There is no hiding from it. The last month has been rough. Dealing with large doses of volatility is hard, but then, so is anything worthwhile in life.
If something is worthwhile there is a price to pay, in fitness the price is discipline and pain.
There is an entire industry built around promising the results while avoiding the “price,” i.e. ab, machine infomercials, fat-burning secrets for only 3 easy payments of…
Your bullshit detector should go off as a promise of fitness results without reps as it does on the idea you can achieve high returns without volatility.
I’ve cited this study dozens of times now, as it rams home the point even with perfect foresight you run gut wrenching volatility and drawdowns.
Volatility presents opportunities to those who have done the work and scares out those who haven’t.
The Art of Execution is a must-read on this:
“The ability to identify a rabbit by their unwillingness to add to a position during a draw down.”
“The connoisseurs on the other hand added gradually then left the portfolio the hell alone.”
– Lee Freeman-Shor
The volatility that comes with big winners is just as rough since the numbers are bigger, and the temptation to realise the profit is hard to resist, especially in a world of social media and information.
“The most successful investors I worked with, those who made the most money, all had one thing in common: the presence of a couple of big winners in their portfolios. Any approach that does not embrace the possibility of winning big is doomed.”
– Lee Freeman-Shor
Framing of volatility
Once you realise markets are mass human behaviour and the vast majority of moves are humans on mass getting greedy or fearful or simply impatient it makes the whole game much easier.
While I’m not big on pure technicals, I do believe trading patterns contain a lot of information.
One thing that is kind of obvious is that as a sector moves out of “flatline” or hated territory, the proportion of momentum/tourists goes up, and the volatility with it. This is an argument in itself for heading for the exits if we move into optimism, let alone euphoria.
With uranium putting aside supply/demand, we are at early optimism (or were until the last few weeks). It will likely be a progression of my investment process that I move more from the red to the green below (be ok with leaving a lot of gains on the table).
This assumes there is an investment opportunity in the pessimism stage, which my mentor Brad reminds me is not always the case. For example, in 2006-2007, Brad struggled to find any sector attractively priced, which forced him into cash.
Granted, sitting in cash will be financial suicide if Project Zimbabwe really gets into gear. Hell, if you sat in cash in 2020, you're down nearly a quarter on your purchasing power as of today using Government CPI/lie.
The game for the next decade is keeping out in front of the Feds' balance sheet, which may well mean riding investments to silly levels because there are no cheap alternatives to protect purchasing power.
Enough philosophising, what am I doing?
I’m bulking up three positions and trimming three from the portfolio.