14 YEARS OF WAFFLING
I got an email recently from a disappointed patron of this fine venue for market analysis and ideas. The email went something like this:
You were bearish when the S&P was at 1260 and now you are bullish at 1290. You are a waffler. Fortune cookies provide more useful analysis than your website.
The email was more detailed and colorful than my loose interpretation, but that is how I remember it.
I've been playing in this sandlot for quite a few years. In the time I have been trading, a majority of the time I have been in the public eye, so to speak, as I have always had a need to share my ideas and analysis in a public forum. I was blogging before the word blog existed with my first website in 1998.
When I formed my fund in 2001, I continued to be extremely transparent with all of my thoughts and analysis. I remember one investor, in particular, who was particularly fond of digging into me about my investment ideas. She was unfortunate enough to invest a half million near the top of my fund's NAV in 2004. Her capital losses would take form of vitriolic emails to my inbox on an almost weekly basis. There wasn't an idea that wouldn't be shredded. On occasion, the emails weren't enough so a telephone was used to communicate the futility of my cerebral functioning.
Throughout all of these years, I have always waffled to the displeasure of many. The nature of the markets is to change direction and ideas, therefore, it is only natural that as an active participant you must change ideas with the market if you want to survive. Here is a history of my waffling:
1999 - Came into the year bearish. Didn't switch my stance until a couple of months in. Ended up finishing the year up multiple hundred percent.
2000 - Came into the year bullish. I was bullish at the market top. You know? Nasdaq 5000 top. Yes, that one. I was managing money then for family and a few outside investors, I had one investor invest in March of 2000, near the top tick in the Nasdaq. As aggressive as I was and as bullish as I was, I piled in. I suffered a 50% drawdown by May. I managed to recover all of it and then some in the bounce that took place in June. Remember, volatility was rampant back then and if you knew how to trade and was as crazy as I was, you could make back losses very quickly. I switched to the bear side in July of 2000 and managed to finish 2000 up a little over 20 percent.
What is important to note is that I had a "blog" then that was quite popular. My becoming a bear was tantamount to the Pope becoming a Jew. You must realize that in 2000 the army of bulls, even after the enormous damage caused by the top in the Nasdaq, was quite large and very powerful. I lost a good deal of followers and received countless emails from disappointed readers.
I remained a bear throughout 2001 and my following continued to dwindle despite being correct about the market. In 2002 I waffled again.
2002 - Between July - September of 2002 I began to accumulate as much stock as I could...on margin. I had been solidly bearish, with a few hints of bullishness, for nearly two years. I put together quite a few studies that pointed to an important bottom being formed in the market. I started buying the most aggressive name and suffered a good sized drawdown as a result. 2002 turned out to be my first down year since I started managing money. I was down about 15% that year.
2003 - No waffling. I remained bullish as the US attacked Iraq. I finished that year as the #1 ranked macro hedge fund in my space.
2004 - No waffling. I remained attached to a study that I spent literally hundreds of hours cultivating and I couldn't detach from it. It caused me to stick to ideas and positions that should have been reversed. I should have been waffling....I wasn't. A double digit down year in 2004.
2005 - No waffling. More of the same. The ship was sinking fast. Redemption notices were coming in. Another double digit down year in 2005.
2006 - Fund closed. The only waffling I was doing was in my decision to spend my afternoons at Barnes & Noble or Barry's Brewery.
Flexibility and adaptability are as important to investing as assholes are to a shit factory. You can't have one without the other.
Of course, there is a catch. The catch is that you must have the confidence in your ideas to see them through. If you remain unsure and jumpy, then you wind up grinding your account down over time.
How does one go about balancing flexibility with confidence? You must find a method that allows you to walk these types of thin lines skillfully. If you are outside of your comfort zone then you are more susceptible to being unbalanced, thus unable to walk the numerous thin lines you encounter in trading.
There is no be all and end all in the investment world. Every method has a patron that will render the system useless. One man's pot of gold can indeed turn into another man's nightmare. If it doesn't fit your personality and psychology then the methodology will be useless. That's why the vast amount of information available on the internet can be both a benefit and a hindrance to investors. You are much more susceptible, with all of the information available, to circumvent your own methodology that is well suited to your own personality and rely on something that is ill-suited to you in particular. It doesn't matter how well things end up going in the short-term, over the long-term circumventing what matches you the best will end up costing you. There will come moments when you are forced to walk the many thin lines that exist in the markets and will be unable to do so because of the mismatch.
It is interesting that it was only when I stopped waffling that things went from good to bad. It is also interesting that it is when I waffle that I receive the greatest criticism both now and 10 years ago. Readers take comfort in knowing there is somebody to stand by them when things are going wrong. I take comfort in knowing that when things are going wrong, I must take an unbiased look at why and be prepared to waffle if I find reason to.
More waffling ahead.
