Maintaining Your Sanity

Log on Twitter at any moment in time and you will find abrasive predictions in line with the price action of the last day. Netflix stock down 40% after hours, it has to because they created woke content. Facebook stock down 50% from its, that’s what happens when you abuse too much data farming. Yet ask them why they didn’t short it if it was so painfully obvious that these companies were starting to fail and you get a “well…"

I hate to say it, but it’s true, 90% of the trading twitter population are just trend NPCs. What exactly is a trend NPC? A trend NPC is a person who is reactionary to market conditions and has the mental foresight of a gold fish to only associate the events of tomorrow with the events of today. Given that most of these traders operate on very short time horizon you’ll find them only able to associate the market with whatever general emotion they’ve felt over the past day or week. This is a very dangerous game because I don’t understand how people can expect to make money when they are only being reactionary to price action and not anticipatory.

I’ve discussed this a lot but in trading and investing (i.e portfolio allocation) your job is to manage risk. The main factor in managing risk is attempting to account for it potential scenarios that could threaten your performance, but also have the rationality to know that things that have never happened before happen all the time. It’s the realization that you have built a portfolio or taken a trade while accounting for all the possible risks you can think of, but that will also weather something you could have never seen coming.

I’ve made it quite obvious down that I’m down on my Shopify stock by over 60%. My first buys were at 1300 and I have average down at 900, 700, 600, and now 450. Even though I understand Shopify was a growth company, I did not anticipate it falling 75% from its peak. I also didn’t anticipate needing to average down my entry. But I did set up my portfolio so that at the absolute worst case scenario, My Shopify would only account for about 25% of my total portfolio. I also ensured by having a strict rule against the use of margin that could’ve wiped me out in what I would consider a level of sell off not seen for 20 years.

The point is, as stocks and cryptos have been falling and mind you over a longer time horizon than people have wanted, it’s become painfully obvious who knows what they are doing and who was just the beneficiary of seemingly unlimited risk taking during a free money and zero interest rates environment.

That line in the sand to me is simple, if you are a trend NPC you will never think about taking profits in raging bull, but you will also never think about buying during a brutal bear. You will show up to the party late and stay past your welcome. Most participants were so focused on resume the trend of the last two years, they failed to think about any headwinds in the future. The reality is, most traders fail to think at all and let the market’s volatility do the thinking for them. It’s a horrific strategy and hence why you will find the data to support that not only do 90% of day traders lose money, their average portfolio loss is -33%.

In January I wrote a thread on why I believed we were due for a decent 20% correction in the SP500 because I believed that the market was not accounting for the possibility of 3 rate hikes or more and on a faster time frame than initially anticipated. At the time, the general market consensus given by the FED was that the first rate hike would be in December of 2022 followed by 2 other hikes in March of 2023.

However, as inflation spiraled out of control, I speculated that people were not accounting for the risks of a more hawkish FED wanting to start them earlier.

Tendo - Fire Chief of Goblin Town @ThetaTendies

Of course this is total speculation, but I think the market has not priced in the potential for 3 rate hikes or the potential of the first one simultaneously coming when the March taper ends. Higher rates = lower present value of stocks. The banks can't be as stupid to wait.

I was met with a multitude of tweets, all of them having to do with trend. People telling me to stop being a stupid bear, that since the market was up 25% last year it will go up this year. People posting charts with arrows telling me how they don’t see why we wouldn’t go to 5000.

Now as I’ve been buying tech for the past month, those very same people are talking about the deep recession we’re about to head into. How the Nasdaq might have an 85% drawdown like it did in 2000s. How everything “looks like shit”, keyword looks. They are so busy worrying about trend and so fearful of losing money they are failing to deploy capital to the long side. You see, stocks don’t work like commodities or crypto. It’s not the same product, it’s an ever-changing productive asset that usually will grow earnings and become even more productive over time. They are so focused on trend, they fail to see Facebook at 13 times 2023 earnings. They are so focused on trend they fail to see Netflix is trading at it’s lowest P/E in 12 years. They are so focused on trend they see GOOGL trading at 20x earnings while they have grown their revenue 37% a year for almost 20 years now.

They are failing to recognize the opportunity that thee bargains are creating in the same way they failed to recognize the risks that loomed ahead. Of course these things are hard to decipher between what you should pay attention to and what you should ignore, but don’t let these idiots sabotage your sanity.

In this episode I discuss how you can maintain your sanity through the noise of these trend NPCs and the focus required to make those buys that make you hesitate.

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