(Not) Picking Peaks and Troughs

Today (Wednessday, September 2, 2009), I completed the rebalance of three of the four portfolios that I manage, as I said I would do in my last blog. I decided to complete this before Labor Day because I did not want to go into a three-day weekend without this task completed.

I am now approximately 30/70 equities/treasuries in these three portfolios (the fourth portfolio is a smaller spec portfolio that I am starting to churn a lot).

It was very pleasing to lock in the capital gains that I have picked up in the last six months.

I still think the market will soften now for reasons stated in my last blog and I haven’t changed my mind about any of that.

But it doesn’t really matter to me.

Good swing investors know that they can’t precisely pick peaks and troughs (no one can do that). You have to be content to be in what I have called in lectures “fuzzy vicinities.” Somewhere down near the river when you buy, at least in the foothills when you sell. You don’t have to be at the base of the falls when you buy nor tip-toeing on the peak when you sell. Such vanity if you think you can do this.

In fact, turning point anxiety screws up immature and inexperienced traders, even of they really have a flair for market conditions. How many times have I seen young traders take a 40% short-term gain then, rather than celebrate such sterling performance, grieve over the fact that the stock continues to rise. The lamentations are endless and vexing: “I could have made 50%! 60!” Then they buy back in and you know the rest.

When this happens I always say, “Are you so vain that, for a stock that has been rising for months, you think that you can pick the turning point to the day?? Because if you don’t think you are that good because you know no one is that good, then logically the stock will continue to rise for awhile after you have sold it, so just live with it!”

The reason is essentially the same if you sell a stock after it has peaked and has come down. If you end up netting 40%, of what relevance is it that, had you sold it on the day it peaked (because you are such a mastermind that you knew it was the peak?!?) you would have netted 45%?

That kind of thinking is the sign of an muddle-headed immature trader.

Why do you think it is called uncertainty?