Friday, September 19, 2008

Right and Wrong?

Here is a comment from Catherine which she posted earlier today. Below her comment is my reply.

This is going to sound critical and I wouldnt want to write a blog and be subject to all the abuse you get so it is meant to be constructive.

Were you right? No I dont think you were. I started looking at this blog about 4 months ago and repeatedly said we were going lower.

I also looked back to your reports in Dec at 1500 and you were bullish then. I was bearish and have been since last August after Northern rock - too early yes. I was wrong then.

If I had followed your predictions then, I would have lost my shirt rather than having a v good year.

Now yes you will be right for a while. Between 2 weeks and 2 months. If it goes through 1250, it will be the later BUT this is still a bear market and there is a long way down on housing yet to come and on stocks at a later date.

Watch Marc Faber on Bloomberg tonight (and he knows what he is talking about. He has a great track record)

'Those who think we are in a new bull market are in fantasy land.'


Regards
Catherine

 

Catherine: 

I always enjoy reading your comments!  Thanks for joining the discussion. 

The principal conclusion I have drawn from my forty years in the markets is this. The name of the game we play is profit. To be a winner in this game you have to learn the art of survival, of losing only a little when you are “wrong”. And you have to learn how to make as much money as is reasonable when you are “right”. 

I might add that the mistake made by most people in the market is to think in terms of good or bad, right or wrong, and then to identify these polar opposites with profit or loss. This is psychological poison. For it limits that person’s ability to deal with adverse situations by taking losses appropriately and by adjusting his or her views in response to changing situations. 

The famous speculator Bernard Baruch is known for prospering during the great bear market of 1929-32 when the stock market in the U.S. dropped 90%. After his death one of his biographers examined his financial statements for that period. He discovered that Baruch’s portfolio during that time actually dropped 30% in value. What made Baruch a genius was that he lost only 30% while the average person lost 90% !!! 

As  you say, I did not see this bear market coming. With this in mind it is interesting to examine the results of the trades I have posted to this blog.  The first trade was posted on October 22, 2007, just 11 days after the top of the bull market. During the subsequent 11 months I have traded 54 units and made profits on 25 of them. Most of these trades were on the long side of the market. Net result? A profit of 157 points on 54 units. This works out to a 52% profit in 11 months trading the e-minis in a $15,000 account with a single unit being one e-mini contract. 

My retirement accounts are intended for longer term investing. As I write this, with the S&P at 1260, these accounts are down 3% vs. a drop in the S&P of  20% from its bull market high. 

So, as you say, I was “wrong” because I didn’t see the bear market coming. But most people would be happy to have the results I have achieved during the past 11 months.

I believe that thinking of your results in terms of "right" or "wrong" is what philosophers call a category mistake. Right and wrong have literally nothing to do with the markets. All that is relevant is profit or loss.

26 comments:

pattern.solver said...

Dear Carl,

I perfectly concur with your fantastic explanation and a wonderfully convincing response.

I must admit one more thing that since i have been following your blog almost since it's inception, i had amassed an incredible amount of knowledge and forever grateful to your sharing of market wisdom.

Cheers

Anonymous said...

Carl
Thank you very much for your reply. I am flattered to have my name in print.
Yes I agree with your philosphical point of course. You are correct.
Do you know the book, 'The Professional Commodity Trader' by Stanley Kroll 1972.
It is has an adage that I took to heart and it has improved my sleep.
He advised always trading WITH the major trend and against the minor trend.
I have had a tremendous year and owe a lot to this but we are all different.
I just know that your style is not easy for many people - ie 93% of short term traders lose money and I found that doing as Kroll suggested helped me.
I did recognise 2 days ago that the end of this current trend maybe near ago. I think I posted ths and was long for the first time in literally months yesterday afternoon.
Thank you again.
Catherine

rcks said...

Carl
Your comments are very important. Emotions run wild when markets are behaving as they are. TA reads don't make sense, so on and so on. This is a difficult business and the most important lesson in any market is capital preservation and I think you do this as well as anyone I've seen that is take losses quickly and reassess.
Great job this week.

Anonymous said...

Can you speak about more about your pproach to long term investing?

many thanks
tractatus

ps: your use of "category mistake" is completely correct

Anonymous said...

Carl
One other thing.
I used to trade options professionally and used to see both the buyer and the seller of the same option lose money - the buyer because they left the option unhedged and it expired out of the money and the seller, me, because I hedged it all the time and the market didnt move enough for me to break-even on my gamma.
I guess I like to be spoon fed with the big view more and then the shorter term ones take more care of themselves.
Catherine

Anonymous said...

Carl,
That is a great post and totally agree with what you say... If you are a trader, it doesnt matter if the market is up down or sideways! What matters is you net results in your account... The market could be down 30% from the bull market high, but if you have a 50% profit thats what matters!

Congrats!!!

Now, the question for me is how can I learn to trade like you or can you guide me to the right place to learn!

Cheers

Anonymous said...

Carl
I guess you might not believe this but my return on equity is approx 36 times since Jan 1st 2008. ie 3600% but I do trade very high leverage and have had a possition pretty much constantly since August.
I have also not ever been short any individual stocks but just the index and have had only 2 days long in that time.
I accept you have a wonderful trading record but I guess I had to do less trades.
Now is your turn. I am out of this market and taking rest until we reach potential short levels again. I am knackered.
Au Revoir
Catherine

sandy allred said...

The real estate market will have little to do with the massive rise in equities we are about to witness.

Anonymous said...

i completely agree with Carl. One does not need to be a perfect forecaster in order to make money in the markets, but if it is one, the better it is i'd rather say. Cheers. :-) MC.

Anonymous said...

I'd also ask what Carl has done in his retirment accounts, if he would be willing to share this information at least in broad strokes. The question would be: if, as you acknowledge, your overall thesis about the market's direction was wrong, how did your retirement portfolio perform so well? It seems like only those that were defensively positioned over the past year have had anything close to a breakeven return, and yet you have achieved the same with a mostly bullish outlook. I'd be very interested in how you positioned your retirement portfolio to achieve these results. Thanks!

Anonymous said...

I call it FREEDOM OF CHOICE !

No one is forced to read this blog, let alone place trades based on your views. I think the world is better off with your blog than without it! At least you have the guts and integrity to post your views and those of others even though they might disagree with you.

Keep up the good work Carl!

Rico
Toronto ON

Anonymous said...

great reply to Catherine thanks Carl for tsking the time.

i got out all my longs as fast as i could but didn't get the top. all cash now with the best best trade i made for the year, so far.

looking to short any test of todays high.

good trades to everyone.

cheers,

rob

Anonymous said...

For me, it is important to know the reasoning behind a position or opinion.

So thanks again Carl, I am beginning to learn how you see things.

enjoy your weekend
Solrac

modernmind said...

Bear in mind that if there weren't enough people that were so concerned with being "right or wrong" with the market then people like me would make a lot less profit on their trades.

Anonymous said...

Catherine,

In EW terms then, do you think perhaps the DOW completed a leading diagonal yesterday from the 10/07 top? I'm expecting bear rally back to maybe 12500+ before it falls apart again.

Carl, I love your blog. You teach us a lot! By far, I tell my friends to read you more than any other financial info.

Anonymous said...

hey carl
you may be able to admit that you did not see this bear market . ill give you credit for haveing the guts to admit that , but your work was accurate , so it wasnt your work that lead you astray it was your doubt of what your work said .
the low yesterday came right on time and ill admit i was having my doubts since my own work was calling for a low between the 16th and 19th .i will say this were not out of the woods yet though with the cyclical bull market .
id say to catherine you are part right and part wrong about the
bear market . it is very easy to
be complacent and wait for a top to short only to find it keeps going and then you find yourself asking why didnt i just take a small long position and hold it .
bear mar rallies can last long then many expect . i find it interesting the uk just banned short selling . it seems those in the power of controling the markets have in effect created a one sided trade by limitiing the way people exit , yet in doing so they are also removing the catylist that drives stocks higher . we wont know the true effects of this untill we see how
the masses feel at the next top when ever that comes yet in my own work is mid 2010 .
joe

Anonymous said...

hey catherine
the problem i see with the leading diagonal you mention is typically
diagonals the waves get smaller
hence wave 1 is stronger then 3 is a bit weeker and 5 is weaker still
on the dow the waves look to be strong on each leg down so id question the leading diagonal pattern . im a bit anal when i count waves and to be honest while i do see the subdivisions of 5's from oct high i dont see a clean 5 down from oct it looks more like a 3
also when i look at the week of dec 24 top to the downside then i do see a 5 wave down into the recent lows on a weekly chart
yet in doing that you would call the mid july 2007 high the top and the aug low in 2007 wave A THE OCT high a wave b and then c d e into the week of dec 24 and then wave c
would be 5 overlapping waves , leading or ending diagonal . i would think more iof an ending diagonal wave c though because the subdivisions were each 3 wave moves. leading diagonals are 5's ending diagonals are 3's .
12577 is my line in the sand on the dow . a failure to get above that level and id call this rally a wave 2 from the 11577 high in early sept .
my own cycles now poinjt higher into oct 1 3rd , ill see how the mkt looks when we get to that
day .
good luck carl

Anonymous said...

I am amazed insightful comments by Catherine and Carl along with many good follow up comments and only one poor soul calling Carl an idiot.

I might add I agree with Catherine but truly love Carl's blog. You never want to close your mind to an opposing point of view and Carl has been rather insightful in pointing out my own errors.

What does your retirement account look like in broad strokes?

Milo Minderbinder said...

I'm just enjoying the heck out of reading your observations. Please keep up the work, profit or loss.

Kash said...

Hi Carl,

Thanks so much for a great job! I have benefited much from your website, and just sent you another donation.I really appreciate your transparency.

Please keep up the good work!

Regards,
-FK

Anonymous said...

Catherine, you should get into gamma trading in FX. Liquidity is great and recouping decay is easy. We run long gamma all the time now and never fear decay bills. In fact, its so liquid that we put on ccy pair gamma sprds to accentuate this. But nice job on your 3600%! Were you on the floor or OTC? CF

Pappy said...

Not one of us is forced to read your blog, let alone place trades based on your perspective or recomendations. Most of us are much better off with your blog and appreciate your work. We appreciate that you have the committment and integrity to post your views and those that might disagree with you.

Keep up the good work Carl! We love ya.

David

Anonymous said...

Carl,
Different strokes for different folks?Right or wrong-the bottom line is profit-many traders have different styles-the one right thing the 'best'performers have in common is keeping losses small while milking the good trades-its not about frequency of win/loss ratio so much as total return.
Tend to agree with Carl that at times of high volatility day trading can be very profitable but not every day-You need a big account to position trade the indices'Kroll' style,especially his'against pyramding'long term trend following approach.
At the end of the day like Carl said the bottom line is profit-
-just my two cents
regards

Anonymous said...

Anonymous at 11:11:00,

That wasn't Catherine proffering a leading diagonal. It was me asking her if she thought it might be one. Also, I meant to identify myself, but I hit anonymous. But I appreciate your opinion too. It could be a double zigzag too, and probably several other patterns. That's why I'm not crazy about EW, but I saw Catherine mention it and was curious about her interpretation.

Anonymous said...

the blog is perhaps not without use. if you disagree and label carl as idiot, just use it as a contrarian indicator.

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Thanking you