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Got It Wrong… Again! What to Do
Monday, March 9, 2015 5:25
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Darn it, my friend… I made another mistake…
Mistakes happen in investing. I know they do. It's part of being in the markets.
Seriously, you win some and you lose some. It's how you handle the “lose some” part that really matters.
Did you learn from this experience? Or are you going to make the same mistake again?
In January, I told you about my last big mistake…
In January, I predicted a top in the U.S. dollar on national television (on the Closing Bell with Liz Claman on Fox Business). Hopefully it made for good TV… But I got it wrong.
Most importantly, I didn't wait for the trend to confirm my idea. Fortunately, we hadn't put the trade on in any of my research products. I didn't put my subscribers in harm's way.
In February, the trend started to change… So in the latest issue of my True Wealth newsletter, I recommended buying the euro (betting against the dollar). To spare you the suspense, this was my latest mistake.
The euro was trading for less than 1.14 when my newsletter came out on February 20. I wrote in that newsletter to “sell if the euro closes below 1.11.”
I don't like to lose money. So with a stop loss at 1.11, I gave the trade less than three cents of downside risk.
Specifically, I wrote: “This tight stop loss gives us a fantastic reward-versus-risk ratio in this trade. Our upside is 20%, and our downside risk is less than 5%.”
Unfortunately the euro closed below 1.11 last week. We had to get out of the trade.
Darn it…
I had the pieces that I wanted to see… The euro was cheap, hated, and in the start of an uptrend.
It was perfect. But it didn't work out.
I know down in my toes that the euro is extremely hated right now, so I do believe the turning point is just around the corner. For example, on Friday morning, the legendary Alan Greenspan was on CNBC, and the topic was “Is the Euro Doomed?”
Photo courtesy of CNBC
That is exactly the type of talk you'll hear when an investment is hitting bottom.
Even though I am passionate about this idea, I have to move on from this trade.
I did many things right here…
I didn't lose much money because I used a tight stop loss.
I didn't “cheat” myself – I followed my buy criteria closely… and yet I still cut my loss when I was wrong. (Most people will find a reason why they should hang in there in a losing trade.)
I would really like to stay in this trade… But I can't.
One of the most important things I can do right now is to LEAVE THIS TRADE ALONE for a while. I need to take my emotions out of it. So I can't touch it for a while.
I think I will be proven right about this trade. I think I will be vindicated here. But you know what? That doesn't matter. Nobody cares…
The euro doesn't care if I am right or I am wrong. At this point, the only thing that's hurt is my pride. My pride is hurt much worse than my pocket.
People love to be right. But you've got to be smart about this in the markets… “Being Right… Or Making Money,” that's it. Ned Davis – one of my investment-analyst heroes – wrote a book with that title. He got it so right.
You have to ask yourself… “What do I want here? Do I want to be proven right? Or do I want to make money?”
If you want to make money in the long run, then (in this case) you actually have to cut your loss, and you have to move along from this particular trading idea for a little while. You can't let your emotions get caught up in it. “Don't fall in love with your stock… It won't fall in love with you,” the old saying goes.
I got one wrong… So what can I do?
Cut my loss early. That way I never let a small loss become a big one.
Forget about “being right.” The dumbest thing to do would be to have a vendetta against the euro. Nobody cares.
I need to accept that I was wrong on this one, and move away from it.
If you want to make a lot of money in the markets, then you have to minimize the impact of your mistakes. It's crucial.
Cut your losses early. Don't make it personal. And move along from that trade until it's no longer personal. That's the best advice I can give you (and me!) to handle what to do when you're wrong…
Good investing,
Steve
Source: http://www.stansberryresearch.com/dailywealth/2958/got-it-wrong-again-what-to-do
