I like cruising. I pick stocks for a living. Come to think of it, those two have a lot in common.
You can get into a storm at sea. The ship is rocking and rolling but you just keep going, determined to enjoy yourself no matter what. But eventually you develop a pounding headache and come down with a nasty bout of sea sickness. And long after the storm is over you are still suffering from a headache and a sick stomach, in no shape to do much of anything. Same in stock trading. Every once in a while a correction hits, but you pretend that nothing is happening. After all, you are a buy-and-hold investor with a long-term time horizon. You are tired of being jerked around by the market! You will weather the storm! But eventually the pain of watching your losses grow becomes unbearable and you sell. Shortly after that the correction ends and stocks rally again but you are in no position to participate so soon after such a gut-wrenching experience, so you miss the early opportunities.
Some storms hit without warning, but usually there are signs: dark clouds gathering, the wind picking up, the rain getting heavier. Same in stock trading: distribution days piling up, new breakouts failing, leaders faltering…. But we ignore the early warning signs, especially when the official forecast still says clear and sunny.
After the storm passes, we expect another one – after all, there are still clouds on the horizon. We don’t even trust the blue skies when they return, and still wear waterproof shoes and pack an umbrella – just in case. But the waves calm down and good weather returns. Same in stock trading: after a correction, fresh opportunities abound but we still tread carefully, expecting the worst.
The simple lesson is: go by the actual signs, not the official forecasts or wishful thinking. When clouds first appear, take cover as a precaution. If they go away, you can come out and play again. But if a storm hits, you will stay dry and unscathed until good weather returns. Same in stock trading: sell at the first signs of trouble. If it’s a false alarm, you can always buy your positions back, but if things get worse, you are already out of the market, keeping your powder dry, ready to come back when the good times return.