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Keith McCullough
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Research Edge, LLC (http://www.researchedgellc.com/) is the leading real-time research firm. Focused exclusively on generating and delivering actionable investment ideas, the firm combines quantitative, bottoms-up and macro analysis with an emphasis on timing. The Research Edge team features... More
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Research Edge LLC
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Diaries of a Hedge Fund Manager
  • Early Look: Mental Flexibility 0 comments
    Jul 31, 2009 8:28 AM

    “It's easier to think outside the box if you don't draw one around yourself.”
    -Jason Kravitz
     
    One of the hardest things to accomplish as a person is mental flexibility when things go wrong!  Mental flexibility means forgiving yourself for slips, while keeping the mental focus on positive progress – learn from your mistakes because you are going to make them.  Wow, that’s deep for the early morning wake up call, but here we go anyway. 
     
    If you have some degree of mental flexibility, it’s unlikely that you will get overly bent out of shape when things go wrong. One of Keith’s favorite sayings is “when the facts change we will”, which is of course borrowed from Keynes.   Having the mental flexibility to change is a very desirable trait, but it takes a strong discipline and a process to admit that you are wrong. 
     
    As an investor, without the flexibility to change, you put at risk your performance and the ability to recover from mistakes.  As an analyst, the key questions to ask are: Am I able to see things from different perspectives? Can I fully appreciate the viewpoint of others that disagree with me?  “I'm right and you're wrong" - is nothing more than an expression of intolerance and narrow-mindedness - that is a problem.
     
    Having the mental flexibility to be open to new or different ideas allows one to adjust to a changing environment.  Much of the stress we experience in life and in the market is due to the inability to accept change.   Change is both inevitable and the very nature of life. Changing one's mind is not a sign of weakness, but of flexibility and growth. Flexibility also promotes mental and physical health because it frees us from stress, resentment, anger, and fear.  To the flexible person, life is not about survival but about enjoyment.
     
    I know there have been a number of times in my career when a stock was going against me, but I kept making excuses to justify my opinion.  The facts just kept getting in the way!
     
    Keith wrote yesterday “when I made the transition from being wrong on the top end of my Range Rover (954) to calling it for what it was – a confirmed breakout - I started giving you higher-lows of support and higher-highs of resistance.  Now your daily risk management objective is to play the game that you see in front of you.” This is a process that some have criticized as too short-term, but certainly allows for mental flexibility! 
     
    Which leads us to the set up for today; the risk reward for the S&P 500 suggests that there is 1.5% downside and 1% upside.  This is a trading range, with commensurate risk and reward. The levels of immediate term support/resistance for the three key indices are:
     
    1.      SPX = 971-996

    2.      COMP = 1954-2007

    3.      Dow = 9026-9238

     
    I suspect the July rally has caught a number of people flat footed.  I know where I sit; I have not found the mental flexibility to get bullish on my stocks, the restaurant sector.  While I have certain names that I like and dislike, being out right bullish seems counter intuitive to the fundamentals.  But the market seems to be telling me I need to be more flexible and look past next month’s comp number.  I’m working on being more mentally flexible every day.

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