This is why we trade
Reprinted from an article I self-published elsewhere on August 21st, 2015.
This is why we trade
When the world goes to heck in a handbasket, and seemingly cataclysmic events swirl around us completely out of our control, we remain the "captain of our own ship." The value of our house may decline. The business supporting our livelihood may suffer minimal to significant damage. Our 401K may start to look like a 201K. Politicians on all sides blather on attempting to assess blame as far away from them as possible. Talk of the next Great Depression may become more common. Yes, the perception may be that it is all imploding around us.
This is why we trade.
Not because it's cool or fun or an interesting hobby. Not because we have all of these fast computers, lots of data, and an endless array of tools and techniques to work with. Not because we enjoy exchanging ideas with other individuals regarding the latest and greatest methods and techniques. Not because we enjoy telling our friends about our latest market conquest or because we feel comfortable commiserating with others regarding our most recent losing trade.
We trade because trading is the only business that allows us the opportunity to make money regardless of the events that go on around us. Granted, we must be on the right side of those events - or at least not be on the wrong side for very long - to prosper. But that is a given. Unlike true gambling-related endeavors, if we make a bad bet, we can pull our bet off the table with as much haste as possible and wait for a better opportunity.
Many who consider themselves "red-blooded Americans" have an aversion to selling short. Too much risk, too much uncertainty, and doggone it, we like it when things go up, not down. And in a perfect world, that would be great. If you dare take your hands from over your eyes and survey the current state of affairs, the odds are good that you will conclude this is not a perfect world.
But you see, this is why we trade.
When those things around us are good, we can take a long position and prosper. When those things around us head south, we can sell short and do the same. Wait a minute. Doesn't that make us "evil speculators?" Not by any sane definition. By any sane definition, we are simply people who prefer to shape our own destiny rather than rely on others to do it for us. When faced with adversity, we are merely people who would like to take responsibility rather than sit around and whine and complain that no one is bailing us out. People who trade are the true capitalists. And while some seem to be taking great glee in disparaging capitalism these days, the fact is that those people are fools.
Freedom - living as you choose and making your own way in the world - is the single greatest "entitlement." Slowly but surely, this right seems to be slipping from our grasp. More and more, the "powers that be" attempt to assert greater control over the everyday lives of others. And I am talking about politicians from both sides of the political spectrum. More than anything, this explains the great unraveling we are witnessing today. We must also recognize our own culpability in all of this. Perhaps if we had looked up more often from our big-screen TVs, laptops, and iPhones, we would not be where we are. But we are.
Which, of course, is just one more reason why we trade.
Over the past two decades, too many people have come to the conclusion that because we now have high technology, we are somehow impervious to the economic cycle. So let me be the first to say, "Welcome back to reality."
Still, this is why we trade.
Unless and until they close down the exchanges and have the government set the price for everything, we can continue living a decent lifestyle. Until the income tax approaches 100% (somewhere, some politician just read this and thought, "Why didn't I think of that?"), we can take steps to continue to make money as other avenues dwindle. No politician is going to solve the current state of affairs. Only "the people" can do that. And this week, some of those people actually stirred from their slumber.
The "Current Crisis" versus "Past Crises"
How this current market decline will ultimately work out is a subject of great debate. I will spare you my "prediction." I do so simply because if I lined up all of the predictions I have made over the years and all of the predictions that I have heard others make over the years, it would start to look a lot like those endless miles of government red ink.
And this, too, is why we trade.
By not being fully locked into the "buy and hold" mentality, we retain the flexibility to take advantage of new opportunities and cut our risk significantly when things get too volatile. If we trade with an eye toward minimizing risk, we lose only a small amount, even when we are spectacularly wrong in our market opinions.
Which - oddly, is a good thing.
Which is just one more reason why we trade.
Summary
Contrary to what you might expect me to say at this point, I believe there is absolutely nothing wrong with investing a portion of your money using a long-term buy-and-hold approach. If, for example, you want to put a portion of your income into a mutual fund or ETF and let it ride for the long term, by all means, go ahead. But also remember that if you do so with all of your money, then your portfolio is essentially like a ship at sea without a rudder. As long as the wind and tides move in a favorable direction, you may eventually reach your destination. But the fact remains that you are trusting outside forces to control your own destiny.
By taking the time to develop and/or learn a small handful of trading techniques, entry and exit techniques, position sizing, money management, and risk control, you afford yourself the potential to stand at the wheel as the captain of your own ship charting your own course in even the most turbulent waters.
As I said, this is why we trade.