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Whenever CNBC breaks out its “Markets in Turmoil“ chyron, the stock market tends to rally.
Not this time!
This is my 21st year in the capital markets. I have seen some crazy stuff. Actually, 99% of the stuff I have seen is boring stuff, but it’s the crazy stuff that I remember.
Some of you have the ability to short things, trade derivatives and do all kinds of other fancy stuff. Most others just buy things. For the latter group, it often comes down to very brief moments where you have to decide to buy something cheap. Those decisions are hard because they often feel terrible.
Here’s something to take some of the sting out of those hard investing decisions. I call it the three Cs of trading in a crisis. I published this for my paid-up subscribers last week. And this short list can help you in any market, and especially in times like these.
The three Cs of trading in a crisis are:
• Capital
• Conviction
• Courage
Capital
In order to buy stuff, you need cash.
If you have cash, it means you weren’t fully invested on the highs.
This time around, like most times, everyone was fully invested on the highs.
Cash yields nothing, so people were very scornful of cash, considering it a drag on performance. But people forget about the option value of cash, the idea that cash is a big pile of possibilities, and it allows you to buy things cheaper in the future.
This is why you always keep cash around.
People never, ever learn this lesson, no matter how many times they get burned. Again and again, markets go up, people chase performance, and feel the need to be fully invested … on the highs.
Don’t be one of those people.
Conviction
Conviction is how sure you are on a trade.
There is one easy way to get more conviction on something: Do a lot of research on it. The more you know about something, the better you feel about it, and the more comfortable you are. Although there is such a thing as knowing too much.
Just because you have conviction on a trade doesn’t mean you are right. You can have conviction and be wrong. But conviction is necessary to get comfortable with a trade, which will help you size it appropriately.
When I have conviction on a trade, I feel like I must act. And I can’t do it fast enough.
Courage
Often, these opportunities happen when things look really bad. And even if you have the capital, and you have the conviction, working up the courage can be tough.
We had some 1,000-point down days in the Dow DJIA, +0.65% in the past two weeks. Takes some courage to buy the market down 1,000 points. Never feels good when you push the “buy” button. If it does, then you could be a psychopath.
I have never had a shortage of courage in my career, which some people confuse with bravado. I’m a trader, and it’s in my DNA. I’m always up for taking a risk. I’ve done some big, big trades in my career, and I’ve never had any fear.
I’m unusual — don’t confuse courage with fearlessness, as it’s normal to experience fear — even healthy. You shouldn’t be a kamikaze like me.
It’s good to deliberate about a trade, and really think about what you are doing. But don’t take too long — sometimes it comes down to a matter of seconds.
But let me tell you: It’s not enough for you to hear me say all of this. If you truly want to learn about the three Cs — capital, conviction and courage — and have this knowledge seep straight into your bone marrow and completely live it, you should hear this every day of your life as an investor.
Because it takes that much reinforcement to live, breathe and feel comfortable with the three Cs and to follow through on those high-conviction trades.
Jared Dillian is an investment strategist at Mauldin Economics and a former head of ETF trading at Lehman Brothers. Subscribe to his weekly investment newsletter, The 10th Man.
