Stock Market Rules To Live By: Part 2

Mute the noise and avoid distractions

Ditch the noise and look inward - avoid shiny distractions and the 'latest thing'

Stock market news and news services exist for one purpose: to sell advertisements.

Worse yet, those ads are often paid for by the companies that the news service is telling you to buy, without disclosing that the company is an advertising customer.

When a Big-City Newspaper runs a story, there's a joke in the media business that the story exists in the 'news hole,' and everything around it - above, below, and on both sides - is advertisements. The advertisements are the actual reason for the paper, and the news in the middle is the justification for actually going to print. No ads, no newspaper - period. To make matters even more perverse, the news has to align with the advertisers because companies won't pay the wages of your writers and the rent of your office if you publish articles that don't completely coincide with the advertisers' beliefs and views.

Advertising in the markets

The largest advertiser of the NFL is Anheuser-Busch. If Anheuser-Busch feels threatened by something like cannabis, you better believe the NFL players are not allowed to use, discuss, work with, or be around the plant. Worse yet, the alcohol company (a cannabis competitor) mandates that the NFL is not allowed to run cannabis ads during the football games, as that may affect beer sales. It sounds like a funny conspiracy, but there are massive examples just like this throughout the Western world.

Another big and blatant example could be something like the New York Times having very liberal ownership. If the owners of the media business behind the paper think guns should be illegal, for example, then you will see a lot of anti-firearm propaganda on their pages. If they find out that, for example, Elon Musk is conservative, then they may not accept advertising money from any of his companies out of pure ignorance or bias. If a pro-gun lobby wants to run a 2nd Amendment ad trying to inform people of politicians trying to take away their rifles, that newspaper will simply not take those advertising dollars because it does not fit the agenda of management. In fact, they will always go the other way and publish articles with extreme bias and a view that matches the agenda of said management. You can often feel the anger towards the other side of these large media companies; think Fox News towards liberal views, or CNN towards conservative views. The news used to be about reporting, and it is now about opinion and partisanship.

CNBC, 'first in business' as they say, takes advertising money from public companies, which they expose to you as 'great opportunities' or 'best of breed'. They will then often feature those public company CEOs on the air and declare what a tremendous opportunity that particular business is for investors right now. They don't disclose this relationship, nor do they provide a counter-argument for their claims. A blatant conflict of interest takes place every day, on almost every media outlet worldwide. These companies are selling ads, and you are the eyeballs - you are the customer. Your tuning to that channel becomes an engagement, which is a statistic they sell to companies in order to take that company's advertising revenue.

This is far worse in and around micro-cap stocks or startup businesses that are publicly traded. In Vancouver, BC for example, there is a thriving business of marketing companies employing dozens of spin-doctors that do nothing more than take money from brand new public startups and try to create stories to describe just what an incredible opportunity this particular startup is for investors. They will often use the name of other big established businesses in the same arena to create clickbait and to draw in unsuspecting victims to expose them to this new client of theirs. It might be a lithium mining startup that gets a 4-page write-up on why they will be the next big producer of batteries for Tesla. They are okay with these far-fetched claims because at the bottom of the article is a well-crafted legal disclaimer stating that none of this may happen and that the company is a client. So they can say whatever they want.

Next time your newsfeed displays an article such as “These three stocks will rally this year,” scroll down to the very bottom and have a look. You might be surprised to see that within the article is a name drop of some OTC listed startup that paid for the whole article. The clever writer used some clickbait and tagging of some Blue-Chip names to get you to find the article while scrolling on your phone.

It’s always something

If you've been an investor or a trader for any period of time, you'll know that there is always something going on on a daily and weekly basis in the markets, influencing the flow of capital. Trade wars, political events, turmoil in the Middle East, bond yields, elections – it’s always something that is often forgotten in a mere 10-day news cycle. Good traders know how to leverage this noise and also how to mute it and stay disciplined. Whip-sawing back and forth based on whether the Dow Jones is up or down today is a recipe for frustration and losses – you are chasing no action. Reacting instead of being proactive. As Wayne Gretzky eloquently put it, you want to “be where the puck is going to be,” and the only way to do that is to not react to news events – to put on the horse blinders, so to speak, and stay in your lane.

Go with your gut

The best reason to follow your intuition is to hold yourself accountable. There's little worse than knowingly ignoring your better judgment. If you adhere to your plan and encounter unforeseen circumstances, you can take solace in knowing you did your best. Bad trades, despite efforts, are inevitable in this business. However, making a bad trade when you knew better is particularly difficult to accept because you ignored your own wisdom.

The most successful traders and investors possess a keen intuition and heed their instincts. When they sense they are overexposed in a certain area, they begin to rebalance their portfolio by reducing exposure and increasing cash reserves to achieve equilibrium. Conversely, if they have a strong conviction about a significant opportunity, they start accumulating assets in that direction, even in the face of skepticism from others.

Listening to your intuition offers the invaluable gift of peace of mind. It assures you that you're heeding an inner voice that often provides more rational guidance than our imperfect human minds, which frequently get distracted and overwhelmed by unnecessary data.

News can be detrimental for traders as it amplifies the tendencies of an ADD-brain, pulling them from one extreme to the next on a daily basis, fostering a binary "in or out," "long or short" mindset. However, successful traders understand that trading thrives in the grey area.

Trading is not binary

Amateur traders and investors buy and then sell. This is wrong. 

Professional traders and investors accumulate their positions over time, and then distribute those positions back into the market, over time. A very big difference from buying and selling in two transactions.

Trading is not a black-and-white game, and only when one realizes this can they become a professional at their craft.

Put another way, you often hear investors say, "I sold too soon" or "I bought way too much." Well, guess what? They're doing it all wrong.

If you buy ABC stock in January with 1/10th of the position when it was $10, and then buy the rest in 1/5ths over a period of weeks, you’ll not only be protecting your capital in case something goes wrong, but you’ll also be able to take advantage of dips and dollar-cost average like the pros.

Once it rolls over at $20 and starts to come back down, you can start to offer up that position and sell in 1/5th sizes, while maintaining control and a core position in case it goes back up. Selling, even more than buying, should be done over time for several reasons.

Buy, sell or hold?

One of the biggest everyday questions that any stock or commodity trader faces is the eternal dilemma: "Buy, sell, or hold?"

The correct answer is not black and white, and it is not one that financial news can provide. Even if it could, the answer would vary from one trading session to the next, rendering it only temporary anyway.

The correct answer, if your gut doesn’t feel good about the position, could be to "sell half." This strategy allows you to reduce your exposure by 50% in case you are right while maintaining 50% exposure in case you’re wrong, enabling you to continue in that position and live to fight another day. I have successfully lived by this mantra.

The correct answer, if you’re eager to stay in the position, is to simply add a bit more to your position, not double down. This way, if you’re wrong and the trade goes against you, you haven’t doubled your exposure, and you can now start the process of distribution back into the market.

The best piece of advice I was ever given about being long a position and being unsure about getting out vs staying in is: “when in doubt, sell half”. Ditch the noise and make business decisions.

In the stock market, you tend to be either coming or going - but never sitting still - at least in your mind. So it’s critical to know at all times: “Am I looking to add more to this position, and if so, for how much longer?" Or “Am I looking to start exiting this position, and if so, over what period of time and how?"

Example

Throughout 2019, my gut strongly sensed that the market was overdue for a correction, and that volatility on Wall Street was unusually subdued - eerily quiet. Nearing the end of 2019, despite events such as a trade war with China, tensions with Iran, and the quasi-impeachment of President Trump, volatility remained remarkably low on Wall Street.

As an insurance policy, I held a substantial call option position on the VXX. This meant that if there were any significant disruptions to stocks in general, the VXX (which tracks the VIX, or volatility index) would rise, and I would benefit from being on the right side of the trade by owning a call option on the volatility note itself. This position also served as a hedge against any losses I might incur on my long stock positions.

It took a full year, but on Monday, February 24th, 2020, fears of the Coronavirus finally rattled the financial markets. This sent the VXX from about $13-$14 in the weeks prior to $23 by the end of that week. My trade proved successful, and on that Monday, I exited the 290 March calls, realizing profits of a little over $60,000. I felt okay at a time when everyone else was panicking.

Until I started listening to the news. "The worst is over." "Tuesday is usually green after a Monday drop of more than 2% on the S&P." So, on a greed-high from the small win, I went 180 degrees against my gut. I went ahead and placed chips on black - I bet against the VXX and bought several put options in an effort to ride it back down for what the media was declaring as an "oversold situation" and a "potential for a bounce tomorrow." I knew better, but I went short anyway on the very index that I had been long on throughout 2019 - because I listened to the noise.

By end of day Tuesday, over $60,000 had evaporated.  By Friday, all $75,000 USD was gone.

By Monday March 18th, 2020, the 290 March Call options were priced at over $60 each, that would have been a $1,740,000 gain had I held on - as I had planned:

I had not only chopped my winning position way too early and gave up over $1.7 million USD in further gains; I didn’t stick to my plan of exiting slowly and maintaining the hedge (remember  ...The Plan?)

As a result, I suffered a significant loss, despite being in the perfectly correct spot for a full year. However, I let my emotions take over at the very moment when I needed to keep them in check. I gave up a $2.2 million payday that I patiently and correctly waited a year for - all due to one bad decision driven by fear and greed.

An expensive lesson one might say?

I listened to the noise instead of muting it out and sticking to the plan.

-B