Stop Throwing Your Cards at the Dealer

At the end of the day, all we are doing in the stock market is wagering money on outcomes that have yet to be determined. If you insist on spending your time coming up with condescending, pre-packaged responses about how trading is categorically not gambling, then you are already battling demons that will eventually come home to roost. Trading is most certainly gambling, and so is investing for that matter. Even if you buy a stock for a dividend in lieu of capital appreciation as a long-term investor, you are gambling that the dividend is safe. I invite you to take a look back at history at how many firms cut or completely erased their dividend back in 2008, to illustrate just how much of a risk it is, even when it seems like the safest thing in the world.

Given that we are gamblers, it is especially illuminating in a market like the current one to see how traders react to adversity. Look at your local Twitter stream, and you will see traders trying to fade other traders simply because they dislike them. You will see others arguing against straw men, creating their own twisted reality where “everyone” expects a 2008 crash, so therefore they are bullish. Alternatively, you will see other traders arguing “everyone’ is bullish, so therefore they will press their shorts here (albeit with the wind at their backs). Of course, when “everyone” is fading “everyone” else, you really do not have the type of contrarian evidence that you look for at inflection points. Instead, you have noise upon noise.

In a market like this, you also see raw emotions come out. When the market is trending higher in a low volatility environment, it is very easy for traders to act like one big, happy family, save the few outcasts who short the uptrend all the way to the top. However, once the tide turns and volatility returns in a corrective market, most traders get bit–The only question is how much. If you take a lump early on in the correction/bear market, there is nothing wrong with cutting your losses and retreating to a highly defensive posture via cash for the duration of the volatility. For those who continue to trade these markets in an active manner, unless you have a specific game plan you are bound to lose control of your emotions. You simply cannot afford to lose your head. Imagine sitting at a poker table in person with nine of the traders you despise the most from social media. Imagine them getting lucky and winning a hand of poker against you, and seeing them smirk as they drag in your money and count it. How are you going to react? Will you throw your cards at the dealer? Will your berate the jerk who won your money and got lucky?

The first thing to remember is that you are here to make money without exposing your capital to undue risk. So, you should ask yourself whether you truly are, in fact, getting unlucky in the current market. If you honestly believe luck has nothing to do with it, and you are simply not adept to this type of a stock market, then there is absolutely nothing wrong with getting up from the table, walking away, and coming back later when the game conditions (stock market conditions) have changed. The next thing to consider is, supposing you are truly getting unlucky in this market, then will emotionally reacting by cherry picking a trader you dislike or think is weak to use as a contrarian indicator be an effective strategy? I view this type of a reaction as being the poker equivalent of throwing your cards at the dealer for losing a tough hand.

In the current market, we have seen unrelenting selling in many of the industrials, energy, materials, and financials. Indeed, that can be described as forced selling and capitulatory. I can certainly envision a bounce sometime soon, but it is likely to be much more of a function of exhausted selling than of “everyone” leaning bearish. In other words, since many traders appear to be focused on making bets based on sentiment, I am getting up and walking away from the sentiment game altogether, focusing now more than ever on price. Because when “everyone” tries to fade everyone else, you are left with an amorphous quagmire that is nothing more than a sucker’s bet.