Sheer Dumb Luck

[Arindam]

Into TKC Fri, Mar 3, at $4.08. Out just now (Mon, Mar 6) at $4.31, for a 1-day, 5.6% gain.

OTOH, if ‘luck’ is defined as preparation plus opportunity, then was the trade still just “dumb luck”? I’d have to admit it was. OTOH, the trade wasn’t totally unmotivated. TKC’s fundamentals are solid.

But on a longer-term, 4-month chart, it was pretty obvious that TKC was being sold down, but likely to hold just above Support.

What I didn’t anticipate is today’s pop in price. But my ‘Windfall Rule’ says I need to grab such profit when they happen. Might I have squeezed another penny or two out of the trade? Probably. But equally as well, I could have had to have gotten out with a couple cents less.

[Arindam]

My thinking on windfall profits is this.

If the long-term, average gain from owning equities is 10% per year --and Buffet projects 8% per year going forward from our present high valuations-- then an average gain per market day is a modest 4 basis points.

Therefore, if a one-day, windfall profit of 2% or more falls into your lap, and if some quick scrambling finds no reasons why the price jumped, it has to be assumed that “someone knows something” and that he/she acted on that info and that the algos picked up on transaction and shadowed it, which triggered yet more buying from discretionary traders, but that the rumor or news will soon be confirmed/disconfirmed and discounted, and that the price spike will subside and fade away like the morning dew, returning prices close to their prior level.

So, this question arises. If one intends by temperament and goals to be an ‘investor’ instead of a ‘trader’, does that mean one should bypass harvesting windfall profits as and when they occur? That’s at tough one, right? But a decision has to be made, and it needs to be part of one’s written investing plan or else one is nagged by unnecessary shoulda/coulda’s that really will wreck havoc with achieving one’s goals.

The ‘Fear of Missing Out’ (FOMO) is one of the emotions that has to be managed, and it’s easy to do so if one’s investing/trading plan spells out exactly what one is permitted to do and what one is forbidden to do.

[physician]

I’m watching SOXL for an entry this morning:

and USO…doc

Crude oil Wednesday Forecast

[physician]

I’m seeing now that it is challenging to figure out entry points with the feints that happen…doc

[Arindam]

Doc,

Actually, oil is one of the easier commodities to trade. Note the nice rolling waves in the chart of USO below.

[physician]

Thats a nice graph/chart. I’m just not comfortable rolling sixty something thousand every month or two…doc

[Arindam]

“That’s a nice graph/chart. I’m just not comfortable rolling sixty something thousand every month or two.”

Doc,

$60k can be tiny money, or it can be more than a person’s total net worth. It all depends on one’s individual circumstances. Also, there is another factor going on here, namely, genetics. Some people are comfortable “betting the farm”, no matter their account size. Others, no matter that $60k would be just a small, 5% bet of AUM, would never do such a trade.

Investors in the former group include Buffet, who advocates for big positions and scoffs at diversification, which he calls “deworsification”. Others, like Lynch, when he was managing Magellan, ran 1,500 positions, whereas nearly half of BRK.A is allocated to just two positions.

My view is this. ‘Diversification’ is a crock of academic nonsense, because when markets are under stress, correlations go to 1.0. What does matter, though, is position-sizing relative to three things: one’s account size, one comfort/discomfort in making directional bets, the obvious risks of the trade.

My preference is to keep positions small, which is entirely predictable from my Jungian personality type, INTJ. Same-same with the other 15 personality types, each will have his/her own comfort zone --aka, money type-- that they have to stay within or else risk ruin. Alex Elder develops this idea in his books and summarizes it with this triptych: “Money, Mind, Market”.

Arindam