IT IS THE MARKET THAT HAS ISSUES, NOT THE ANALYSIS
My approach to each new trading week is a mind frame that assumes perfect information. By "perfect information", I mean that the analysis I have performed with respect to general market moves on a technical basis are perfect in nature. I don't say this out of a sense of false arrogance, overconfidence or any of the other pitfalls of ego on Wall Street. Rather, it is my way of functioning at an optimal level with respect to risk control as well as the pursuit of abundant returns.
Last week was a prime example of a divergence between perfect information and the market, in general. I came into this past week with no inkling of the substantial amount of downside risk we faced during the week that was. In fact, I had the remainder of the year being bullish with a move up to 13,300 to 13,400 by year end. This analysis is the road the market should have taken in the case of optimal health or as I like to refer to it, symmetry.
When the market is dysfunctional and unhealthy in nature, there is no perfect information. There are no support levels that can help. Price action is generally sloppy and broken in nature. All you can do as an investor is hide inside of your home, hoping that this dysfunctional subject doesn't drive a tractor through your front door. Defense becomes the only offensive measure of note.
Another way to visualize it is with the simple act of opening the door to your vehicle and starting your car. You know, without any doubt, that there is an order of operation that takes place from the time you press the start button or turn the ignition. Lights start flashing, the engine turns over, your car turns on, the radio starts playing Def Leppard and the heater starts blowing through your feathery hair. This is perfect information.
Now assume that you get into your vehicle, press the start button or turn the ignition and none of those things happen. You instantly know that your vehicle has been compromised in some sense. It is no longer functioning as it should. Your perception of the once trusty vehicle changes. For the next few weeks you become paranoid every time you start the vehicle after its repair. Your expectation of it functioning normally based on your analysis are correct in nature. However, your perception and the reality of reliability have changed as a result of an anomalous act.
This is one example of perfect information with respect to an uncooperative subject. The question obviously becomes: How does this help me preserve and create wealth in the financial markets? After all the fancy blogging, tweeting and analysis, that is why we are here, right? To create wealth?
After you obtain a certain amount of experience, comfort and familiarity with your own process, you will get to the point where your analysis allows you to function profitably and with confidence, regardless of the market environment. After you obtain this level of comfort, you are able to see the road much better. You are able to tell almost instantly when the market or a specific investment is not functioning properly. Repetition of analysis is the only way to get to that point. Gladwell's 10,000 hour rule as applied to finance. F
For some this process takes a couple of years, for most it takes more than a decade. I fall into the latter category. It has taken me 18 years of constant obsession (with a break of a few years after closing my fund in 2006 to pout, mourn and then claim bankruptcy) to get to this point and I'm still constantly tweaking, rethinking and critiquing my own analysis. This business isn't a fly by night project that allows you to watch a few videos, read some books and then obtain tremendous wealth. That is the type of unrealistic thinking that leads to such an enormous failure rate in the business, as well as the very real loss of valuable capital.
Hopefully by giving readers a window into my process, it will allow your process to speed up along the curve.
In closing, investors got into the driver's seat this past week and turned the ignition. Instead of the usual order of events and may I add, the events that should have very well occurred, the engine started smoking, Barbara Streisand started playing on the radio instead of Def Leppard and the steering wheel fell into the lap of investors. A dysfunctional entity has emerged that, at minimum, warrants some short-term caution until some sort of reliability can, once again, be established.
