When markets are going up and down and uncertainty reigns, you have to make two decisions, one long-term, the other short-term.
Taking the long view and trusting yourself
Long-term, you decide that the uncertainty of the markets won’t make you doubt yourself. Markets do it from time to time. It’s human nature and part of the business cycle. One of my favorite two-word sentences (#1, of course, is John 11:35) is the first line of Dr. Spock’s Baby and Child Care: “Trust yourself.”
Sometimes even good things lead to uncertainty. The U.S. economy grew at 3.2% in Q4, not as high as some quarters, especially in 2012, but far above the Eurozone’s 0.1%. And lest we forget, the whole reason for the Fed’s taper is that unemployment has been below 8% for 18 months and the 46 straight months of job creation under President Obama, though weak, have not abated.
And if President Obama makes good on his threat to simply bypass Congress whenever possible–a threat he hid in a calculatedly bland State of the Union–he will finish his term engaging in an outright campaign of civil disobedience against the legislative branch. In a struggle between the majority of Americans and the largely bought-and-paid-for Congress, I know who I like.
Warren Buffett is known for long-term thinking. His well-known ideal time to hold a stock is “forever,” though it has actually been more like 5 to 10 years, depending on when you start counting.
He recently announced a $3 billion investment in ExxonMobil, which did enjoy a modest gain soon afterwards. Now, following a disappointing earnings report for one quarter, ExxonMobil’s stock price has fallen back to his entry point. But if he does anything, Buffett is most likely to increase his stake.
Since New Capitalists like me believe that fossil fuels are as much dinosaurs as the dinosaurs whose carcasses turned into crude oil, I’m guessing that he won’t hold Exxon “forever,” but he may hold it until we finally have cheap, abundant solar energy and high-capacity batteries. For that, we’re really just one Apollo or Manhattan project away. Those took less than a decade.
That’s long-term thinking. It requires you to treat quarterly fluctuations as just noise. Your main decision is to let others do the emotional drama while you ask yourself the simple question, “Would I buy/sell at this price now?” If the answer is yes, don’t worry. The herd will do enough worrying for all of us.
Here and now
The short-term decision, for day traders and shorter-term position traders and especially for futures traders like me who deal in contracts that expire and are as likely to be short as long, the decision is still about what to focus on and how to manage emotions.
Though the trading pits in the CME and NYSE are the most visible scene of public panic and emotionality, you get the same thing in prop desks, trading rooms and kitchen tables all over the world.
Remember this: If you can master your own emotions, then the emotionality of others becomes your secret weapon.
Why? Imagine you found out someone had stolen $1000 from your bank account. Then five minutes later, someone called with a business opportunity that would pay $10,000 in six months. You’d say, “Can’t talk now! I just had $1000 stolen!” and hang up on an opportunity ten times more lucrative.
It’s the same in trading. If you just “know” that the market is going to drop, but it keeps rallying every time you take a short position, you’ll miss the obvious opportunity to go long and follow the trend of the moment.
You’re too busy trying to tell the market what it should do, instead of listening to what it’s telling you. You’re too busy needing to be right. You’re failing to master your emotions.
Master them, however, and you’ll ride the ups and downs of each new roller coaster that you climb into, enjoying the thrill of a healthy level of risk and laughing all the way.
The decision you need to make in every moment is: Which is more important, always being right or making money?