Trade Alert: Trimming and hedging in case of another forest fire

Good morning and welcome back to the news studio, where you better have plenty of make up on so nobody can tell you have make up on.

Since the Little Bear Fire ripped through Ruidoso, NM, and specifically since it burned about 75% of the land I bought here last year to live on, I’ve gotten literally hundreds of emails and comments from readers wishing me the best. My just finished new house was miraculously spared, in large part because I had been so diligent in trimming the trees and raking up the pine needles all around the house.

I bring all this up because there’s a lot of parallels between trading and my forest fire experience here. First, some times, no matter how well planned and laid out your portfolio is, a market crash forest fire, can and will on occasion rip through your portfolio. I often write about how important it is to “stay in the game” when you’re trading, so you can trade another day, and that includes being able to survive a market crash forest fire. I got lucky with my house surviving, but as noted above, I’d also been preparing for such a horrific event, and it was that hard work and preparation that played such a huge factor in my house still standing despite the land on three sides of it having burned within 30 yards of the house or less.

And now that the fire has burned through here, I’ve spent countless hours spreading grass seed, cutting down burnt trees and now I’ve got two giant masticators out there pulverizing the burnt stubs and trees still standing. If you’ve ever lived through a market crash, you know how hard it is to build that portfolio back to where it was, but it’s a helluva lot easier to do so if you’ve kept enough capital on the sidelines and/or if you’ve got enough hedges in the portfolio that you’re not starting from scratch when the crash is over.

You know how stocks are up big from their recent lows and also up near multi-year highs?  You know how there’s suddenly little or no panic about Greece, Spain, the whole EU/financial industry insolvency issues? That is the time to be trimming the trees around your portfolio’s house. For the last two years or so, we’ve been buying almost every time the market panics over the EU crisis and we’ve been trimming/hedging every time the EU crisis moves from the front pages. I don’t see any reason to change that playbook quite yet. And my main point is that now, when nobody else is panicking about the EU, is the time to panic about the EU once again — trim some longs and put on some short hedges if you haven’t already done so.

I’m not touching my largest positions, including Google and Apple yet. But I am going to trim some Sandisk common (that will reduce by a small part of my overall Sandisk exposure) this morning and also some Nuance. I’m not adding to my recent Morgan Stanley or JPM shorts yet either. But I’m also going to add to my LPS short for the first time in a very long time using just common stock there too. I don’t expect a near-term catalyst for either of these two stocks, but I’m taking my own advice and just doing a little trimming and hedging while the weather is clear.

Panicky crashes and forest fires are part of life. Prepare for them while you can, even if you don’t expect another one to hit anytime soon — which I don’t. I remain bullish for pretty much the near-term, the mid-term and the long-term, but preparing for the worst when times are great and the markets are up by trimming and hedging is the only way to stay in the game over the next 10,000 days.

Finally, remember that even in the most scorched earth parts of the land that burns, growth will return. Here’s a picture I took this weekend from one of the blackest, barren pieces of burnt land on my property, just six weeks after a massive forest fire ripped through at 4000 degrees Celsius:

Thanks again to all of you who sent the nice comments about the fire. Things here will indeed come back prettier than ever. Make sure your own portfolio can withstand a forest fire too.