I’m compelled after receiving so many phone calls yesterday from clients and friends to write what I believe may be my most important post.
Markets globally plummeted yesterday. Some of you spoke to me Sunday night when I had cancelled social engagements to stay at home, make some popcorn, and watch the financial fireworks as Asian markets opened. When markets imploded in the U.S. Monday morning the first message I received was “You are f*cking psychic!” Ok well yes I am and I’ll talk about that in more depth in a moment because everyone is psychic they just don’t know how to use it.
What really happened was the synthesis of very hard work for many years tracking and researching macro data, awareness of key red flags both obvious and non-obvious, tons of discipline, and a willingness to listen to that inner voice that’s processing the subconscious and/or universal mind.
One of the most important trading books I’ve ever read was The Disciplined Trader by Mark Douglas. This is a must read whether you are a trader or passive investor handing your portfolio over to external managers. Discipline is not something that happens over night. It is the result of instilling good habits and cultivating them until they become second nature. It is discipline that I first wish to discuss so that you hopefully read this before U.S. markets open.
In multiple conversations yesterday with friends and colleagues for whom we do not manage money I could hear panic setting in. Discipline is your best friend in a panic situation because it helps you do the right thing as a reflex rather than over thinking it. Here’s an example of what I heard over and over yesterday and I’ve heard it my whole career, “I can’t sell now because then I’ll have to take a loss.” Making the mistake of looking at unrealized losses as if they are not “real” is a massive mistake. It is a great way to go broke. A disciplined investor should always know in advance exactly where they will sell a position in their portfolio that is losing money. If you don’t know this you lack discipline and basic risk management skills.
Now here’s the key reason I’m writing this at 4am in the morning. The worst thing that can happen to you as an investor or trader is to make money doing the wrong thing. This reinforces a bad habit that will take at least twice as long to unwind if you are even successful ever doing so.
It is entirely possible that U.S. markets will open up in positive territory. As I write DJIA futures are +464. The danger is that many that were panicking yesterday and failed to properly kick in their risk management will be relieved if markets open up positive and then patting themselves on the back for not selling during yesterday’s chaos. This too is a massive mistake. While yes it is true that you don’t want to be selling during a panic it is clear you weren’t prepared for the panic in the first place which means you need to be out of the markets and sitting on the side lines before you really hurt yourself.
This yo-yo of emotional behavior never leads to good results and will certainly destroy long term performance.
As a quick side note regarding markets, which we’ll discuss in depth in later posts, we believe that markets are fundamentally broken and that the wheels are starting to fall off. Yesterday was a flash crash which should be scaring the crap out of everyone because it means there is a serious problem with market liquidity. Furthermore, the issues in China are much worse than the mainstream media realizes and way worse than their market sell off has priced in thus far. That said, it may seem crazy but it is possible the U.S. market could rise and even touch new highs before catching up with the global reality. Don’t forget that’s exactly what happened in 2007 leading up to the last financial crisis. Would we want to be long U.S. markets just to ring that bell of a new high? Not a chance in the world. Bad odds, bad trade.
Okay if you’ve made it this far let’s get in to the fun stuff – psychic powers! Psychic powers go hand-in-hand with discipline. I think there’s a general embarrassment, particularly among professionals in such fields as finance and medicine, to acknowledge the role of using extra sensory perception or ESP. This is odd considering that everyone has ESP and everyone has experienced it. Whether thinking of someone before the phone rings, having a dream that comes true, a de ja vu moment, a gut intuition, or countless other things these are all examples of ESP. Still don’t believe in ESP? Well the CIA does and so does the KGB. Both agencies spent millions during the cold war to study ESP. Ever heard of PEAR? That stands for Princeton Engineering Anomalies Research where they conducted scientific study of consciousness-related physical phenomena. PEAR has been doing this research for nearly 30 years.
I was fortunate to grow up in a house hold where ESP was discussed, debated, and taught. I owe a deep level of gratitude to my father for such an upbringing. I love you Dad and I know you’ll be reading this. Giving this background does not mean I can predict the lottery, the up and down gyrations of a stock or contact your dead relatives (although I believe others can do that). I will say however that developing a heightened intuition has saved my life physically on multiple occasions and it absolutely has contributed to generating profits and avoiding losses in our portfolios.
While there are various techniques to hone ESP skills I’ve found the one thing that works the best is meditation. The Buddhist monks and yogis had this figured out way before the scientists at Princeton. Meditation has countless benefits and seems to be enjoying a popular resurgence as celebrities and CEO’s tout it’s positive effects. Yes meditation will lower your blood pressure, make your more calm, and give you clarity of mind. Don’t those things sound like fertile ground from which to grow the ability to do additional things with the mind? Meditation is easy to describe, easy to start, but difficult to maintain. This is where discipline comes back to play. There are not words to describe the benefit of a long term disciplined approach to meditation. Worst case scenario such a practice will change your entire life for the better and make your more calm, happy, and aware of the present moment. Best case scenario you achieve enlightenment. As a disciplined trader the risk/reward scenario meditation presents is a no-brainer – it’s all upside! This is why I practice and so should you.
There’s lots of books I could recommend on meditation but as a starter the classic Zen Mind, Beginner’s Mind by Shunryu Suzuki is a great place to start. Enjoy.