Sorry, Cathie Wood — Hope Is NOT a Trading Strategy
If you want to be a successful trader, you must be able to laugh at yourself.
Trading is a high-stress job, after all — and nothing relieves stress like a good joke.
One of my personal favorites goes like this:
”A short-term trade that fails isn’t a loss — it’s just a long-term trade that hasn’t won yet.”
I’m sure you’ve never done something like this… And there’s absolutely no chance that I have.
But we all know someone who has. Instead of accepting a loss and moving on, they start talking about the long-term potential of the stock.
It’s not only inexperienced traders that make this mistake, though.
In fact, one of the most talked-about investors of the decade recently fell into this trap…
Ignorance Is Bliss…
Less than a month ago, tech investor Cathie Wood made a presentation at a conference.
A year earlier, she’d estimated that her firm ARK Invest would deliver annualized returns of 15%. After devastating declines in many of her positions, though, she changed her outlook.
But not in the direction you might expect…
Instead, she told investors: “Now we think 50%.”
Maybe she’s right. Maybe there’s something in these stocks that every other trader is missing. But the basis of her claims seems to be hope rather than actual data.
ARK’s research continues to emphasize stories. A popular one goes like this:
“This company’s technology will disrupt a multi-billion-dollar industry. If it gets just 1% of the revenue, it will be worth billions. We think it will capture more than 1% and the stock will deliver incredible returns.”
Unfortunately for Wood, hope is not a trading strategy. Holding through downturns has real costs…
The biggest of which is known as “opportunity cost.”
Stop Waiting for a Comeback
To understand opportunity cost, it’s important to remember that losses have an asymmetric effect on performance.
If a stock falls 10%, you need an 11% gain to get back to breakeven. A 20% loss requires a 25% gain. And an 80% loss requires a 400% gain.
If a stock has dropped 80%, why on earth would it rise 400%?
For that to happen, the market would have to be wrong — and the market isn’t wrong very often.
You may still think the stock has potential, but the market is saying it was overvalued. And even if you’re right, it will take time for the stock to bounce back… if it ever does.
While you’re holding on and waiting for that comeback, other stocks are moving. You can’t profit off them, though, because you have capital tied up in losses.
Now, investment managers don’t have to worry about an underperforming portfolio. They can avoid making tough calls to sell because they collect fees regardless.
But we’re not money managers. As individual traders, we need to act — even when the action requires us to recognize a loss.
For me, the best way to ensure I act is with a rules-based strategy, like the one Amber Hestla shared earlier this week.
Don’t let hope become your trading strategy.
Develop your own rules, and follow them — or you’re bound to wind up in the same boat as Cathie Wood…
Michael Carr, CMT, CFTe
Editor, True Options Masters
Editor’s Note: Andrew Keene has made millions in the options market by following one simple rule, over and over again.
And thanks to that, he’s sitting on a 69% win rate in 2022 trading only call options in a bear market.
That’s right — even with stocks down 20% this year, Andrew’s model portfolio is UP…
With standout gains of 100%, 230%, and 250% in as little as one hour.
A track record like this is priceless right now…
But that’s not stopping Andrew from slashing the price by 90% for charter memberships.
Your chance to join his exclusive Trade Room at a steeply discounted offer is almost here. Put your name down now to get priority access when Andrew opens the doors to Trade Kings.
Chart of the Day:
By Mike Merson, Managing Editor, True Options Masters
(Click here to view larger image.)
Demand shock is smacking the commodities markets… and the pain may have only just begun.
Today we’re looking at a chart of Cotton futures, which are down 10% in a matter of days, giving back 3 months’ worth of gains.
I focus on cotton because it’s the most dramatic example, but the truth is, a lot of soft commodities look like this right now. Orange juice, lumber, sugar, lean cattle and hog, corn, soybeans — they’re all in a slump.
And the hard commodities — iron ore, copper, nickel, crude oil — are also facing volatility.
Why? Demand shock.
Futures are pricing in decelerated demand for everyday goods, in anticipation of a major slowdown in the global economy. This is due in large part to China — one of, if not THE top commodities importer in the world — not being able to put the COVID pandemic behind them despite draconian lockdowns.
Commodities enjoyed a huge rally in the first half of 2022, but the second half might just give it all back. An important space to watch.
Managing Editor, True Options Masters