A “Hopeless” Reader

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In case you missed it, reader Chuck had some interesting comments a few days ago:

It’s true that there are so many conflicting opinions as to whether the markets will rise or fall. There are good cases to be made on either side. It seems to me that, up until now, the big money is betting on this bull.

I think that’s why I like trend following. You can ignore the opinions and react only to what the market is actually doing. That is, if you can stick to your strategy and not let your emotions rule you. I can’t, LOL. I sold out Thursday.

I hate a directionless market and it makes me nervous. I’ll probably buy back in on any slight correction. Maybe I’ll buy back in next week no matter what. I admit that I was in in June and sold out early July on a slight correction, only to get back in in early August. I don’t seem to have the stomach for even a small (5%) loss. Subsequently, if I get down 3-4%, I usually pull the plug.

Am I hopeless?

What Chuck is referring to is something I deal with in my advisor practice on a daily basis. It’s called a client’s risk tolerance. With new clients, I tend to start out with a more conservative stance within the framework of trend tracking and then switch to a more aggressive mode, if requested.

When you are investing in anything, you have to be sure that you’re comfortable with the approach itself along with the potential risk involved. If you’re not, you will not stick with for the long-term, which is where the rewards are.

While I don’t advocate setting stops as tightly as Chuck does, he seems more comfortable with the outcome and apparently does not mind the more frequent whip-saws resulting from his approach.

However, when dealing with tight stops and frequent whipsaws, you have to make sure that you don’t do the same on the upside, which is taking profits too quickly. You need to let your winners run until the trend ends and reverses. Your trailing stop loss will then tell you when it’s time to exit your position.

Not letting your profits run and cutting your losses too quickly is a bad combination. You may find out that, while your downside is well controlled, you’re not making enough on the upside to make up for the small losses you incurred. In other words, you’re simply treading water.

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Comments 4

  1. Wow, I made the headlines! And it wasn't even for that misunderstanding in that rest area men's room……..LOL.

    I am actually back in today, or about 75% back in. The bearish dollar ETF, CVS, F, HMC, GLD, TIP, SBUX (ahhh….), and NFLX. I would like to hold the last two forever. Also bought some BRK/B, which is recovering more slowly than the market as a whole and the 50 and 200 day M.A. just crossed about a month or two ago. I actually tried to pick a few, and am leaning towards putting the rest in either FAIRX or the Yacktman fund, but don't want to get sucked into my brokerages 90 day holding period. So, I will probably consult your tables for an ETF that is outperforming SPY, but hasn't risen too much yet……..

    I don't know if you publish peoples stock picks. These are certainly not recommendations, and this information is worth exactly what you paid for it. But I see a bright future for F. There is very strong anti union, anti UAW, and anti Obama sentiment in this country. There are millions, millions, I say, of people who will never buy another GM or Chrsyler after the bailout. Most of these same people would also like to buy American.

  2. Ulli,

    Boy can I agree with Chucky when he said the following: "There is very strong anti union, anti UAW, and anti Obama sentiment in this country. It seems to be building quickly and most likely will cause major marches and protests to take back our country and manufacture more goods here again. I bought a new Jap car, but it was assembled here in the good ole US of A, which I made sure of before purchasing. I believe it is time to change our thinking and request items that were at least assembled by good ole Americans and the parts to eventually be made here again. I would certainly be willing to pay $2 more for a shirt or $3 for Jeans to have been made in our own country.

  3. Amen, Bill.

    There are websites devoted to products manufactured in the U.S.

    My Toyota was built (assembled really)in Kansas. I am looking for another car in a few weeks, probably a Honda that will most likely be assembled here?

  4. I'm worried too, but going from fully to zero to 75% invested in a matter of days? If I don't know which way the market is going, I try to pick a percentage–50, 30, etc–that I can live with for at least a couple of weeks while waiting to see if there's a direction forming. That way I'm not pretending to know something I don't know, and I'm protected either way. It's an even simpler hedge than Ulli's.

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