Uncle John's Cabin

Losing My Religion (or Gambler's Ruin)

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I have to rate my recent performance as spectacularly poor. There are a number of factors involved. I could say the market turned against me at the wrong times. I could say the market has acted irrationally in the face of bad news which I expected and got. I could say my ability to time the markets on short term swings has left me. But I won't. Everyone could say these things at one time or another.

A little background here first. I am suffering from chronic fatigue of some form (chronic fatigue syndrome or God only knows what???) From time to time, I have "setbacks" where my energy levels drop severely and I think more sluggishly then usual. This is the main reason I haven't posted much recently. When I get tired, I make bad choices, irrational decisions and tend to doubt myself or worse, not even remember my original strategies. OK, no pity party for me. Life is. You play the cards you are dealt. Also, I can say I certainly have been distracted (and worn out) by March Madness as well as watching the Cubs in their quest to win the World Series this year! (According to Time magazine, the Cubs will make it to the Series - but lose to the Tigers. The Time magazine curse worries me. Then again, maybe the curse will be that the Tigers lose the Series and the Cubs win!)

But there are times everyone does not have the time to pay attention to the market whether it be full time jobs, family issues, personal or health issues or whatever. What does that do to a short term trader strategy? At least in my case, it plays havoc with my positions. When I did not stay on top of my positions by keeping an eye on them constantly, I tended to chase the ups and ride the downs to my detriment. I didn't get in our out of positions quick enough and the next day/week/month found myself with a large losses. As I stated in my spotlight interview, I do not typically trade like this. Due to the restraints of the game, I thought though that I would try a "fast trading" strategy to see how I would do. I did well when I had time to watch the news and pay attention to the markets and was alert. When I got tired and didn't wake up until noon or woke up early and could not stay awake until the close, I missed a lot of action that I didn't want.

Also, I started getting the "too much information, running through my brain" (The Police reference) syndrome. When tired or when I didn't have the time to process this information, it made me turn around in the ring like a bull, raging so much that it couldn't see straight. The information was useless and I couldn't make sense of it because I didn't process it. This lead me astray from the bigger picture.

My big picture plays were infrastructure like steel, coal, nat gas. They were odd one off foreign investments like homebuilders in Brazil and Mexico in emerging markets. They were ag plays like seed, fertilizer and machinery. I started out well with these as well as shorting at appropriate times when any news was bad news. To a degree each of these plays worked while I stuck to them. Once the rating issues were fixed on the leader board I was one of the 25 that were above even.

Then, I started "losing my religion." (R.E.M. anyone?) When ag did a head fake and started dropping for a week, I thought the party was over and I sold for losses before letting it play out and giving it time to work (POT), (AGU). The same was true of my coal play (ACI) which was dumping even while steel was doing well and exports were up. I sold out of that as well. The scare in Brazil about peasants trashing Monsanto (MON) facilities made me worry as well as a general dip in the Brazilian overall markets. I sold my home builders (GFA) and (HMX) and more ag. Deere (DE) underperformed while I held it without giving it a chance to report earnings even once. I dumped it. When steel started losing ground I sold out for a small profit on (X) and did not buy back in.

I wish I had all these positions back. I guess there is time to still try to recover but I have lost about 10% in the last month. It will be difficult. When I lost faith in my overall themes, I looked at what the market trend "had been" and starting looking at the people at the top of the board. I bought gold right before it got hammered and sold for a loss. I started shorting everything thinking the March run up was due for a correction but I bought in so high, that even with the correction, I was due to lose some money. I considered jumping into the highly volatile solar plays thinking I could make a comeback. I was at the edge of "gambler's ruin" and probably still am.

When things start going badly in Vegas, many people try to double up to win their money back quickly even though it may have taken days to lose it. This is why most people not only come home with a loss, they typically lose every dollar they set aside to gamble with. In effect, these people are destined to lose every dollar they are willing to risk. The smarter people in this group set aside a set amount of money they are willing to lose. If it is small enough, they can still come home happy losing a couple hundred bucks from a vacation just as if they spent a couple hundred bucks on trinkets and tourist traps. That's fine if that is what you are willing to pay for entertainment. "Gambler's ruin" is when they get desperate and start using their ATM cards to reach for more money that they can't afford. The more they lose, the more desperate they get, the more money they lose until they've lost money they can't afford, or worse end up broke. Technically, gambler's ruin is more of a mathematical theory that ends up with a total loss. This is due to odds against (or house odds in the case of Vegas.) For example, if a game of chance has a 10% house edge, for every $100 wagered, you would expect to win $90 total. The problem is, the main assumption is that those winning dollars will never be rewagered. If people take that $90 and rewager it in the same game, they should win $81. Rinse and repeat to $72.90 etc until you reach 0.

Now, doubling down on a stock you believe in when it's down my just be cost averaging down. It's when you lose your belief in that stock, that's when you start heading towards ruin. Jumping at every bit of trivial news is a quick way to ruin. If the fundamental reasons you believe in a stock changed, then it may well be time to get out. But, if its a short term correction, losing your belief can cost a lot. You end up selling every dip and chasing every run. That's pretty much what I did in March. I got tired, lost focus, lost my beliefs, learned too much information only to find out that I was dumber than before. My performance shows it.

This is one reason I really sweat it out when I take a very short term position like shorting the financials in my real accounts. If something happens and I miss the move (busy, tired or whatever), I could take a very large real loss. Thankfully I don't do this often and can't sleep well when I do so I am very eager to get out, even if it means smaller gains. While I am happy with my performance in my real portfolios, so far, in this simulation, I won 1 month only to lose it all back and then some the second month. Hopefully, I can find a new set of beliefs. I need to reexamine them all. I may very well still like the plays I discussed earlier but with their current run up in price, I can hardly expect to get back in right away and make a profit.

Game on and here's to finding my religion again.

Good luck as always,
Uncle John