In the words of Warren Buffett:
"Ben Graham, my friend and teacher, long ago described the mental attitude toward market fluctuations that I believe to be most conducive to investment success. He said that you should imagine market quotations as coming from a remarkably accommodating fellow named Mr. Market who is your partner in a private business. Without fail, Mr. Market appears daily and names a price at which he will either buy your interest or sell you his.
"Even though the business that the two of you own may have economic characteristics that are stable, Mr. Market’s quotations will be anything but. For, sad to say, the poor fellow has incurable emotional problems. At times he feels euphoric and can see only the favorable factors affecting the business. When in that mood, he names a very high buy-sell price because he fears that you will snap up his interest and rob him of imminent gains. At other times he is depressed and can see nothing but trouble ahead for both the business and the world. On these occasions he will name a very low price, since he is terrified that you will unload your interest on him.
"Mr. Market has another endearing characteristic: He doesn’t mind being ignored. If his quotation is uninteresting to you today, he will be back with a new one tomorrow. Transactions are strictly at your option. Under these conditions, the more manic-depressive his behavior, the better for you.
"But, like Cinderella at the ball, you must heed one warning or everything will turn into pumpkins and mice: Mr. Market is there to serve you, not to guide you. It is his pocketbook, not his wisdom, that you will find useful. If he shows up some day in a particularly foolish mood, you are free to either ignore him or to take advantage of him, but it will be disastrous if you fall under his influence. Indeed, if you aren’t certain that you understand and can value your business far better than Mr. Market, you don’t belong in the game!"
A most striking line from the Sage of Omaha stated "it will be disastrous if you fall under his influence."
This Wall Street Journal article Phil noted recently highlighted how investors can chase information as mindlessly as cats will maniacally chase laser pointers. We can easily become spellbound while satiating our need to stay on top of rapidly changing market data. Much like a horse with blinders, we continue down a path, ignorant of what may be taking place all around us.
It is precisely for this reason that we must step back at regular intervals from our positions and re-evaluate our thesis for any single position. The market is SO choppy these days that positions can quickly go against the most experienced of traders. The easy choice is to give up. Scouring numerous blog sites this past weekend, we have seen exasperation reach peak levels among retail traders. The futures will do nothing to alleviate those concerns – as this article is being written the Dow is down 225 pre-market. It is at times like these an old quote from Harriet Beecher Stowe can act as a crutch of faith.
"When you get into a tight place and everything goes against you, ’til it seems as though you could not hold on a minute longer, never give up then, for that is just the place and time that the tide will turn" – Harriet Beecher Stowe
The contrast between successful traders and hopeful traders was especially apparent this week. At the same time I received a phone call from an old friend expressing despair at market conditions, I was reading comments from the great ‘optrader’ on Phil’s site.
At 2.44PM Optrader wrote: "We have a -300 points day and AAPL and GOOG are still above 5MA. No reason for me to change my bias yet. When I have to I will."
With Apple remaining above its 5-day moving average – a trigger point -, Optrader remained with his position in spite of the market turmoil, because the system he adheres to specifies so doing!
Similarly, when HUM dropped off a cliff, Phil followed his rules of scaling in to lower cost basis and benefited from the bounce from $35 to $44.
Both have systems that work for them. Most importantly, when pain levels reach threshold levels and few can stand the pain, both maintain the trading discipline to hold their positions through the rough patches. They have both internalized Harriet Beecher Stowe’s words in a trading context "Never give up…for that is just the place and time that the tide will turn".
