Friday, August 31, 2012

Thoughts on Investing from Crosshairs Trader

Have you ever played games with a rule bender? I have. You know the ones. If you don’t, let me make a fresh deposit in your short term memory bank. A rule bender is a person who bends the rules of a game while playing the game in order to personally benefit from not following the previously agreed upon rules. Of course, when the rules are bent others suffer the consequences, not for losing but for being associated with such a jerk.

Let me give you an example. I few years back I played golf with a gentleman who obviously lost a rule book or two somewhere on the 19th green. If he shanked a drive off the tee box the “mulligan per nine” rule became the “mulligan per hole” rule. Of course, I used up all of my mulligans on the first hole and was required to play all others as is. The “I’ll give you the three foot putt rule” became the “I thought you said the nine yard rule.” I had to stick with the three foot rule since my three foot putt to win the hole counted more than his nine foot putt to lose. Ah, now you know the type. The same rule benders are found when playing basketball, monopoly, or any other game where the rule bender has to win at all costs…even if it cost the rule bender the opportunity to play again. When it comes to stock trading, Mr. Market does not like rule benders and will quickly and assuredly let the rule bender know…and fairly quickly I might add. Rule makers, such as Mr. Market, do not like rule benders.

I’ve had the opportunity this past year to work with quite a few disciplined, rule following traders who respect Mr. Market rules and what he expects from those who want to play. Rule respecting traders are the ones who are not afraid to take a loss. In fact, they expect every trade to be a loss and are surprised when they win. False expectations are not a problem here. Sure, they do not like to lose, no one does, but they are well aware of the fact that losing is part of the game. It’s in the rule book. Page 1. Try not taking a small loss and see what it turns into. Does the word “disaster” come to mind? Experience one too many disasters and Mr. Market won’t have to tell you that you are not allowed to play anymore. Money is the ticket for admission. Without money; no admission.

Rule respecting traders also have a strategy in place for both trending and consolidating markets. Just like the athlete who must adjust to the elements or the team being played, traders must adjust to market conditions. The golfer who has never played in the rain will suffer against those who have; the basketball team unprepared for a full court press will freeze like a deer in the headlights; the trader unprepared for market conditions will continue to trade break-outs in a market not rewarding break-outs. The rule changer will simply try to reinvent the game to suit his rules. Try to force a square peg into a round hole so to speak. Not going to happen in the stock market. Mr. Market could care less about what we think should or should not work AND when. Mr. Market goes through mood swings just like the rest of us, so when Mr.Market says he is anxious and nervous then we leave the break-outs alone; when Mr. Market is happy, then befriend the trend. Mr. Market plays by his rules based on his mood. Try to change his mood and he’ll stamp that big ‘ole “L” on our foreheads.

Rule respecters are not greedy. To win at all costs is greed personified. To the rule bender it is not just about winning but winning BIG. Not by a point at the buzzer but game over in the third quarter; not by a stroke but by ten; no need for the bottom of the ninth inning when game over in the seventh. The greedy, rule bending trader considers every trade a lottery ticket, the one that will increase his twitter feed ten fold, place him at the center of attention at the next dinner conversation with friends and family, and make him the next guru by default. Unfortunately, greed may win big from time to time but the loss in mental capital is HUGE. Greed is not a friend but the enemy lurking behind overconfidence, optimism, and hope. Mr. Market loves the greedy rule bender knowing that the odds of winning over time are 1 in 1,234,852. About the same odds as winning the next lottery. Mr. Market prints the tickets with a grin and a wink.

So, the next time you meet a rule bender who happens to be a trader you will know exactly what type of trader he or she is…the one who allows you to make money. Thank this jerk with a grin and a wink.