This ‘Game’ of Patience and Persistence

Posted on Dec 22 2014 - 6:45pm by Sharpe Trade

It is a sad happenstance that these markets can attract the type that is ‘hungry for action’.  I’m just going to say it ….  as an educator it’s truly annoying to watch that sort of behavior. 

Something equally as annoying and something I’ve heard quite a bit of lately as we wrap up 2014, is the thought process that “he with the greater percentage gain is the one and only way to measure success for 2014“.  The mantra being bandied about, is that professionals are doing anything this late in the year to “beat the index benchmark

Yeah … this actually might be true.  There actually may be guys who run funds, who might be making moves this late into 2014 to try to ‘beat the index benchmark’. I’ll also say if any professional is engaging in that sort of behavior, then they’re a gaggle of idiots.

Both of these attitudes and outlooks actually betray a lack of understanding of how anyone generates returns with longevity.  

It’s not done by getting your Aroon indicator set correctly, or tweaking your ‘bollinger bands’ just right. And who cares if you beat the index by 2 BPS?  I certainly don’t.  It’s your portfolio.  Not mine.  I care about my money.  Regardless … this is not a chart game.  It’s a mental game.

This is a game of patience.  A game of persistence.


The Addict

Let’s take that first group. Those looking for ‘action’.   It’s self-directed retail traders that fall victim to this problem (primarily).  They treat the markets as their own personal roulette table.  This innate ‘need’ to be ‘in a trade’.  The ‘excitement’ of getting long, and clicking that ‘buy button’ or if short, the ‘sell’ button.  I have seen such stories play out a million times, and I can spot it from a mile away.  Those who turn to the markets for some sort of ‘fix’ of buying and selling, inevitably end up on the sidelines … at best. RouletteThey’ll either spiral out of control as would any degenerate gambler, or they will burn out of the markets completely after they blow up their account time and time again.  

Obviously, such behavior has roots in some sort of addictive personality type.  It’s an impulse control problem at it’s heart.  But as well, it springs from the notion that this is some sort of ‘game of direction’ and getting ‘direction’ ‘correct’, and whamo, you make a bunch of money, and then look to dive right back in.

Make no mistake.  Some professionals can trade the day-trading time-frame.  Myself, I can day-trade, although I find it a bit draining, mentally. But even the most ardent day-trader would tell you that primarily, this is a game, where you have to have your head on straight.

You must be patient

You must be persistent.

The addictive ‘need to be in a trade’ has nothing to do with patience, or persistence.

If need be, I’ll wait until kingdom-come for my parameters be filled, in order to buy more IBM.  Because I understand that in order to be successful, I need to be patient.  And in order to be patient, I can’t lose focus … so I must be persistent.

In this business, if you are simply patient and persistent, you can make a lot of money.  If you succumb to some need for ‘excitement’ you are dead before you even begin.


‘Beating the Index’

So let’s move from that to discuss this other related notion.  That managers are doing anything at all to “beat the S&P 500 Index” on a percentage, or BPS basis.  Self-directed retail traders get this in their head from hearing this idea.  “Do what you can to beat the stock market”.  

What does that even mean?  Beat it how?

I could give two whips about December 31, 2014, or January 1st, 2015.  And the S&P 500 Index?  Meh … it’s an index.  Over the long haul, I clock it.  But I could really care less about what it’s doing this month, or even the next three months.  You want to know what I care about?

I care about not losing money.

I care about not losing money.

I care about not losing money.

January 1st, 2015 is just another day to me, in what is an never-ending game.  I care … about not losing money.  I care about the volatility of my returns, and making sure that the volatility of my returns are very low.  And I accomplish that by being ridiculously patient, and ridiculously persistent.

As I said in the stocktwits stream last night, benchmarks have their place. 

I view a benchmark sort of like viewing a ‘neighborhood’.  You want to know what ‘neighborhood’ you live in.  You don’t want to be ignorant of your neighborhood, or in this case, a general idea of your performance.  At the same time however, it’s a bit silly to get in a contest with the “Joneses next door” over who has the biggest boat.   I personally use the Spoos (S&P 500 Index) as “a” benchmark in the parts of the portfolio that are built for growth.  But I consistently see people get completely and  totally out of whack and obsessed with trying to “beat” an index, only in terms of Basis Points (BPS) or percentages.   “Beat it”?  On what periodicity?  So great, you ‘didn’t beat it’ on a 1 year basis, but on a 9 year basis, you’re clocking the Spoos by a solid 4,000 BPS, so who cares about 1 year?  When I hear people obsessing over 1 year, this tells me that they focus on a really, really small time frame.   If you are up for the last 9 years, why get all bent out of shape over one year?  Listening to the volumes of obsession that some have over the benchmark … it’s all gotten a bit stupid to tell you the truth.

And how exactly do you want to measure ‘beating it’?  My valuation account last year, did 9.753% as of Saturday’s compilation.  The S&P 500 Index had a return of 12.03% for the year at that time.  Did it “beat me” for 2014?  Because if you ‘just went” with the S&P 500 Index, or something like the SPY, you would have had to withstand 10% drawdown “holding” the Index via the Spiders (SPY).

Now if you think that you can make the same decisions at 10% maximum drawdown, that I can while I’m staring at 2.425% maximum drawdown?  Good luck with all that.  Minimal drawdown, or minimum volatility has this beautiful way of having your decisions more balanced.  Because let me tell you something that my 18 years has taught me.  You make completely different decisions at 10% drawdown, than you do at 2.425% drawdown.  I’ll take my 9.753%, with only 2.425% drawdown any day of the week.  On a risk-adjusted basis, I see myself as beating the stock market (we’ll get to Sterling Ratios’s in another entry).

The S&P 500 Index?

I could give five flying figs what it’s doing.  

And I say that, as my short-term trading book did over 16% in 2014, with 1.28% drawdown.  THAT’S what I care about.  MY book.  Not someone elses.  I’m obsessed with my own portfolio.  My own risk.

This business, from top to bottom, has always been, and always will be, not a game of who can get the better BPS, or return.  That comes later.

This business is about who has a better psychological build.  The guy (or gal) who isn’t obsessed with “besting the Joneses”, or the benchmark, but focuses on his own book, and how to be constantly engaged with the market while simultaneously being OBSESSED WITH RISK, and the by-product of that, is that in the long run you’re the guy (or gal) that makes all the money.

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