Avoidable Risk

I’m always thinking about losing money as opposed
to making money. Don’t focus on making money,
focus on protecting what you have

–Paul Tudor Jones, Master Trader
(a guy who has made and kept
over four billion dollars in the market)

I lost half a house one afternoon in 1986. I was shorting naked put options, an insane strategy in which you can make a little money if you’re right and lose a ton if you’re wrong. It’s the sort of thing you do when you are dead solid certain of the future. It takes a few of these boneheaded decisions to make you realize that betting on the future is always a wrong thing to do.

The above may sound silly but, the truth is, you do not know what is going to happen next. All you know, if you’re paying attention, is what has already happened. For me, the right way to make investment decisions is to look over your shoulder. What was the last extreme?

The stock market is not a venue where utilitarian decisions hold forth. The super market is: I love steak, but at $20.09 a pound, I can eat hamburger some of the time. If, on the other hand, steak was a stock, the crowd would be hating it at a buck a pound and break down the doors to get it at a hundred bucks. Take a look at the volume on Apple as it went up the chart:

Apple Computer
AAPL volume

The driver for this behavior is fear of missing out. The notable thing about the fear is that it comes in to play well along in the stock’s move. There will be another time when fear brings the volume in. This will be toward the end to a crash in the stock, when fear of loss has the crowd piling out. Most times, the mass liquidation, also called capitulation, happens at the bottom. Logical? Of course: The crowd is always late to the party and late to give up.

This behavior is an immutable part of the human condition: we need confirmation in matters of uncertainty, so we don’t get on to a good thing until we see confirmation in the rise the stock, then we clamber aboard. Likewise, once we buy, it takes a lot of convincing to get us to sell, so we wait until we are almost wiped out to unload.

Obviously, the way to win is to go against the crowd. It starts by waiting until the entire market has been liquidated. That did not happen at the lows in 2009. That’s why we stayed in cash.

Looking over my shoulder, then, I see that the last extreme in the market has been overvaluation, so I won’t invest until the capital market cycle turns down in a bear market that ends in capitulation and a complete high volume liquidation by the crowd. After that, one brief rally (dead cat bounce), followed by a long drifting down to a low where there is no public interest in the market, despite the fact that steak can be had for pennies. The risk will be gone with the departed investors and the cycle can begin all over again.

Action in the market this past week is highly suggestive of my notion that the bear market that will destroy values on the way down to a buy point is now underway. The public is still fully invested. Their advisors are telling them to hold on. Comments like these are spewing forth from brokers across the land:

“In this environment, we advise investors to remain patient, stick with high-quality issues, and take advantage of this bout of volatility to rebalance portfolios in line with their goals.” (Merrill Lynch, 8/21/15)

Comments like these should be prosecutable as crimes against humanity. The global economy is free-falling into depression and bankers and brokers are offering smarmy palliatives instead of the only reasonable advice there is at a time like this: Get the fuck out!



No one should consider any part of this presentation as a recommendation to buy or sell any securities whatsoever.



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