Human nature anchors on the high tick of mark-to-market gains. It’s virtually impossible not to. And this makes it excruciatingly hard to stay fully positioned during a melt up. Every intra-day dip, every tape bomb, every ominous indicator du jour begs us to lock in paper gains before they slip away.
Even if you are fully cognizant of this problem you can’t make this feeling disappear. But there are some modest tricks that can help you, at the margin, manage it:[signinlocker id=675]
1. Remind yourself every day that markets tend to go up over time, and that the greater sin in money management is overthinking your way to the sidelines and not being able to get back in, not getting caught in a vicious draw down.
2. Throw a virgin into the volcano. Take a smaller, less strategic position (we all have them in bull markets) and sacrifice it. It won’t be material to your performance, and will go a disproportionately long way towards stretching that itch.
3. Sell half of a strategic position, but commit to stopping yourself back in if it doesn’t come in and starts to get away from you. (See the recent post about $GM and $F.) If you are tactically selling part of a strategic position, having a plan for getting back in that doesn’t require you nailing the call is as important as having stops.
4. If one of your large, strategic positions has had a particularly feverish run, sell short-tenor upside OTM calls against half of your position. Either current month or next month–any further out than that and you’re giving away too much upside in a name you like strategically. I am not a huge fan of selling OTM calls, but it is a less damaging way of, again, scratching that itch.
5. Plan for the draw down. Make a list of areas that you think would sell off first and hardest and track them for signs that their price action is weakening and/or their prevailing correlation matrix is changing. This usually comprises the areas that hot money has most recently flowed into as a result of the narrative–in today’s case ‘global reflation’. This list should always evolve with the narrative. Being prepared for the inevitable drawn down doesn’t guarantee you will be able to sidestep it, but it increases your odds and makes staying fully invested easier.[/signinlocker]
For some people all of this is just too hard. It certainly is not easy for me, and I’ve been doing this for a long time. If you find yourself chronically under-invested because of a macro hair trigger, maybe passive investing or systems-based trend following is a better approach. Discretionary trading–especially in macro–is not for everyone. It’s better to go with what works best for your forma mentis. There is certainly no shame in that.