for it due to the favorable circumstances. If you wanted to avoid risk you went to cash and that was that.
In the early 2000's the bullish euphoria was ongoing despite the bursting of the internet bubble. My website was quite popular then and I had a small army of paying members. I remember when I went from being the ultimate cheerleader of the bull market to raging, shit kicking bear I had a mutiny on my hands. This was during the second half of 2000. I was balls to the wall long at the March 2000 top in the Nasdaq after being up nearly 400% in 1999. I wasn't about to take my foot off the pedal. I paid for it by one of the steepest and fastest drawdowns I have ever experienced between March and June.
When I recovered the drawdown during the summer months and began really looking into the market, I decided that the party was indeed over. The punch drunk bulls of the time were not ready to hear that song and I lost a good deal of followers, members and "friends". At that time, being bearish was considered being stupid, late and backwards thinking.
Starting in late 2002 the ramifications of what had happened and the dim prospects of recovering what was lost began to sink in. 90% losses in some of the popular names were not uncommon. The thought of technology coming back was the last thing on the minds of investors. Liquidity was ramping at the time due to an accommodative Fed realizing the scope of the problem at hand. Cash was king, equities were death.
Each one of these periods had a different theme, attitude and texture, if you will, associated with them. There was always a demon in the distance that investors were trying to avoid. Typically that demon had already passed investors but they were too slow to realize it.
What I see in the present market is an attitude towards preserving capital that doesn't correspond with the environment at hand. Investors have become so sensitive to risk that they are either looking to hedge every spike or cash out at the first sign of trouble. This is a mirror image of the attitude that was with us at the tail end of the 1990s when abandoning risk or protecting against it was seen as being irresponsible. Warren Buffet was seen as a washed up old man in 2000. If you were investing then you'll remember all the negative press that accompanied his "antiquated style" of investing.
Now aggressive risk takers are frowned upon. If you are not hedging you are an irresponsible steward of capital. If you are not looking at going to cash at every opportunity, you are reckless. If you are not widely diversified across numerous asset classes then you are an amateur. The thinking is indicative of the extended period of abuse investors have faced over the past several years...and it is down right wrong.
To attempt to avoid risk within a mechanism that is built off risk means that you are not playing the game. It means that you are fooling yourself into a sense of safety when, in fact, what you are doing is simply avoiding getting in the water all together. It is not responsible and wise to miss out on one of the greatest rallies EVER in the markets. It is as foolish as being long the Nasdaq in 2000. Or being in cash during early 2003. Or buying a condo in Miami in 2006. Or buying a tulip in Holland in 1637.
Being conservative at the wrong time can be just as foolish as being aggressive at the wrong time. The only difference is that when you are aggressive you see your capital disappear in the form of losses. When you are conservative you have no way of tracking the opportunity cost of what has been lost. Since the loss isn't apparent, it is much easier to ignore. It is, nevertheless, a loss and a steep one at that.
This doesn't mean that your first move tomorrow morning should be to pour all of your cash into high-beta technology stocks. This is a call to change your frame of mind towards risk and realize by attempting to avoid it, all you are doing is fooling yourself into thinking you are being responsible when you are being anything but.
