Blocking out the noise

Navigating 2023

After a tumultuous 2022, this year has offered more opportunities for long-focused investors. Hindsight always makes things look simpler, but the year started from the very depths of the 2022 bear market, making it difficult for trend followers to capture a big portion of the year's initial rally. In addition, as soon as markets finally looked to be establishing an uptrend, the US was rocked by a banking panic! Again, for risk-first investors, this was a particularly rocky market to navigate.

If all of this wasn't enough to think about, there was a relentless chorus of investors, pundits, and analysts referencing different indexes to support their personal views. If were a bear, you could reference the Russell 2000 as a reason for the bear's next big leg down to begin, which at the end of May was basically unchanged YTD. If you were a bull, you could tout that the Nasdaq 100 was up 30% YTD at the end of May, and speak as though we were in the midst of an epic bull run!

As someone who makes his livelihood from active investing, I don't look to predict what is coming next but instead relentlessly implement my strategy. This is a huge distinction. For some, their strategy is to outperform a specific index such as the QQQ. If that is your strategy, and you sat there in January waiting for another leg down... you're in trouble.

My personal aim is two-fold. 1) Protect my capital at all times. Without my capital, I'll have to go job hunting, and I've become accustomed to my independence since I began trading independently in 2014. So, job 1 is ensuring I keep my ability to trade. 2) Once capital is protected, make as much money as possible regardless of the volatility along the way.

Those are my two personal objectives, resulting in a very different return than the indexes. I only trade the long side, so making a few percentage points in 2022 was a win as I skipped the bear market but, more importantly, stuck to rule #1. So far this year, I am lagging behind the QQQ. Why am I lagging? The market exploded out of the gate from the depths of the bear market. It also started a second leg up amidst the banking crisis. My Rule #1 prevents me from fighting downtrends and being highly committed in high-risk situations. Does this upset me? No, because I would be much more upset if I failed at my rule #1 by fighting the trend in 2022 or being stuck in a faltering/collapsing bank stock in 2023.

The point here is not to justify returns as I don't need to - it's my capital. The point is your job as an investor is to reach your goals and targets within the limits you place. QQQ is doing great this year but had a 38% drawdown last year. That is what you accept with buy and hold. I don't accept being at the whim of the general market. Had you invested in markets in 2000, you would have had to wait 14 years to get your money back after a nearly 80% drawdown - no thanks.

I also don't accept the market's typical annual returns of 7-12%. I make a living from trading, and my aim has always been to substantially exceed that.

To achieve these goals, I need a strategy that I agree with, trust, and can execute. This means ignoring anyone else's opinion. I can listen to them and agree or disagree, but ultimately I need to stick to my strategy and only adjust it outside the pressures of the market if I feel it can be improved.

One tool that has been very helpful to me has been studying new 52-week highs vs. 52-week lows. Healthy bull markets have more stocks making new highs than lows - or it's not much of a bull market. However, the heavily concentrated Nasdaq 100 was able to do just that despite a long period of net lows this year. Does that mean the tool failed me? No! It isn't a trend predictor. It describes the current underlying health of the market. Low risk / high reward markets occur with more highs than lows. As the Nasdaq 100 climbed higher, MOST stocks were breaking down. Do I wish I had NVDA, which led the QQQ? Of course! However, underlying conditions were not typical of environments I do well in or where I can easily protect my capital (remember rule #1).

As May approached, the market improved, and new highs finally began outpacing new lows. I also became heavily invested and enjoyed a good June/July. Does this mean I am a bull? No, I am never a bull or a bear. I do my best to find conditions and setups that satisfy my two goals. The concept of being a bull or a bear works well for conversation but not in practice. What if you were a bull in January 2020? Did you stay that way despite conditions obviously changing?

This is all to say that you need independence of thought and a strategy to follow, NOT the noise of everyone else. Unless someone else has similar goals, it is very unlikely that they are ever positioning their portfolio similarly to yours.

The trouble of being swayed by others goes beyond incompatible objectives. Human beings like comfort. If people are fearful (the markets will often bring this out in us) and sitting in cash, they want to hear negative things to confirm that they made the right decision. Take a hop over to youtube and look at the endless videos of 'The Market is About Crash!" with hundreds of thousands of views. Fear and greed sell well, but independent hard work doesn't.

It's been an odd year. If you are outperforming - congratulations. If you are not, keep working on it. However, most importantly, stick to your strategy and block out the noise. In the heat of the battle, a reminder of this key concept is essential. Keeping a strong and focused mindset is the bedrock of successful investing.

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