QUESTION OF THE DAY: ARE YOU VIEWING THE MARKET OUT OF THE WINDSHIELD OF AN OLD DATSUN OR A BRAND NEW ASTON MARTIN?
I know my strengths and I know weaknesses.
My greatest strength: I am a very good stock picker during bull runs. I have put together triple digit percentage years many times in the past based on a combination of stock picking talent and advantageous market conditions. I doubled the return of the nearest hedge fund in the 2003-2004 based on stock picking alone. Pay no mind that it was Peter Thiel that was in second place to me that year. Just several months later he invested in Facebook while I was in the process of discovering my greatest weakness for the upteenth time.
My greatest weakness: I am a terrible seller. Every stock I buy I believe has the potential to go to $1000 per share. I want to hang on in order to extract every single dollar of profit. I am greedy in this respect and I know it.
I've developed a way to deal with my weakness while capitalizing on my strengths to the best of my ability. The only means of dealing with being a terrible seller or profit taker, if you will, is to create a mechanical system that takes you - the human greed machine - out of the game. I have done this by creating three trend indicators that slowly pull me into cash whenever the market is turning. My opinion of the markets be damned. These trend indicators take precedent over all else. When they begin turning...I take profits. It is that simple.
My short-term trend indicator turned firmly to the downside today. That is the bad news. The good news is that the intermediate and long term trend indicators are nowhere near turning yet. However, the severity with which the short-term trend indicator plummeted, particularly today, is disturbing.
Fortunately, over the past couple of weeks I have been taking profits on the names I bought in January and February. I sold PRGS, SPRT in March. I sold GSIG on Monday. The only original holding from Q1 is PTGI. I continue to hold SYNC and CIS that I have purchased over the past couple of weeks. I am also holding a very small position (less than 2% of portfolio) in DPTRQ.
I have been battling myself in this profession long enough to know when things are getting foggy for me and I should simply back away. There are moments in the market when the picture is so crystal clear for me and the trading so fluid that I can't help but win. It is like looking out the window of a brand new vehicle. The smell, look and feel of the road is different than the vehicle you came to the dealer in. You see the road in ways that you would have never occurred to you behind your old beater.
Similarly, when the market creates confusion, it is as if a fog comes over me. My thinking becomes distorted. It is like looking out of the windshield of 1979 Datsun that has been sitting in an abandoned parking lot for 6 years. You can barely see in front of you and are afraid of hitting something because of the lack of vision.
It is foggy right now and it is being reflected in my trading. It is no coincidence that along with this fog came my first equity trading loss of the year in LGF. It was a small loss, but nevertheless...a loss. From the very beginning of the trade I lost money until I was stopped out towards mid-day today. This is another sign that my windshield viewing the market landscape has become distorted, littered with the carcasses of giant mosquitoes that do not allow me the pleasure of clearly observing where it is I am going.
And then there is the issue of "worsts". We have experienced the worst week for the market of 2012 last week. We experienced the worst day of 2012 today. I posted the red cloud versus fields of green chart a couple weeks back. This is also pointing to some changes in the structure of the market and a tendency towards "worst".
What to do? Step back. Doesn't mean you liquidate your entire portfolio and sit in cash. I'm not close to doing that. I am sitting on good deal of cash, however. And I'm not eager to put it back to work. Not until my short-term trend indicator turns back to the bull side. Not until the windshield on my Datsun is traded in for a brand new windshield on an Aston Martin that allows me to look and feel the road in the same way I was in Q1.
Until then it is ok to do nothing. It really is.
