SEPARATING MICRO AND MACRO IMPERFECTIONS
In participating in the financial markets, we have all made a silent agreement to be subject to the rules of imperfect information. In fact, a better classification would probably be subjective information. In either case, we use a set of data that is highly subjective in nature to make decisions that we hope will positively impact our financial fate. It should be seen as highly unusual then when a market participant who chooses to make his or her decisions public sports a near flawless record.
I am always shocked by the nature of fraud that is reported commonly involving investors who believe in a guaranteed return exceeding Treasury yields by anywhere from 500 to 5000 basis points. I am even more perplexed by individuals who choose to pay for information given by financial charlatans who are posting gains not in the 20-30 percent range per annum, but 200-300 percent range. If it were only this easy we would be all be fighting for parking spots at Whole Foods in our Lamborghinis.
The truth of the matter is that incorrect decisions, thesis and hypothesis are as much a part of the landscape of the market as a bid and offer. With that said, I have decided to dedicate tonight's post to a study of my micro imperfections, followed by a commentary on how unrelenting and fatal imperfections of the macro variety can be. You can get away with a host of micro imperfections in the markets, but a macro imperfection is death.
Let's start with a plethora of my micro imperfections that those of you who have been reading this site over the years have been subjected to:
- Recently I have been eating hairy humble pie (mind out of the gutter, please) on TZA. It has been my biggest losing investment in 2013. It shouldn't be a surprise, as we are facing one of the strongest bull markets of recent memory. Anything with a bearish slant will get you killed. Just ask Bill Ackman.
- I have been off with AAPL as of late. A lot more off than at anytime over the past couple of years. According to my studies it was supposed to be below $400 by now. I defer.
- Off the top of my head, my call on RGR was atrocious. I actually dedicated an entire post titled: The Technical Case For An 80% Drop In RGR Over The Next 12-18 Months Not only was the title too long, but RGR isn't dropping. It is up 5% since I posted this study in October of last year. To be fair, I still have some time left to be vindicated.
- I want to go way back for this one. I don't have a link to share with you. But I was catastrophically bullish at the 2000 market top, loaded to the gills with QCOM. At the time, I had just started trading client money at my own firm for the first time and immediately faced an enormous drawdown in capital. You should know that at the time I didn't invest anything like I do now. I was in my mid-20s, traded frequently, utilized leverage, traded anything/everything and could work my way out of most any hole through capitalizing on volatility alone. The hole that I created resulting from being long at the top of, arguably, the greatest bubble in stock market history proved difficult to climb out from. I did prevail, however, ending 2000 in positive ground.
These are all examples of micro imperfections. Calls that can be corrected with a flick of the wrist or a wave of the wand. If I had decided to short RGR, I could have covered at anytime and it is just a "bad call." If I traded AAPL, I could cover my short and it is just another loss. As you saw on TZA, I was perfectly fine taking the loss some weeks ago and am happy I did so since it is down more than 10% since that time.
All of these are micro errors in judgment that all of us face at one time or another throughout each and every trading year.
What cannot be corrected, often times proving fatal to investors are macro imperfections. Macro imperfections are idea and beliefs that are so entrenched in the psyche that they unconsciously become embedded within your investment philosophy.
Let's take the ZeroHedge, Nouriel Roubini, long gold, get pillows for your bunker and wait for the fiat monetary system to collapse crowd. These types of investors can have the most brilliant system of investing, but are mentally unable to capitalize because of the overwhelming nature of their beliefs. It becomes embedded within the foundation of their investment portfolio.
A macro error of this nature, resulting on missing out in a great bull market in real estate, stocks and optimism is not something that any investor can afford. This type of macro imperfection in thinking and philosophy results in literally a lifetime of poor performance. When your ability to adapt becomes compromised due to a set of zealous beliefs, you already have one foot in the grave in the financial world.
And that is where the financial markets create fools out of otherwise smart men. In life, we are taught that holding onto beliefs and having enthusiasm for those beliefs is the hallmark of true character, grit and fortitude. In the financial markets your beliefs are only as good as your bottom line. If you are suffering due to your convictions, then it is time to throw out those convictions and find a new set somewhere else. Often times it will be in a place where one is completely uncomfortable. An alien surface for the mind built on foreign concepts and emotions.
It is not the micro imperfection of being short FB when they report blowout earnings. Or being long ZNGA when they report that the only source of excitement for the company's future has been extinguished. No, these are not the fireballs that will set your financial world ablaze.
What will kill you are the beliefs that you cannot get away from.
The beliefs that infect every aspect of your investing environment.
The macro imperfections that cannot be resolved because they become the gospel from which an investor preaches.
