As premium subscribers already know, we decided to increase our "short" position on the market last week. Not in a huge, gigantic "bet it all on black" roulette type bet.
But the indexes weakened almost exactly where I expected them to. So it's a good spot to increase our bets (but always with an eye towards recoverable risk).
It'll be pretty obvious if I'm wrong (and the market suddenly surges to new highs). But it won't be a big unrecoverable mistake. And if I'm right, it could pay off in spades in the weeks and months ahead presuming the stock market weakens further:
In that respect, there's a lot we can learn - about looking for opportunities and avoiding risks - by studying surfers.
Really. Surfers. Not kidding.
Not that I'm any kind of surfer. I've only caught one real wave in my life - years ago, on a rented surfboard at Huntington Beach (aka Surf City USA) in California. I rode the board on my belly the whole time; I didn't even get up on my two feet.
I know. How pathetic.
And I live in south Florida, which - despite a plethora of ticky-tack overpriced beachside surf shops - is a terrible surfing area. Blame it on the Bahamas. The island archipelago blocks the big Atlantic swells from ever hitting the South Florida coast.
But I have neighbors who enjoy surfing.
When the winds or tides get the waves up a bit, I see a small parade of them walking to the beach. During the winter months (when waves are the biggest), I even see out-of-town surfer bros in their battered jeeps and pickups cruising the beach areas looking for the action.
Here's what we can learn...
Surfers understand randomness. The ocean is a chaotic environment. No two waves ever crest or break exactly the same way. They respect it and learn to live with its rhythms.
On the other hand, a lot of investors do not understand randomness. We get used to the stock market going up 9 years out of 10, and 18 years out of 20 (or whatever). We learn the hard way - by losing too much money and too much of our self-confidence - that just because things were a certain way before...doesn't mean they have to be the same way again in the future.
Surfers understand the idea of risk, too. They understand that the surfing environment isn't even 70% predictable - so when the waves get too big, or break in unexpected ways - they leave the water. They realize instinctively that the risk - of drowning, or bonking one's head on the ocean floor - isn't worth the temporary rewards of riding the big one to tube city.
Unless they've been through a real bear market previously, it's hard for many investors and traders to understand the concept of risk. When I say risk, I mean the concept of losing heartbreaking amounts of money.
I believe we have a high risk of just such an event happening now and in coming months. I'll continue to believe it as long as this analog - comparing the market today to a similar situation during 2002's bear market - holds true:
Year in and year out, the stock market rarely falls by, say, 30 to 50% or more. Yet it happened with one stock index or another in the bear market of 2000-2002 and the bear market of 2007-2009. And it's happened in other bear markets (though not all of them uniformly) in the more distant past.
So it's natural for us to disregard the possibility of such a decline happening to us, to our own detriment.
Surfers have patience. They understand that good things happen to those who wait. Every so often it seems like the ocean has played itself out - everything goes calm as a saltwater bathtub for a bit of time. Then a swell appears and slowly rolls through. Then another. Then another.
Too often we as investors have zero patience. I include myself in that camp. How many times have I bailed out of perfectly good stocks, or well-time trades because I became...impatient?
Far too many times.
Surfers understand opportunity. Waves come in all shapes and sizes. They recognize that the same randomness that makes waves difficult to ride - also creates a smorgasbord of choices on when and where to ride them.
They may hop on a wave thinking it's going to be a "nothing ride." Instead, it broadens out into something great, that makes the entire afternoon spent in a cold ocean worthwhile.
Too often, as investors, we dismiss the same concept of "opportunity is where you find it." Someone on CNBC says "the market is bad" and we immediately mentally shut down the idea that perhaps that person could be wrong.
That's the great thing about the stock market. There are lots of opportunities.
We can make money when the market goes up. We can make money when the market goes down. Opportunity goes hand in hand with the risks of investing and trading in the stock market.
Even in the midst of a bear market, there are always stocks that look like "nothing rides." But if we hop on at the right time (and respect the potential risks) those same stocks can be just the "broadening wave" that surfers talk about...the kind that gives us a fast ride to our financial goals than we thought possible.
Best of goodBUYs,