Thursday, September 1, 2016

Don’t Trust Your Gut

Economy and Markets

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ECONOMY & MARKETS | September 01, 2016

Don't Trust Your Gut.
Trust the System

By Charles Sizemore, Portfolio Manager, Boom & Bust

In August of 1971, Ray Dalio – now one of the most respected hedge fund billionaires on Wall Street – was a lowly clerk working on the Street. By coincidence, Dalio was starting his career during one of history's critical turning points. President Nixon had just taken the dollar off of the gold standard.

Dalio's gut told him the market would crash the next day. Instead, it rallied. Hard! The Dow finished the day almost 4% higher.

It's not much of a stretch to compare then to now... Back then – as now – you had central banks meddling in the markets. And back then – as now – you had unexpected results.

Dalio learned a lesson from his experience. He realized that the market has a knack for doing what you least expect it to do… and he reached the conclusion that, rather than trying to guess what happens next, the better course was to simply build a portfolio that would perform well in any environment… no matter what happened. So he launched his All Weather portfolio, and the rest is history.

I'm not necessarily recommending you run out and invest with Dalio. Even if you wanted to, you wouldn't meet the minimums. You'd need $5 billion in investable assets to get in the door.

But I do recommend that you take a few plays out of his playbook…


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First, ask yourself the same question he did: what kinds of strategies can I implement that will work in any market, bull or bear?

With stock prices at all-time highs – and with the Fed's next move anyone's guess – you need to be confident that your strategy will handle the unexpected.

And as you look for answers, be systematic.

Set your trading rules in advance and follow them – verbatim. If you've done proper back-testing, then you should have faith in your system to do its job once a storm hits. If you don't have faith in your system, then you have no business investing with it.

And perhaps most importantly, do not let your emotions cloud your judgment and push you to override your model.

Your emotions will betray you every time!

The most successful traders are those that either have a super-human ability to control their emotions (which is exceptionally rare) or they simply take their emotions out of the equation altogether.

That's how my friend and colleague Adam O'Dell invests with Cycle 9 Alert. I have never – as in not once – heard Adam tell me how he feels about the market or about what he thinks will happen next. He removes himself from the equation entirely. He builds systems and his systems tell him what is probable based on past experience.

Adam's Cycle 9 Alert system is designed to work in any market because, unlike a traditional buy-and-hold strategy, he isn't always invested. He only buys when the sector he's eyeing is in a pronounced uptrend and starting to show momentum. And he also has the ability to bet the other way… actually shorting sectors that are in a downtrend.

Cycle 9 Alert's system works because, as Sir Isaac Newton himself put it, an object in motion stays in motion.

Adam's research has shown that outperforming sectors tend to continue outperforming over the following two to three months, so he structures his investments to fit within that timeframe.

Whether the longer-term trend is bullish or bearish, Cycle 9 readers stand to profit from the intermediate-term moves.

I have no way of knowing precisely when the next market crash will be. But I can say with a lot of confidence that when it hits, most investors will respond the wrong way. They'll hold on too long and then end up selling at the bottom, right before it starts to rally again.

They will do this because they will let their emotions get the better of them.

Don't do that.

Learn from Ray Dalio… and from my friend Adam.

Stick to a mechanical system and follow your rules.

Charles Sizemore
Portfolio Manager, Boom & Bust

P.S. For the next couple of days only, you can get a free one-year's subscription to Adam's Cycle 9 Alert. Why not put it through its paces and see the results for yourself? Details here.




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