Investing Requires Patience and Nerves of Steel
A perfect trading environment? Volatility is a mixed blessing. Day traders love lots of action as it creates opportunities to make or lose money. Day traders are action junkies, looking for price moves and technical patterns like predators hidden in the reeds to pounce.
Investors have a long-term view of markets, waiting for prices that they believe are too low or too high. While some look for prices that could be tops or bottoms, the most successful investors realize that markets can move to illogical, irrational, and unreasonable prices, so they often scale into risk positions over time.
Rising inflation can be a vicious cycle. In 2021, inflation turned out to be a lot more than a transitory event. At first, the US central bank and Treasury explained away higher prices as a symptom of pandemic-inspired supply chain bottlenecks. They never cited the tidal wave of central bank liquidity and tsunami of government stimulus. However, it was those factors that lit the inflationary fuse. The Fed waited far too long to adjust monetary policy to counter inflation as they didn’t account for the central bank’s policies that were a root cause.
Russia is one of the world’s leading commodity producers, and China is the most influential global consumer. The invasion of Ukraine, ongoing war, a Russian-Chinese “no-limits” alliance, and sanctions and support for Ukraine from the US and Europe, create an almost perfect bullish cocktail for commodity prices, pouring gasoline on the inflationary fire. The Fed can do little with monetary policy to extinguish the flames. Since the February 24 invasion, market volatility has dramatically increased.
The market price variance creates a highly attractive trading environment, but it also offers investors a chance to profit long-term as volatility creates bargains or overpriced assets.
The current environment requires short-term traders to be on their toes while patience and perseverance are necessary for longer-term investors.
Trade or investment- Make a choice before pulling the trigger
A common mistake made by market participants is many do not distinguish or classify a risk position as a trade or investment before executing a buy or sell order. The vast difference between a trade and an investment is the time horizon. Trades are often short-term, while investments are medium to long-term.
Categorizing any position as a trade or investment before pulling the execution trigger leads to a different set of rules and can minimize losses and allow profits to run.
Trading- One set of rules
Any successful trader knows that the key to success is discipline. They also know that they will never call the price direction correctly 100% of the time. Moreover, most have less than a 50% average on the path of least resistance of prices.
Baseball players who rise to the top of the game and wind up in the Hall of Fame in Cooperstown, NY, have an average batting average of just over 0.300, meaning they do not get on base nearly 70% of the time. The same holds for the trading hall of fame.
What separates winners from losers is discipline. In trading, it amounts to a risk-reward approach that increases the odds of long-term success. When risk-reward is in your favor, it allows for wrong directional calls to outnumber correct ones and leads to more profits than losses. Risk-reward should be at 1:1 at a minimum, and the reward should often be higher than the risk level. When a price hits the risk level, disciplined traders will exit, admitting they were wrong. Moreover, the formula for long-term success means a trade can never become an investment because the price moves contrary to expectations.
Investing- another set of rules
Investing is another animal, as a value investor tends to go against the market’s sentiment, taking a contrarian approach. Charlie Munger’s current risk position in Alibaba shares (BABA) is a perfect example, but it applies to markets across all asset classes.
Mr. Munger saw long-term value in the Chinese e-commerce and technology company, believing it is inexpensive compared to US stocks. At the end of Q4 2021, he was willing to take the Chinese country risk in the stock. Mr. Munger has been buying BABA shares since mid-2021 when it peaked at over $230. His disclosures show he purchased shares in Q3 2021 and Q4 2021. At below the $87 level at the end of last week, his investment is underwater, but he has plenty of capital to support the risk position. Mr. Munger added shares as the price declined, using the principle if I liked the prospects at a higher price, I love it at a lower price. While time will tell if he sticks with BABA, he has scaled into the position at a comfortable level, given his total capital.
Successful investors do not put all of their eggs in one basket, nor do they amass a full risk position at one price level. They often leave plenty of room to add if market sentiment drives the price to a more inexpensive level when buying or a more expensive level when shorting.
Investments require patience, perseverance, and a portfolio approach. Charlie Munger has substantial exposure to BABA, but it is only one of the stocks in his overall portfolio.
Common factors
While trading and investing are different market approaches, some common factors are critical:
These principles guide successful traders and investors.
The differences and pitfalls
Trading and investing are different because:
The critical pitfalls are:
In early March 2022, market volatility has created a paradise of opportunities for traders as wide price variance is fertile ground for short-term risk-reward dynamics. Investing in the current environment where inflation and geopolitics create the most uncertain landscape in decades. An investment plan requires patience and nerves of steel. The old saying, “look before your leap,” is appropriate for traders and investors as they should always plan before executing purchases or sales to enter a risk position. Highly volatile markets make planning critical.
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Trading advice given in this communication, if any, is based on information taken from trades and statistical services and other sources that we believe are reliable. The author does not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects the author’s good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice the author provides will result in profitable trades. There is risk of loss in all futures and options trading. Any investment involves substantial risks, including, but not limited to, pricing volatility , inadequate liquidity, and the potential complete loss of principal. This article does not in any way constitute an offer or solicitation of an offer to buy or sell any investment, security, or commodity discussed herein, or any security in any jurisdiction in which such an offer would be unlawful under the securities laws of such jurisdiction.
- Trade or investment- Make a choice before pulling the trigger
- Trading- One set of rules
- Investing- another set of rules
- Common factors
- The differences and pitfalls
Investors have a long-term view of markets, waiting for prices that they believe are too low or too high. While some look for prices that could be tops or bottoms, the most successful investors realize that markets can move to illogical, irrational, and unreasonable prices, so they often scale into risk positions over time.
Rising inflation can be a vicious cycle. In 2021, inflation turned out to be a lot more than a transitory event. At first, the US central bank and Treasury explained away higher prices as a symptom of pandemic-inspired supply chain bottlenecks. They never cited the tidal wave of central bank liquidity and tsunami of government stimulus. However, it was those factors that lit the inflationary fuse. The Fed waited far too long to adjust monetary policy to counter inflation as they didn’t account for the central bank’s policies that were a root cause.
Russia is one of the world’s leading commodity producers, and China is the most influential global consumer. The invasion of Ukraine, ongoing war, a Russian-Chinese “no-limits” alliance, and sanctions and support for Ukraine from the US and Europe, create an almost perfect bullish cocktail for commodity prices, pouring gasoline on the inflationary fire. The Fed can do little with monetary policy to extinguish the flames. Since the February 24 invasion, market volatility has dramatically increased.
The market price variance creates a highly attractive trading environment, but it also offers investors a chance to profit long-term as volatility creates bargains or overpriced assets.
The current environment requires short-term traders to be on their toes while patience and perseverance are necessary for longer-term investors.
Trade or investment- Make a choice before pulling the trigger
A common mistake made by market participants is many do not distinguish or classify a risk position as a trade or investment before executing a buy or sell order. The vast difference between a trade and an investment is the time horizon. Trades are often short-term, while investments are medium to long-term.
Categorizing any position as a trade or investment before pulling the execution trigger leads to a different set of rules and can minimize losses and allow profits to run.
Trading- One set of rules
Any successful trader knows that the key to success is discipline. They also know that they will never call the price direction correctly 100% of the time. Moreover, most have less than a 50% average on the path of least resistance of prices.
Baseball players who rise to the top of the game and wind up in the Hall of Fame in Cooperstown, NY, have an average batting average of just over 0.300, meaning they do not get on base nearly 70% of the time. The same holds for the trading hall of fame.
What separates winners from losers is discipline. In trading, it amounts to a risk-reward approach that increases the odds of long-term success. When risk-reward is in your favor, it allows for wrong directional calls to outnumber correct ones and leads to more profits than losses. Risk-reward should be at 1:1 at a minimum, and the reward should often be higher than the risk level. When a price hits the risk level, disciplined traders will exit, admitting they were wrong. Moreover, the formula for long-term success means a trade can never become an investment because the price moves contrary to expectations.
Investing- another set of rules
Investing is another animal, as a value investor tends to go against the market’s sentiment, taking a contrarian approach. Charlie Munger’s current risk position in Alibaba shares (BABA) is a perfect example, but it applies to markets across all asset classes.
Mr. Munger saw long-term value in the Chinese e-commerce and technology company, believing it is inexpensive compared to US stocks. At the end of Q4 2021, he was willing to take the Chinese country risk in the stock. Mr. Munger has been buying BABA shares since mid-2021 when it peaked at over $230. His disclosures show he purchased shares in Q3 2021 and Q4 2021. At below the $87 level at the end of last week, his investment is underwater, but he has plenty of capital to support the risk position. Mr. Munger added shares as the price declined, using the principle if I liked the prospects at a higher price, I love it at a lower price. While time will tell if he sticks with BABA, he has scaled into the position at a comfortable level, given his total capital.
Successful investors do not put all of their eggs in one basket, nor do they amass a full risk position at one price level. They often leave plenty of room to add if market sentiment drives the price to a more inexpensive level when buying or a more expensive level when shorting.
Investments require patience, perseverance, and a portfolio approach. Charlie Munger has substantial exposure to BABA, but it is only one of the stocks in his overall portfolio.
Common factors
While trading and investing are different market approaches, some common factors are critical:
- Successful traders and investors never risk all of their capital on one risk position.
- Success requires a plan before buying or selling to initiate a trade or investment.
- Risk-reward and leverage dynamics are critical.
- Success requires the acknowledgment that the price of any asset is always the correct price because it is where buyers and sellers meet in a transparent environment, the marketplace.
- Successful traders and investors eliminate the emotional impulses from fear and greed.
These principles guide successful traders and investors.
The differences and pitfalls
Trading and investing are different because:
- Time horizons- Trading requires a short-term orientation while investing is medium to long-term.
- Technical versus fundamental- A trader tends to use short-term technical factors driven by market sentiment. Investors are more likely to react to fundamentals and longer-term trends.
- Approach- A trader tends to be more dynamic, reacting to each price movement in a market. An investor is often passive, watching market action over more extended periods.
The critical pitfalls are:
- Traders and investors should never assume an assets’ price is wrong and they are right. The current price is always the right price.
- Attempting to call tops and bottoms in any market is dangerous as prices often move to illogical, unreasonable, and irrational levels on the up and downside.
- Never allow a trade to become an investment because the price move contrary to expectations.
- Changing a game plan during a trade or investment’s life refutes the original thesis. A change should be considered a new risk position, requiring abandoning the existing trade or investment.
- Failure to account for the worst-case can lead to disaster. Risk involves price, liquidity, and the accessibility to an exit.
- No trade or investment should prevent others. Allocating too much capital can cause devastating losses.
In early March 2022, market volatility has created a paradise of opportunities for traders as wide price variance is fertile ground for short-term risk-reward dynamics. Investing in the current environment where inflation and geopolitics create the most uncertain landscape in decades. An investment plan requires patience and nerves of steel. The old saying, “look before your leap,” is appropriate for traders and investors as they should always plan before executing purchases or sales to enter a risk position. Highly volatile markets make planning critical.
--
Trading advice given in this communication, if any, is based on information taken from trades and statistical services and other sources that we believe are reliable. The author does not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects the author’s good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice the author provides will result in profitable trades. There is risk of loss in all futures and options trading. Any investment involves substantial risks, including, but not limited to, pricing volatility , inadequate liquidity, and the potential complete loss of principal. This article does not in any way constitute an offer or solicitation of an offer to buy or sell any investment, security, or commodity discussed herein, or any security in any jurisdiction in which such an offer would be unlawful under the securities laws of such jurisdiction.
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