A Stock Picker's Lament

 | Dec 06, 2012 | 8:20 AM EST
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None of our men are 'experts.' We have most unfortunately found it necessary to get rid of a man as soon as he thinks himself an expert because no one ever considers himself expert if he really knows his job. --Henry Ford

If you write about the stock market, the general rule is that you make it sound like you always know what is going to happen as you steadily rack up big profits day after day. You are always in control and never have any doubts. Most market pundits worry that if they admit to struggling with the market, their views will be dismissed. Who wants advice from someone who isn't a master of the market at all times? Thus, there is a constant effort to create an image that is seldom an accurate reflection of reality.

Unfortunately, that approach to stock market punditry isn't very helpful to readers. The nature of the market is that no matter how good you are you will struggle at times. The challenge of investing and trading is dealing with the hard times when things aren't going your way. Anyone can deal with good markets where the positive action bails you out of your mistakes, but the ability to work through the hard times is what separates the long-term pros from the unsuccessful amateurs.

Obviously, I bring up this issue because I've been struggling with the market recently. I'm not suffering any big losses, but I have not made much upside progress in the last week or so and I'm feeling out of touch with the market action. It is clear that the fiscal-cliff debate has affected the way the market is trading and I haven't found an effective way to deal with it so far.

The biggest obstacle I see is that I'm a stock picker and this market is mostly macro driven. Finding and trading good stocks isn't working that well because the big-picture worries about the economy and the fiscal cliff constantly jerk us around. When traders are worried about the headlines they don't stick with stock picks, which results in very tepid momentum and few opportunities for big profits.

When someone is struggling with the market, the first thing I tell them to do is to sell everything, go to cash and trade small. You have to rid yourself of any baggage and cultivate a fresh mindset. People are often hesitant to unload positions because they are sure they will sell at the exact wrong time but, typically, it is better to run that risk and clear your mind.

One of the biggest problems we face in dealing with the market is that we are never truly objective. We always have some bias in one direction or the other. Even when we hold cash, we may be rooting for weakness so that we can buy back in at lower prices. We have to consciously set aside our biases to really deal with the difficulties we face in our trading.

I'm holding a very high level of cash, so my general inclination is not to be overly optimistic about stocks. If I felt good about them and saw lots of charts I liked then I would be buying them, so I have to question whether my reluctance to do so is based on facts or some unjustified bias. Frankly, I'm not sure, but given how trades are acting I can say my lack of confidence in the market is somewhat justified.

The best thing to keep in mind if you are struggling is that the market is dynamic and conditions always eventually change. We'll move past this fiscal-cliff debate and the way stocks move will shift once again. I find that if I just stick with it and don't let the slow times affect me too much, eventually the clouds will part and the sun will shine again.

The one great certainty of the market is that it will go through cycles, and if you are patient you will eventually encounter conditions that favor your approach.

This market isn't looking much easier this morning. We have a very odd mix of action with Apple (AAPL) being slammed while some banks are dragging up the senior indices. The fiscal-cliff debate continues to be a major distraction and it is unlikely that a resolution will come before the deadlines.

It is tough slogging, but simply recognizing that fact will help to make it easier.

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