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Psychology Patience


Fare ye well into the bell!


The waiting is the hardest part
Every day you see one more card
You take it on faith, you take it to the heart
The waiting is the hardest part

(Tom Petty)

One of the toughest tasks facing active traders is the ability to exhibit patience while following the flickering ticks. The trick, as we know, is to adopt a risk profile that is adaptive yet mirrors the time horizon of your thesis. The only difference between being early and being right is whether you're "there" when your ship comes in. Therein lies the critical element of successful money management and the key to the vault of returns. I will use two real-time examples with the hopes that you can extract value from my experience.

The first is the secular trend that I mapped out late last year when I opined that I wanted to toss on the "long energy/metals vs. short tech/financials" pairs trade. While my style has never been to slap on positions and walk away (dangerous game), I've allowed my views to manifest via my stylistic trading approach. In other words, when I've looked for long exposure, my eyes migrate to the former and when Boo comes knocking, I've directed him towards the latter. In hindsight, I could have skewed my profile more aggressively but for purposes of this column, the approach is what matters most.

The second example is that of Fannie Mae (FNM:NYSE). Minyans know that I've had a love/hate relationship with this stock for a mighty long time (read: I've loved to hate it). In fact, I've donated more money to the Fannie Mae put memorial fund than I'd like to recount. The smoke in the GSE's and the attendant ripples have been on my radar for years--I was actually chided on TV for bringing it up last summer--but it didn't "matter" until recently (and some would argue that the holders are still in denial).

There are a few ways I could have approached the Fannie but I ultimately fumbled the position. As I'm a big believer in defined risk, I owned "out month" puts and continually rolled them as expiration neared. I eventually became so frustrated that it started to get personal. Now, if I know anything about the market, it's that emotion is public enemy #1. As such, I placed Franklin's Pain on my "restricted list" and focused my trading attention elsewhere. (The fact that I was bidding for puts the night before it blew was the definition of minxy irony).

What would I have done differently? A few things--I would have spread the position and elongated my time horizon (to match my risk profile). I would have also paired my risk differently (by adding other longs) and let my position run. Don't get me wrong--I still believe that there is plenty of trading left in this name--but the only difference between mistakes and lessons is the ability to learn from them. It's my hope that by sharing my missteps, you'll avoid them altogether.

Turning our attention to the tape (quickly), the gory story continues to be rude crude and the shiny metals. The dollar has been quiet--almost as if it's hoping nobody notices it--but it doesn't feel like it's going anywhere today. Equity land trades alright (the internals don't budge) but the sudden supply in select financials and a spate of sell signals from one of my trusty guides (DeMark) has my right hand up. What else is new, right?

Gonna hop back to the Buzz. I sincerely hope you're all faring well and keeping your head in the game. It's not easy, that's for sure, but it's not impossible either. It just takes patience, discipline and a trusted network. The first two are up to you but the circle of trust is something we can together share.

May peace be with you.

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