There Are Times When It’s Best To Trade Once Every Two Weeks, And That Time Is Now

The most important aspect of putting capital at risk is risk management. Today, regardless of price pumping in the equity market, the capital market is not stable, which brings us back to our first rule: “If you are not comfortable, don’t trade!”

Job #1, after all, is capital preservation. Prices can be hyped in the short-run; it’s the long-run that counts.

Jokers will say that in the long-run we are all dead. But, that’s not true when speaking of capital markets. We may die at any time; but unless it is squandered or gifted, our capital ought to live on. It was hard earned, perhaps by us, perhaps by our parents and theirs. For certain, it ought to be there when we need it. But, my point here is that it won’t be if we keep taking inordinate risk, making dubious decisions.

One of those risky decisions is to over-trade. Sometimes we are forced to by the actions of others. The market is not about us, but about all of us, and there are components of the market, like central banks and commercial/investment banks, that are stressed right now, forcing liquidity into markets and taking actions that simply are outside the norm, and in fact have never been seen before.

In normal times, where the norm has been calculated over 80 years, the best risk management as it pertains to trading activity has been found to be to turn over a position every six weeks, not several years as the bankers and mutual fund companies would have the public believe. There are times, when markets are particularly solid, that it’s best to trade a position once every three months. Unfortunately, there are also times when it’s best to trade once every two weeks, and that time is now.

Trading on a day to day basis is, I believe, flat out playing into the hands of Humungous Bank & Broker (HB&B) who trades against the order flow, causing constant whip-saws, earning some of them over $100 million a day, almost every day, mostly from the most risk-taking traders in the public. It makes no sense to trade against HB&B when they know all the cards in the deck, sometimes 40, sometimes 60, whenever its to their advantage, and they also know every card in your hand. In a quick game they will win almost every time. So, you need to stretch out the holding period to about six weeks on average, which is half a quarter, the period a listed corporation reports financial results.

At the end of the day, whether people think the equity market ought to be rising or not, the issue is risk. Last evening we discussed one of those reasons. It’s about the Fed and the growth of debt, enabled for now by taxpayer support of the fractional reserve banking system. On their own, bankers could not be expanding debt so quickly. But the taxpayers have no control over the process and they are most unhappy.

http://www.minyanville.com/articles/minyanville-moneydebt-Fed-inflation/…

I believe that just because the Fed is stretching the so-called assets on its balance sheet beyond any semblance of orderly realization of economic return on those assets, the health of the financial system is not getting stronger. What governments and bankers are doing today is borrowing against higher future taxes and interest rates, but simple mathematics and indeed history has proven there is a limit.

Every banker today knows that as the Fed is pumping liquidity into the commercial and industrial banks, and whatever organization is close to being called a bank these days, its own financial strength is weakening. Soon the actual liabilities of the world will never be matched by real assets, but only by goodwill, which is fleeting. First the bankers and then the Fed will never collect when goodwill turns into bad or when people and companies cannot afford higher taxes and interest rates.

The world has seen the first round of bank bankruptcies. If there is a W-shaped economic recovery, soon, which is quite possible, then there will soon be a second round of bank bankruptcies. At some point, the FDIC and even the Fed itself will go bankrupt. Sooner than later, the US government must make a decision as to what to do about the Fed, about its own proliferate spending, and about the use of the Dollar as the world’s reserve currency. I say that because in any financial system, there must be checks and balances to assure that assets stay in balance with liabilities, and the Government and the Fed have been failing to do that. At the rate its going, the US Dollar ($USD) could go to 60 cents, 50 cents, and lower. The implications are too unpleasant to contemplate.

In the meantime, it’s up to us to manage the risk in our personal finances and our daily investing/trading activities because that’s something we can control. In terms of personal finances, many people are now doing what I recommended in my book Lessons, which is to pay off debt. They are also trading more frequently. Some of us are trading only a small percentage of our liquid assets.

Do I feel “guilty” not chasing prices higher in the short run? I don’t give it a second thought - not at all. I’m too busy watching capital risk build up and looking for highly selective near-term trading opportunities while I await the next price pull-back, knowing it will come. I will then participate on the downside as I did on the upside, selectively.

As to some of you deciding to leave the community, it’s unfortunate, but life goes on, and there will be replacements. There has always been people come and go to this community as there is everywhere, and they are welcomed when they go, and most are missed when they leave. In the place where I live, there has been an exodus of ex-pat bankers because of the financial conditions of the world. Some of those were terrific people. One of my neighbors many years ago was the man who came from Hawaii to build the aquariums at Atlantis, and he was missed when he moved on. Now, my friend who came here just 18 months ago as brewmaster for Heineken, Guinness and Kalik has resigned and is moving soon to London. He too will be missed. People, like companies and even financial systems change. Some pass away. Hopefully the evolution is a positive one, but for sure while they are with us, they add a slice of life. It’s up to us to take value from the experience and grow from it. And, hopefully one day, the best of them return.

Have a good day.

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