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Keeping an Open Mind


...remaining open minded is often swept under the rug as we inadvertently subscribe to the prevailing thesis of the day.

We find ourselves at a unique juncture where in the midst of market chaos, it is quite hard to muster even the slightest bit of optimism. Bad news is receiving all the attention with credit crunch woes taking center stage, while the most recent market bounce is being discredited due to some crafty fed maneuvering. It is quite hard to avoid the noise and many if not all are not asking if, but when the other shoe will drop and the market will fall into the abyss, surely hitting zero by Christmas.

If there is one thing I have learned during my time of market participation it is that while the crowd mentality is comfy, it more often than not can be extremely costly. Furthermore, I have also learned that when the general trading population tends to be leaning in one direction, it can be hazardous to simply jump on the other side, however no one ever got hurt keeping an open mind and staying flexible.

You will hear me discuss the power of remaining open minded numerous times, however it is always in direct correlation to the role I believe it plays in order for an individual trader to experience success. Quality stock picks have become a given and even a novice can catch a TV show each evening to see what is really taking place inside the tape, however remaining open minded is often swept under the rug as we inadvertently subscribe to the prevailing thesis of the day.

Experienced traders realize the importance of remaining open minded and while they may subscribe to a thesis in one breath, a change may take place in another causing them to quickly switch sides. The novice views this as being unstable however in reality it is that flexibility that will keep someone in the game, with the incredible ability to switch sides when a change is necessary.

Once you have determined to remain open minded how do you attempt to find the truth? I believe this can be done by simply watching the action or casually 'reading the tape.' While many may discredit technical analysis, I am not suggesting studying lines, regressions or stochastics, however I will always respect the price and volume activity that I see taking place. Consider if you will, an actual cash register tape and equate this with the stock market. Assume you had the ability to see a daily glance at all the cash register tape for Wal-Mart (WMT), regardless of what the management said, you would easily be able to tell how sales were going. Despite the company's energetic and optimistic tone, the cash register tape may be telling you something else.

On the flip side, assume you had this same power with Starbucks (SBUX) and while upper management may not be feeling so good about the new triple mocha hunka hunka burning love latte, you could tell that just about each person was not just buying one, but scooping up two per visit. I realize this example is stretched however, it does help to better understand what I mean when I discus 'reading the tape.' Should we continue to see buying power persist on high volume, chances are, that regardless of how negative the prevailing thought is, bears are covering and bulls are making up ground. Furthermore, glancing inside the tape will give you a better idea of what stocks are benefiting. If you start to see some positive action in a stock like Cisco (CSCO) while the general market is remaining choppy and churning, chances are this is a stock to keep high on the radar and flock to first, once your comfort level increases.

We could continue along the technical analysis path, however my point is that many won't even start to look for opportunities simply because they have already subscribed to a thesis about where we go from here, and will not even consider another option. In my opinion, this is a terrible mistake, and just when the prevailing thoughts are so strong, we should be curious about other options.

Volatility has been high, and many stocks have been slaughtered. It is easy to assume we plummet from here, and while that may actually happen, investors should keep an open mind and always be on high alert for other scenarios to play out.
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