Thursday, November 29, 2007

Position size again

This is going to be probably the most important post that I will do this year. I've gone over this before but I'm going to go over it again because I think it's doubly important right now as we possibly head into the 4 year cycle low. Position size!!!

As one might expect I received quite a number of e-mails the last two days from investors freaking out about their short positions.

Now let me reiterate again that I'm not going to be like 99% of the other bloggers and newsletter writers on the Internet. I'm not going to brag about how accurate my calls are and what a great record I've got yada yada yada. Sure it's great for subscriptions but I didn't really start this to sell subscriptions. I started the blog to help novice and intermediate level investors improve their investing skills. (Many are the days I wish I'd never started this. It's become a monster that's eating up way too much of my time.) Sure I've had a few good calls lately. I can tell you unequivocally that it was luck. Pure D luck. I'm going to tell you a secret. No one, not me, not Trade, not F-Trader, not Pattern Guy, not Mr. T, not Richard Russell, not John Hussman, not Dennis Gartman, not Warren Buffett, no one can see the future. I've guaranteed before that I'm going to be wrong on probably 40-50% of my calls. Over the long haul trust me I'm correct in telling you this. It is just senseless to search the newsletter world or Blogosphere looking for someone to confirm your bias.

So how does this relate to position sizing you ask? Well here's what I see happening. From the amount of e-mails I've received quite a few investors are now on the short side. Which by itself is not a problem. Maybe I'm right about the 4 year cycle low and maybe I'm wrong. The problem is that these investors shouldn't be freaking out about a 4% bounce after the market has dropped 10%. At most they shouldn't have more than a 4% drawdown on their account and that's only if they went short at the exact bottom. If you were watching your position size you should only be down 1% or at most maybe 2%. That's nothing to freak out about.

I'm going to say it again. There's going to be huge money to be made in the commodity bull market but you can't make it if you get a case of the stupids and lose everything trying to bet too big on the decline. Big money is never ever made in bear markets, unless you take on leverage, simply because markets can only go down 100% and realistically a bear market is probably going to drop no more than 20-30%. Bull markets can easily go up 1000%.

Here is my motto and has been for several years. "If the market is going to take away any of my money it's going to have to fight me tooth and nail to get it and you better believe it's not going to get very much at any one time."