So this past week I’ve been relaxing (as best as I can) in Tybee Island, GA. This is supposed to be my last vacation before the school year starts, but I’ve spent most of it getting destroyed by waves, early morning workouts, and studying the markets. I’ve come to the realization that I cannot get away from the markets, mainly because I love them so much. It’s my passion, so I don’t think of it as distracting or “working” while on vacation.
This brings me to the point of this article. I won’t go into any details on specific companies, but rather provide an insight into the methodology and process of my trading. I tried surfing this week and I struggled, a lot. To my defense, the waves were very large and challenging in general. More or less, I’m trying to make excuses for myself. But while I was out in the ocean letting the waves decide where to take me, I thought about markets, investment opportunities, and the waves. It hit me. Along with a wave, a thought hit me that garnered a writing piece. My strategy to the markets is exactly like surfing in 4 major ways. Let’s break it down.
4. You Cannot Control The Ocean
Everyone knows you can’t control the ocean, but a lot of people believe they can influence and control the aspects of the market. What I mean by that is that Mr. Market doesn’t care about any individual or institution who makes trade. It couldn’t care less if one made money or lost all their capital. The ocean is very similar. The ocean doesn’t care how many surfers are out in the ocean, nor does it care how badly the surfer wants to ride a wave. The ocean doesn’t care if a surfer bails, wrecks, or even gets eaten by a shark, it just keeps on flowing in and out.
The point for this comparison is to show that much like the ocean, the market is a dangerous and even deadly place for those that are unprepared and prepared. Its important to keep this image in mind to always come to the market humble, just like a surfer comes to the ocean with tremendous respect and humility for the power of the ocean.
3. Its Better To Crash on Small Waves
When learning how to surf, I started on small waves and crashing frequently. When I mean frequently, I mean every single damn time. However, as I was crashing I thought about how this could relate to trading (like any rational person would do, right?). The way this applies to trading is simple, but yet powerful.
When trading, the best case scenario is to learn from others’ mistakes so that you don’t make those same mistakes. We aren’t that lucky, in part due to human psychology being so difficult to change. That’s been my goal at Rockvue Capital, to learn from those who’ve made the biggest mistakes so that I don’t have to go down that same road. However, when I do make mistakes (and I am transparent when I say I make them often, its part of the game) I want to make smaller and smaller mistakes. It’s very similar to the principle of the sniper getting closer and closer to the bullseye: “Aim small miss small”. When I make mistakes, I want them to be small 20 – 100 bps mistakes. These are mistakes that my trading capital can rebound from. If you’re surfing, crash on small waves, and if you trade, lose small amounts of capital.
2. Surf Even On Days When The Waves Suck
This morning (Wednesday) there was a man named Craig who was out surfing with my buddy and I. Craig was one of those guys that has been surfing since 1969. He knew all there was to know about the waves, the technicals of how to read waves, etc. My buddy and him were shooting the bull back and forth in between waves, and Craig said something that really stuck with me which can be applied to anything.
Craig simply said, “Even though these waves today are nice, you have to surf on days when the waves suck. That’s where you learn and fine tune your technicals and your technique on surfing.”
This applies to the markets so perfectly. These past 8 years have been some of the greatest times to be an investor. Close your eyes, flip through Investors Business Daily, and randomly choose a company and odds are you would be making more than your principal on your investment. In short, it hasn’t been hard to generate alpha. Plain and simple. That doesn’t mean anyone can do it, but if one was to buy the S&P 500 Index, they would’ve made a handsome profit over the last 7 years. That is the equivalent of a surfer surfing in only pristine conditions, not knowing the pitfalls of surfing with too much wind, too much current, or too dangerous waves. What would happen if the surfer only surfed in perfect conditions and then went out and surfed in dangerous, volatile waves? It probably wouldn’t end well for the surfer. Without being prepared for various surf conditions, the surfer came ill – prepared for the task at hand.
It works exactly the same in trading. Unfortunately for me, I was born into one of the greatest bull rallies of all time. I was just young enough not to realize the magnitude or impact of the financial crisis, and began my investment journey at 13 years of age. Because of this, I’ve had to learn from history about what can happen in markets, and what horrible markets look like, knowing only good times since my investment journey. Its this knowledge that things aren’t always like this (the current market bull run) which gives me an edge in my trading. Its knowing what I know, and knowing what I don’t know. I don’t know what its like to trade in a severely bearish market because I haven’t lived through one. That is more powerful than knowing what you know.
Takeaway: Trade all markets in all conditions. Study and prepare yourself for the times when the market isn’t what you thought it would be. Learn from the past, learn from previous days on the water to better prepare you for the future.
1. There Will Always Be Another Wave
I saved this rule for last because I deem it to be the most important. While I was out on the water, I would realize that no matter how many waves came at me, no matter how many waves I skipped over waiting for another wave, another wave always came through. I didn’t take every wave, wearing my body out, leaving me without energy for the waves that matter most. This is the most important rule of trading. Learn to sit on your board and wait.
In trading, there will always be another wave to catch, another trade to make. There is no point in making a trade or catching a wave just because you’re out there in the market or ocean. Sit and wait, be content with waiting for the right trade or the right wave. If you try to trade too much, or try to surf too much, you’ll wear out your capital and your body in short time.
Sometimes the best waves to ride are right behind the one you were going to take. The same applies to trading. The market presents you with opportunities every single day. There is no point to just point and shoot. You can afford to be precise in which trades you make. Out there trying to surf, it would’ve been foolish for me to take every wave that came my way. Maybe a wave was too small and I wouldn’t be able to get up on the board. Maybe a wave was too big and by trying to surf it, I would end my trading career and my living career as a human too soon.
The takeaway is to be patient. Haste makes waste. Be patient for the right wave, and be patient for the right trade. Be content with sitting out there in the ocean, learning and reading the waves until the right one comes along. The same goes for the markets. Just because I live this stuff, I don’t have to be trading 24/7. If I’m not in a trade, I am comfortable sitting on the sidelines learning about the markets in which I participate.
If you thought this was interesting or have any questions, please don’t hesitate to drop me an email. If you like reading more about my philosophy, let me know and I will write more about it along with my securities research.
Here’s to a great last day of vacation 🙂