“Although it’s easy to forget sometimes, a share is not a lottery ticket… it’s part-ownership of a business.” – Peter Lynch

The worst feeling in the world I had as a child was that period of time after I did something wrong (disobeyed my parents, broke something in the house, came home past my curfew, got in trouble at school) and just knew that I was going to get punished when I got home.

Usually I would have to deal with my mom first and get an earful from her….but the real agony came after that.

“Just wait till your father gets home…” she would say.

As I sat at home after school, watching the clock tick and waiting for dad to come home, I remember feeling nauseous. Sick to my stomach. I knew what was coming and there was no way out.

I was extremely afraid of my father growing up and the agony of the wait for him to come from work was often times worse than the punishment itself. (he used to spank me but that was over pretty quickly).

It was a very visceral feeling…the dark cloud of inevitability. Just waiting for your long drawn out sentence.

It was hell.

Not making money the old fashioned way​

I remember vividly the first sizable (at least for me) investment I made in the stock market. I had finally saved up enough of my prior year’s bonus to set up a small trading account of $10k USD and I was raring to go.

It was spring of 2002 and the markets seemed to have finally put the turmoil of 9/11 behind it. Guys on the floor were trading this hot biotech stock called Amgen at the time. I had no clue what the company did or what biotech even was. But I thought with all the excitement I was hearing on a daily basis, this was time to get int.

I even asked a few friends of mine at the time in the research department and at different funds what they thought. They all gave me the same answer.

“Looks solid.”

So I went all in…

I was too nervous/scared to tell anyone about my trade (except for the compliance forms I had to fill out) but secretly inside I had this excitement as I came into work each day and stared at the price chart for hours upon end.

The only problem was despite the fact that I sat on a trading floor of one of the largest investment banks in the world…I actually didn’t have a clue about what I was doing. I thought I did because I saw traders making 100’s of thousands of dollars per day trading in and out of stocks I could simply copy them and do it too.

The reality was I was still very much just a trading assistant, and the only thing that I could (barely) get right at the time was the daily breakfast order that I had to get for the entire desk at the local deli.

A month later, the entire market crashed. I was down over 30% in my position + fees and what took me and entire year to earn in bonus money, I lost a third of in less than a month.

As I sat there watching the price of the stock I had just invested in a few weeks ago get cratered I experienced that same nauseating feeling that I did as a child waiting for my father to come home from work and punish me.

“Look at this piece of shit,” yelled out one of the traders as I buried my head into my desk.

At this point I had two choices:

Option #1 – Sit it out. Wait for a rebound. Pray to the trading gods, call in the swamis and snake handlers and hope for whatever it takes to get the stock price up so I could sell without a loss.

Option #2 – Take permanent loss and close out the position because I had no clue what I was doing and quite frankly was treating the trade as a lottery ticket and not as an investment.

The hours leading up to me placing my sell order to exit the position felt exactly the same as waiting for my dad to come home and punish me.

I knew what going to happen. It was inevitable. It was horrible but I deserved it.

Why?

Because I had just tried to go scuba diving without even knowing how to swim.

The biggest mistake most people make in the stock market is not doing their own work and thinking independently when it comes to making investment decisions.

It usually comes from laziness. They hear about friends making money and want to ride the wave. They ask for quick tips as opposed to putting in the work themselves. They think that they can skip the work and just cashing in on the profits if they are fast enough.  Professional investors are just as guilty of this as retail investors. (Professionals follow the sell side brokers when they feel lazy to do their own work)

Judgement Day

I don’t like the state of the markets right now.  It’s a recipe for disaster. As we sit here waiting for the key macro event of the week which is Fed Chair Powell’s first FOMC meeting and press conference, I can’t help but feel a tinge of nausea as if I am awaiting my deserved spanking.

Well look at that — 100% chance of a hike!  Source: Bloomberg

The only difference is that we’ve actually been given a chance to avoid said punishment. My father never gave me that chance before. If I had done something wrong there was a price to pay.  No amount of good deeds would make that go away.

Everywhere you look right now there are warning signs flashing. Volatility spiked again overnight and everyday is a game of duck duck goose as to who Trump will fire next from his cabinet (or something unexpected from the Mueller investigation).

Further threats of tariff imposition and a trade war continue to escalate but all the while investors seem to be hanging on today in hopes of higher prices tomorrow. (I even heard an argument the other day that March/April is seasonally very strong for US markets…I mean c’mon are we really going there?!)

Let’s not forgot (as it appears many investors already have) that this recent pullback in the market all started with a strong jobs report back in January.  The main concern was that the economy was too hot which would allow the Fed to increase the pace of normalization.

Hope is one of the most powerful states of mind a human can experience.  It is based on the expectation of future positive outcomes and directly affects your judgement and behavior in the present.

But I much prefer to prepare for the worst than hope for the best.

When contagion hits and volatility migrates quickly from forex to credit and finally to equities, the movement will be fast and furious.  If you haven’t done so already I’d consider lightening up on stocks and moving to cash, gold (inflation hedge) and Asian stock markets (which will suffer a downdraft initially but will recover much quicker and continue its long term structural growth pattern).  

Finally, if trade war fears are keeping you up at night I’d suggest taking a look at sectors with significant revenue exposure to the US such as tech, consumer and healthcare and shorting them. Japanese exporters look particularly ripe for the hunt as they will get hit with a double whammy when global disruption leads to safe haven Yen strength.