When the Market Snubs You
- Derek Hernquist
- January 7th, 2010
After I've addressed the "Core" and "Tactical Beta" portions of a typical portfolio, I like to implement a long/short basket of stocks demonstrating the potential for positive and negative alpha over the coming days/weeks/months. I manage the risk on a daily and even intraday basis, with the goal of pulling the weeds quickly enough that the real bloomers can take a more prominent role in the account.
Ideally, pulling weeds means 2) taking small losses, 3) getting rid of non-movers, and 4) taking profits on divergences or windfalls. Of course, most important is 1) stopping out of potential disasters. After a few months of not facing the disasters part, the first days of 2010 brought 2 zingers that necessitated defensive action.
No strategy allows you to avoid bad ideas...contrarianism puts you at risk of being early, trend following the risk of being late. My trend following approach had me entering the week with short positions in 2 stocks($LVS, $FDO) that proved to be ripe for reversal, not the continued weakness my work showed.
I keep a fairly balanced book, letting the candidates dictate whether I'm leaning long or short. In this market, there continues to be far more long setups than short, so a bull move to start the year brought gains to the longs still sitting in my portfolio. But still, who wants to spend hours determining which stocks are most ripe for a move, and then get slapped in the face by a market that says "Not only are you wrong, but the stock that you think is worst looks best to us!"
$LVS gave me a fighting chance, with a modest gap up but clear signs from volume and range expansion that my idea wasn't right. $FDO wasn't so kind, gapping up 10% on an earnings beat and forcing me to take my lumps. Take them I did, ego a bit bruised but no thought that I would wait and hope for an improved outcome. Besides freeing my capital for better ideas, it's crucial to move past the bad experience and get into the present. This week was full of trends to exploit, and dwelling on an old idea isn't part of the equation. 
I know for non-Buffalo Bills fans January is the heart of football season, but picture yourself as a baseball player for a moment. You may have 600 plate appearances in a season, watching 5 pitches thrown your way each time. That means you have 3000 opportunities to consider and react...if you makes 200 of those count each year, you're a 1st ballot Hall of Famer. Unless you're Robbie Alomar of course, in whose case either his saliva or Mets uniform delayed his day of glory by a year.
Your number of "pitches" as a speculator may be a fraction or a multiple of 3000 in 2010, but in either case be ready to accept some failure. Your journal is your game film, and winners learn from their experiences and focus on the next opportunity. Each instance is just a random draw...it's the cumulative effects of our deliberate actions that defines our success.
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