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The recent events
in the markets reminded me of a great tip from the legendary investor Stanley
Druckenmiller. For those who don’t know him, he averaged 30.4% return per year
for 30 years with not even a single negative year.
Stanley Druckenmiller (left) and George Soros (right)
In an interview he
was asked about what made him so successful in the markets and his answer was:
“Having an open mind.
I never get married to a position. I’ve had positions where I was sure I was
going to hold them for 2 years and a week later I didn’t have a position and I
was short. Because conditions change. If conditions change, you have to move immediately.
That was true 20 years ago and it is 10x now with the internet and everything.”
To explain this
concept better, I will use a recent example with the Nasdaq (this is of course hindsight analysis but it’s good for educational purpose).
Last Wednesday, after
a strong selloff caused by the deleveraging of the Yen carry trades, the market
started to bottom out going into the BoJ decision. At one point it looked
like the worst was behind us as the Nasdaq broke through key technical levels
and rallied almost 5% in a single day.
Nasdaq
Unfortunately, the following day we got an ugly ISM Manufacturing PMI which
sent the market into risk-off and defensive positioning into the NFP report. The
US Jobs report worsened everything as the data surprised to the downside with
unemployment jumping to a totally unexpected 4.3% rate. The losses extended and
eventually we got a strong overnight selloff yesterday as the Nikkei crashed 12% in
a single day causing a global market rout.
In the bigger picture, there were certainly good reasons to expect a rally last week and eventually even a new
all-time high. But we can see from the chart above that the ISM Manufacturing
PMI was the catalyst for the selloff, and once the price fell back below the key
19400 zone, the bearish momentum increased.
In that case, conditions changed.
This is when you should take countermeasures to protect your capital.
You
could have closed out a long position altogether or you could have reduced your
risk if the conviction in your trade remained strong. In any case, it was the time to adjust and not getting married to your original idea.