These markets are starting to take a toll on folks and if you are one of these people, know that you are not alone. Even the most stalwart of long term perspective investors are wondering when does this abrupt slide end? Some traders are loving this volatility but even on some of them, the extreme volatility is taking its toll as it can mean many sleepless nights up trading the futures markets. Whichever camp you find yourself in you must prepare yourself for whatever comes next. The bad news is we don’t know what comes next but the good news is that we can prepare ourselves for whatever comes along as we spoke about in last week’s blog. Last week we talked about how to use certain trades to offset some of the damage being done with this precipice fall. This week we are going to work on the emotional side of things more than the mechanical side of things.
I think its time to talk about the emotional side of the markets because I have been inundated with questions this week from friends, family, and students regarding the situation in which we find ourselves. The interesting thing is I would be willing to bet that most folks think the questions that I have been blasted with are how can I stop this pain!? That is only half of the questions I have been getting. The other half goes something like this…WOW, these companies are dirt cheap it must be time to buy, right? You see here we have both emotions covered, fear and greed. Right now, you find most people fall into one of these two areas and neither are good.
If you have been listening to the talking heads on TV or in the news they are mostly saying that either financial armageddon is here or there is a huge buying opportunity in front of us. They are praying on the fear and greed of people to make headlines. So, which scenario is correct? We don’t really know and have no way of knowing for 100% sure. Instead, we need to recognize the situation for what it is and work on our mental states so that we can accept either scenario and be at peace either way. But how you ask can this be done? Well, we are going to walk in the footsteps of giants. We are looking at what the best investors/traders in the world do and see if we can’t piggyback some of their ideas and the lessons they have learned through their many years of trading.
We will start with the big man…Mr. Buffett. He has been quoted as saying many times that he only buys world-class businesses that have great management and solid easy to understand products and then he holds those businesses forever or until something fundamentally changes in one of his investing criteria. So what does Mr. Buffett do in times like these… he does nothing! He knows that a stock market correction doesn’t change the fundamentals of the businesses he owns and therefore he does nothing and waits for normalcy to return. However, the one thing he does in his mind is he keeps a long term perspective and this allows him to relax and ride through the storm. Now, I know most of you are saying well he has billions of dollars and that helps him weather the storm as well and this is true but there was a time many years ago when he didn’t have his billions but he still had the same philosophy. So we have the Buffett way is the best investor of all time, but what about one of the best traders in the world?
If you have been reading this blog for a while or been a member of Tackle for any length of time then you probably already know that there are some big differences between traders and investors but does that mean they have different emotional responses? The reality is that their perspectives may be a little different but they are still subject to the forces of fear and greed because they are human after all. Let’s look at a world-class trader and see what his philosophy to see how it differs from Buffett and see if we can learn from it?
Our next specimen is the legendary Paul Tudor Jones! If you don’t know who this man is then I implore you to check out the book Market Wizards or just throw his name into the google machine. Jones was a wildly successful commodities trader before becoming a very successful hedge fund manager. Tudor has traded well over 40 years and the philosophy that he lives by when it comes to crashes is…its the same old story over and over again. He has seen many crashes in his days and he realizes that each one starts and ends the same. It may have different names and different players but the story remains that same and for that reason he is able to react with calm because he understands that this has happened before and will happen again and he gets better prepared each time he goes through the eventual ups and downs of the markets. His calm comes from familiarity and this gives him a sense of control.
From these two examples, you can hopefully see that we do have control over the way we react to unfavorable conditions even when we are being tortured by the markets. Sometimes it takes a different perspective or vision and then sometimes it takes familiarity to help get us through the rough patches. We just need to get ourselves to one of these places to breathe easier and remain calm.
Trade easy,
Coach Holmes
