Financial Independence

A Time for Work and Play

We're conditioned our entire lives to work harder. By doing so, it is understood, we will make more money and by extension, we will be happy. With that as the baseline mindset, it comes as no surprise that I am often asked how I can have time to travel and trade at the same time. The truth is, trading is a lot like sailing.

The best sailing is done with a steady trade wind breeze at your back. Sailing during these times gives you the best results. Your efforts go farther, in mileage made good, damage to the boat, and stress levels for those onboard. Sailing directly into the wind, on the other hand, results in low mileage, more things breaking, and general unhappiness.

With trading, the best results come with the market trending higher. Your efforts are rewarded more often than not, your stock picks are unlikely to break, and you go about your life stress-free. But trading in a choppy or falling market? Nothing works. You work harder, lose more than win, have stocks in your portfolio "break" and stress levels go through the roof. 

The trick to sailing is to pick the right weather window. The same goes for trading. 

Pat's boat sailing with the wind across the Pacific.
Pat's boat sailing with the wind across the Pacific.

Every Sunday we send our subscribers a newsletter. This is an excerpt from this past week's newsletter:

On August 2nd we reduced our portfolio allocation in Wanderer on Watch and sent an email explaining how risk is elevated. In short, the remaining reward for correctly calling a rally was minuscule relative to the risk of a pullback. With the benefit of hindsight, we can see that it was the correct call to make so far.

Since then, the major market indexes have declined and are now entering a spot on the chart where we would expect to see some kind of rally soon. We doubt the coming rally will be THE rally that we want to participate in. More likely, it will be a short counter-trend rally within a current profit-taking event.

So far, the decline has been orderly and almost in a straight line. That isn't how declines always unfold. Usually, a decline is interrupted by multiple up days that suck in the bulls and prolong the pain for those that are doomed to buy at the top and sell at the bottom. We are probably nearing one of those times when a rally is due. We think it's likely early for medium to long-term traders to jump into the market.

While we can never know for sure what stocks will do next, they are still expensive by almost any measure. We expect them to become less expensive, and don't mind waiting, biding our time until conditions realign with reward over risk.

Every once in a while, we talk about the psychology of trading. To be successful in trading, you need to forget what you intuitively believe about work. The mindset that made you successful so far is ill-suited to guide you in trading. That is because in order to reach the level of success you currently enjoy, it took work. A LOT of hard work. Embracing the work and "gettin' 'er done" is all you've ever known. In trading, it's at least as important WHEN you work, as it is how you work.

Consider that in a strong market rally, the overwhelming majority of stocks will rise. That means that even if you throw darts at a stock list, you are likely to pick winners in a bull run and losers in a bear market. Think of the odds. In a strong bull run, as much as 90% of the stocks in the index might rally, giving you a 90% chance of picking a winner, even if your choice is random.

But then consider the opposite. On a hard down day, you could take your time, look at a ton of charts, read some financials, read the news, really get into it and even break a sweat. But do you know what? You will have about a 10% chance of success and a 90% chance of failure. It won't have anything to do with how smart you are, or your acumen as a trader. It will have everything to do with timing.

Over the short-term, market conditions trump trading skills. If you've had a good run, look at the indexes and you will see that they probably also did. When your trading seems to not work no matter how hard you try, look at the market again and I bet it will be declining. It takes some time to get used to long periods of doing nothing, but consider this: a blindfolded child can throw darts at a stock list during a bull market, and they will likely outperform a professional that agonizes over trading actively during a bear market.

So, improving your trading skill is much easier than most people realize. The trick is to do less. MUCH less. Someone that works the market 10-20 of the best days per year will likely far outperform someone who toils over a long list of stocks each day. Trading is like boating in that there is a time to sail and a time to row. The people rowing feel like they are working harder, and they are, but they aren't actually outperforming someone who hoists a sail and lets the wind do the work.

We've gotten used to long periods of doing nothing, to the point that it doesn't bother us anymore. But we remember the feeling of needing to produce each day. We feel lazy if our portfolio isn't in the game, attempting to make a buck. When you get that feeling, remember the first rule is to not lose the buck. Then look at the market conditions and ask yourself if stocks are overbought, oversold, or in between. Buying when they are overbought and in-between is basically guaranteeing mediocre results. During those times, it's much better to sit back and do something else. Enjoy it, because it is one of the few jobs where you can beat the guy with sweat on his brow by doing almost nothing.

Remember, cash is a trading position.

Pat in French Polynesia, balancing work and play.
Pat in French Polynesia, balancing work and play.

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