A Bull Who's Not Long

¹²A Bull Who's Not Long: Reasons Versus Feelings
Why A Trader With A Bullish Macro View Is 100% Cash.

Some people may be wondering why, given my bullish macro views, I'm not long. I've been wondering that myself.

By James Kostohryz | 25 March 2010

Here's my explanation.

1. Reward/Risk. I've made some fairly complex expected-return calculations in which I estimate the probability distribution along a wide spectrum of possible outcomes. If anybody is curious, according to my analysis, the level at which expected returns balance out and become zero is slightly above the 1,350 level on the S&P 500. (It's a complete coincidence that this level corresponds to the upper end of the "normal" valuation range for the S&P 500 laid out in my March, 2009 article Your S&P 500 Roadmap. And for that reason, my conviction in the relevance of my calculations is strengthened).

The overall conclusion of this analysis is that:

• Expected returns are significantly positive but aren't attractive enough to warrant a long-term "core" commitment. The lack of a clear "buy signal" has to do with the fact that the unusually wide variability of possible outcomes, particularly on the downside, affects the reward/risk profile.


• I should be "trading" from the long side. The conclusion that I should be trading from the long side derives from the fact that as a trader one can significantly affect the distribution of possible outcomes (and thus expected returns) by employing strict stops.


• But here's my problem: I don't really have time to be an effective trader. Thus, there's not a fit between the trading strategy that the current situation seems to call for and my ability to properly execute such a strategy. I'm further dissuaded by the fact that my timing in recent months has been erratic. I am not in a "zone."

2. Intuition. I'm just not comfortable with this market. There's a sense in which that shouldn't matter. But my philosophy is that in trading and investing, just as in life, we're better off coming to terms with the fact that we're emotional creatures.

You can try to overrule your heart with your head. But in the end, that can often create more problems than it solves. When you're doing something that your heart is saying you shouldn't, it's unlikely that you'll succeed at it. You will tend to self-subvert.

This is not to say, by any means, that one should simply give in to one's feelings or instincts. What I'm saying is that as we reconcile our feelings with our rational evaluations, we need to account for how these feelings can and are affecting us at any given point in time. We can't simply pretend that feelings aren't affecting us when they are. Nor can we simply wish feelings away (even unconstructive ones).

So in the end, I'm falling back on something I explained in Why Investors Will Almost Never Make It Big. To be successful at investing you don't need to catch every move. You only need to catch a very few of them. One needs to learn to relax when one is "missing out".

In investing, one must internalize the truth that one will get many opportunities over a lifetime. And one must internalize the equally important truth that it is completely unreasonable to think that one will have the clairvoyance to exploit all of these opportunities. Once you internalize these truths, you can be happy. And this tranquility will greatly assist you in making good decisions in the present and in the future.

So, in the meantime, while you're not doing any trading or investing because you lack the requisite studied conviction in a trade or investment, enjoy life. And to the extent that you enjoy markets, do things that will prepare you to be a better trader and investor in the future. Research and read widely. Write. Teach. Play around with practice trading.

I stand ready to change my stance at any time. But in the meantime I'm happy to be just where I am. 100% cash.

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Normxxx    
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