A New Year's Resolution: Consider The Whole Picture


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I know, it's a bit late for holiday-themed articles, but this market is incredibly boring. We are in the usual holding pattern before jobs numbers and stocks have been drifting lower in the manner of an orderly, small correction. This is hardly inspiring, so I have been spending my time going back through all of the recommendations, specific and implied, from my submissions to Nasdaq.com to provide an accurate track record for my upcoming website.

I don't wish to brag (Who am I kidding? Of course I do!), but the results are pretty good. It wasn't that hard in some ways. I started writing here in June of 2012 since when the S&P 500 was up 35%, so a decent percentage of correct calls is hardly the stuff of legends, but so far, most have beaten the market over multiple time frames and there have been several controversial negative calls that worked out well.

As I went through the articles, though, it was the mistakes rather than the successes that caught my eye. I am not a negative person, I promise, but in markets, as in life, mistakes teach you more. A theme emerged that led me to consider a resolution for 2014 along the lines of "If You Make A Good Call, Shut Up!"

When I started writing I largely stopped trading so as to avoid any conflict of interest, but I still think like a trader; it's how I was trained. I find it hard, therefore, if not impossible, to make a call and then leave it alone... I feel the need to close everything out. This is good practice for traders, but for pundits it can make even great calls look stupid.

Recommending the sale of Facebook (FB) at around $44, for example, looks silly unless you consider that I had recommended buying it at $25 two months before. Similarly, recommending going short GLD in 2013, as I did here, was a good call, but I should have left it at that. There are countless other examples, but I have found that in the world of a pundit, no matter how many times you refer to a previous call readers take each article as a separate entity, and follow ups either sound like gloating or make you look foolish.

I considered making that resolution in order to protect my image, but resolved instead to continue suggesting when a successful call may have run its path. I will no doubt get some of these wrong, but I was trained early in my foreign exchange career to understand that taking a profit is never wrong. This is because refusing to do so and seeing profit turn to loss usually results in some bad or even terrible decisions.

When you watch a 20, 30 or even 40 percent profit disappear the temptation is strong to buy at or below the original entry point, even though the situation has changed. "Well it worked before..." goes through your mind, and the dreaded averaging begins. This risks turning a disappointment into a disaster. If you had closed out even half of your position for a decent profit, however, a return to flat is a signal to sell the other half and look for another opportunity.

This isn't just advice for traders. Even those with a longer term view can be well served by reducing position size following an initial pop in a stock. The chances are that, even if you believed in the long term prospects of the company, the decision to buy at that particular time was influenced by the prospects for rapid short term gains. Once they have been achieved, doesn't it make sense to take that portion of the profits and look for a similar situation elsewhere?

One of the recurring themes of what I write is that investors and retail traders can learn a lot from the habits and practices of those that are paid to trade. Limiting losses is an important part of that, but so is being willing to bank some profit. Ceasing to point out times when that may be advisable could well save me some embarrassment, but it is too late to tame my trader's instincts now. I'll continue to change and reverse calls this year; some will be correct and some won't, but I ask only one thing... consider the whole picture.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Investing Ideas , Stocks , US Markets

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Martin Tillier

Markets, Bitcoin
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