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Managing Risk like it was late 2007

|Includes: ProShares UltraShort QQQ ETF (QID), QLD

Most people do not think about controlling risk until it is too late.  In fact during calendar 2008, the year the market collapsed, Stock traders Daily grew substantially, but it made me a little upset.  Why do people always do things when they are forced to do them, or after they lose a bunch of money and watch their wealth deteriorate?  Why can’t people do things in advance, like when I told them to control risk in 2007?  They would have saved hard earned wealth if they had.  Now is not unlike 2007 in many ways, but persons should have an understanding of why they need to manage risk after what they have been through, so that gives them no excuse this time.  The question is will they do it.

Before I complete my analysis for Monday I feel compelled to share a few other more personal observations.  This sheds a little light on the way the normal person, who is also invested, feels right now.   I will share two examples.  The first is a person who ‘had no time for this crap’ and the second is one that had the time to listen.

I have no time for this crap:

Recently I had a member cancel his account.  He was a new member, he had money, he was heavily invested, and he was a little abrupt (he might have been from New YorkJ).  His response was, literally, “I have no time for this crap.”  My response to him was not what you might expect.  I told him to listen to what it is that he was saying.  He was telling me he had no time to manage his risk, or his wealth, nor did he want to think about it.  I pointed out that when that attitude overlays the past ten years it really amounts to nothing, then that our services were actually geared towards people who don’t have the time, or who do not want to take the time, so he was our target market.  I explained to him why he needed to take the time to manage risk, and although it might require a subtle change from him, I also explained how it would benefit him over time.  That fell on deaf ears, and he repeated his contextual opinion.  I did not bother to mention EQ.  I figured if he did not have the time to find this proactively managed account option in one of my emails he probably wasn’t ready for it anyway.

Had the time to listen:

Another member, someone that was relatively new as well, scheduled an appointment with me, and we discussed the 50 stocks that he owned.  He started doing this late in 2008, and divided his money evenly amongst those 50 stocks.  Every day he spends hours analyzing these companies, once in a while he will sell one just to buy another, and this method has worked very well for him from late 2008.  He explained how it did not work initially, but admits that the market did not bottom until 2009, so that was understandable. 

Our conversation turned from markets to tides, as I started to give the ‘rising tides lifts all boats’ speech.  I explained that his traditional method of diversification, in this case maybe over diversified, works well when the market goes up, but it fails when the market goes down.  I further explained that this approach has not been effective since 2000; in fact investors in this traditional approach have gotten nothing for over 10 years, but there have been times when the market goes up too.  Then I pointed out something more obvious to me.  I showed him that those persons who were nimble were also able to buy the bottoms a couple times, like he was lucky enough to do once so far.  Nimble, in other words, means willing to sell when everything looks good so you are able to buy when everything looks bad. 

My advice to him was simple.  Sell everything, adopt a proactive approach that can work in any market environment, and do not look back.  In a year or two, when the market looks awful again, you can go back to the old ways again if you want, but because proactive strategies work in any environment, you do not need to.  The other end of the phone went silent for a while.  He asked ‘You mean you want me to sell all of my stocks?  I own some of the best companies on the market.’  It sounded like he was in love with some of the companies he owned, and if you read my book you know what I call that.  He had his Golden Handcuffs on, and I do not know if he will take them off.

In each instance, I unfortunately expect to hear from each of these persons in the future if they do not protect their wealth now.  I do not want a repeat of 2008 for anyone, and I am afraid that the normal investor out there is not willing to be prudent with risk control right now.  Only institutional investors are controlling risk now it seems.  Let’s not be caught holding the bag.

You do not need to be out of the market, in fact good money is there to be made for people who are involved, but you do need to control risk, and you need to do it right now if you have not already.  Swing Trades ended the week net long, in QLD after selling QID earlier, so I am not suggesting that we be one-sided either, I am simply suggesting that we do not let the market control us, we need to control our own risk. 

The warnings have been laid.

Good Trading.

Thomas Kee.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in QID, QLD over the next 72 hours.