As traders, we all suffer some form of financial trauma which makes an impression on us (and, hopefully, teaches us). For my last post of the day, I wanted to share a chart of the performance of one of my portfolios over the past 16 months. This isn't as impressive a chart as my IRA, which is more of a hockey stick, but I'm pretty proud of how this has done. First, let's look at the chart:
The "trauma" part of this graph is shaded in magenta. It does not look that bad on this scale, but I went from about $286,000 to $160,000 in the course of a few months. The reason? I maintained a very bearish posture in the face of a big countertrend rally. This was, as you can imagine, devastating to my confidence.
I daresay the gentle upward slope from April 2008 to August 2008 indicates how much more conservative I became. I was in "recovery mode." What's really interesting to me about this chart – – and I really try to bear this in mind every day – – is that virtually the entire dollar gain over a 15 month timespan took place over a period of just a few weeks (the marvelous late September-early October timeframe). I beat myself up during this period only because I wasn't more aggressive. But you know what they say about hindsight.
The "mini-trauma", although much less important, is the green shaded area. I had a six-figure drawdown, mainly because I was firing on all eight "bearish cylinders", and the market was fighting back.
What I took away from these two experiences in 2008 was to try to be more balanced. Balance can be really boring, of course, but it's safer. The challenge over the past six weeks, as I've mentioned, is that in a market like this, by being balanced, one can also get the sensation of running in place.
But the main thing I want to avoid is to have go through another Spring 2008 type experience again. I believe I have become a lot more willing to "jump ships", as painful as it can be sometimes. The artfulness, of course, is discerning what is strength and what is merely an exception. Take today (Tuesday), for instance. Does today's strength mean that Monday's tumble was just a quick break in the bullish action? Or is it just the opposite – – did Monday show the market's true new direction, and Tuesday was simply a small bit of relief before we resume the downturn?
In my opinion, Wednesday will be very indicative of what the next week or two holds, since people are going to "vote" for either Monday or Tuesday. I am positioned for a resumption of the downturn, but if I'm wrong, I am going to scale back quickly, since a mere one-day drop in the market is not a good sign for the bears.
