The title of this post is the funniest thing I’ve heard all day in response to the relatively large worldwide drop in stock prices that we saw today. I was home for lunch today and I saw that the Dow Industrials were off by just over 200 points and that program trading curbs were in effect. It’s been a while since I’ve seen that. I thought about my stock portfolio at that moment, and decided that this was the perfect excuse to sell the stock funds in my taxable account and roll them into my FX trading capital. I have enough invested in stocks via retirement plans as it is. So for once, I actually did some profit taking in the stock market…my long term record in that arena is NOT stellar. 
There were no other actions to take that would be reasonable, given that my retirement investment horizon is 30+ years and I’m comfortable with my asset allocation.
But enough about me…
You know, on days like today, when the market is down sharply, we always hear stories about computer glitches and other hocus pocus that was the ‘reason’ for a sudden break in prices. Even more often, we’ll hear analysts parroting that nothing has fundamentally changed. It’s BS. Look, when the market breaks lower, the vast majority of investors feels pain and we are undeniably poorer…and fear never rides a tortoise out of town. This may be a buying opportunity and it may be the start of a global double digit decline in prices…that part really isn’t important to me. The thing that bothers me is that these “fundamental” cases are brought out on a day like today, and such stories imply that *yesterday’s* prices were the rational ones, not today’s lower prices…uh huh. Could it be that the market was not rational yesterday and it isn’t rational today either?
Before making any changes to your portfolio, consider your alternatives. For me, selling some stock today in my taxable account was a no brainer because I have an attractive alternative in my FX system. Doing nothing in the 401K was also a no brainer, since I’m trying to build retirement wealth over the next few decades…in that context, checking the account even more than once per quarter is counterproductive, because it can only lead to fear-based emotional decision making that could be hazardous to my long term financial health.
Oh, so that’s what a 40% drawdown in one week feels like. The Cable Gilder went a dismal 1 for 5 in last week’s trading, and gave back all of it’s gains for the month of February. Certain specific features of the drawdown make it especially painful. I was looking for evidence that I should not trade on holiday Mondays. I could find nothing in the backtest of the system to suggest that I should not trade last Monday, so I kept the system active, and promptly went 0 for 2 and lost 20% of my equity. I was also undecided on whether or not to trade on Thursday, since it was an EIA Petroleum inventory data day, again due to the shortened holiday week.
In my study of the charts last weekend, I concluded that the “Wednesday” phenomenon that I see in the backtest is probably due to triple swaps every Wednesday and NOT due to the EIA petroleum inventory release. With that knowledge, I kept the system active on Thursday and went 0 for 2 again…again both were relatively large losses, and the last loss was an EXACT hit on a reaction low. Put another way, if the market had retraced just one pip less, I would have been looking at a monthly profit for February in excess of 20% Instead, I have a monthly loss of 3.9% and a paltry year to date return of 4.3% To say that leverage is a double-edged sword is a cute understatement!
So, despite still being up over 80% over the course of the last 5 months, I feel like crap….and NOW, cue prospect theory! I’m currently reading “More Than You Know” by Michael Mauboussin. This book is really thought provoking, and has re-introduced prospect theory to me. The key learning being that a loss hurts about 2 to 2.5 times as much as a gain feels good. With that in mind, it’s back to the drawing board for me in a sense; I’m going to play with my position sizing algorithm such that I’m unlikely to FEEL LIKE A LOSER even when I’m winning. There are lots of nerdly thoughts running in my head right now, but none of them are forming a coherent course of action just yet. I’ll see what develops.
In the meantime, the Cable Glider will be idle until Thursday, so I have a bit more time to see if I come up with any beneficial revisions to the bet sizing algorithm. On another bright note, I re-coded the Cable Glider with Metatrader 4, which gives me more flexibility when I’m looking for forex brokers in the future.