Before you ever start trading or investing, you have to have a game plan and an understanding that you’re going to make mistakes. You’re going to sometimes buy a stock that goes down. Or you’ll short a stock that goes up. Or you’ll buy some call options that expire the day before the company gets acquired for a big premium. It’s a matter of statistics and numbers, if not simply reality, that you’ll make mistakes along the way.
I, like every other trader and investor, make a lot of mistakes. Most recently and most glaringly for me has been my mistake in trying to use JPM as a short hedge to my mostly net long portfolio. I’d noted when I’d first put the short on that, “It’s as good as it can get for the too big to fail banks.” And since then things have only gotten even better for the Too Big Too Fail Banks, as they continue to report record earnings and the Federal Reserve continues all of its bank welfare programs like 0% and Quantitive Easing. JPM, at its recent highs, was up big from my short-sell price, and even with its recent pullback, it’s still by far my biggest mistake in my portfolio over the last few years.
This position keeps me up at night, despite being a “hedge” and not being terribly large either in my own personal overall portfolio. Nonetheless, any major loss in my portfolio stresses me out. I always remind you that emotions are the enemy of a successful investor and trader, and I certainly remind myself of that rule when I stare at the ceiling late at night thinking about my JPM losses. The emotion of pain is real though, and while I do my best to compartmentalize that emotion away from my analysis, I am only human. Not Vulcan, after all.
My last ever article that I wrote for the Financial Times back in 2007 was called, “Managing Money is For Idiots.” I explained in it that one of the most important elements to being a successful money manager was that you should always feel like an idiot because if you underperformed the markets, then you truly feel like an idiot and you wonder why are you even in business. And if you just about met the performance of the broader markets, then you still feel like an idiot because you just didn’t earn your keep and you also wonder why you are even in business. And finally, even if you blow away the markets and your benchmarks and you’ve had a run of consistent new highs in the portfolio…well, if you’re actually a money manager who cares, you’ll still feel like an idiot because you’ll remember all the mistakes, little and big, that you made over the year that cost you yet even better performance than you delivered.
And as I started off explaining in this write up, everybody will make mistakes, even the best investors and traders in the world, will make mistakes over the course of a year, a decade and especially over their lifetime.
The key is to limit the losses, both real and opportunity losses, as much as possible. And to keep emotions out of your trading and investing and analysis. JPM has fallen 10% since I last wrote about it. I’m still down big on this short “hedge” and I’m still not happy about that. I think it is time to remove the last of my bank short hedges and allow myself a little space and time away from the sector. I’m covering my JPM short position.