Source: Unsplash, Lilian Velet
Whenever CNBC breaks out its “Markets in Turmoil“ chyron, markets tend to rally.
Not this time!
This is my 21st year in the capital markets. I have seen some crazy stuff. Actually, 99% of the stuff I have seen is boring stuff, but it’s the crazy stuff that I remember.
Some of you have the ability to short things, trade derivatives and do all kinds of other fancy stuff. Most others just buy things. For the latter group, it often comes down to very brief moments where you have to decide to buy something cheap. Those decisions are hard because they often feel terrible.
Here’s something to take some of the sting out of those hard investing decisions. I call it the 3 Cs of trading in a crisis. I published this for my paid-up subscribers last week. And this short list can help you in any market, and especially in times like these.
The 3 Cs of trading in a crisis are:
In order to buy stuff, you need cash.
If you have cash, it means you weren’t fully invested on the highs.
This time around, like most times, everyone was fully invested on the highs.
Cash yields nothing, so people were very scornful of cash, considering it a drag on performance. But people forget about the option value of cash, the idea that cash is a big pile of possibilities, and it allows you to buy things cheaper in the future.
This is why you always keep cash around.
People never, ever learn this lesson, no matter how many times they get burned. Again and again, markets go up, people chase performance, and feel the need to be fully invested… on the highs.
Don’t be one of these people.
Conviction is how sure you are on a trade.
There is one easy way to get more conviction on something: do a lot of research on it. The more you know about something, the better you feel about it, and the more comfortable you are. Although there is such a thing as knowing too much.
Just because you have conviction on a trade doesn’t mean you are right. You can have conviction and be wrong. But conviction is necessary to get comfortable with a trade, which will help you size it appropriately.
When I have conviction on a trade, I feel like I must act. And I can’t do it fast enough.
Oftentimes, these opportunities happen when things look really bad. And even if you have the capital, and you have the conviction, working up the courage can be tough.
We had some 1,000-point down days in the Dow in the past two weeks. Takes some courage to buy the market down 1,000 points. Never feels good when you push the buy button. If it does, then you could be a psychopath.
I have never had a shortage of courage in my career, which some people confuse with bravado. I’m a trader, and it’s in my DNA. I’m always up for taking a risk. I’m unusual—don’t confuse courage with fearlessness—it’s normal to experience fear—even healthy.
It’s good to deliberate about a trade, and really think about what you are doing. But don’t take too long — sometimes it comes down to a matter of seconds.
Equities Contributor: Jared Dillian
Source: Equities News