One of the most empowering mindset shifts that I made early in my investing career was the understanding that I could start fresh whenever I wanted. When I’ve found it difficult to get in sync with the action, or after a long, tough slog where the market gods have consistently reminded me (sometimes brutally) that they’re still in charge, the simple act of clearing the decks, forgetting the past, and acting as if I’ve just opened a brand new account has helped me break out of a rut and start producing results again.
The wild speculative action after the pandemic attracted countless new traders to the market, many of whom saw their accounts soar as meme stocks, NFTs, SPACs, and cryptos went parabolic. Many of those freshly minted traders left the market in disgust as those positions began to fall apart at the start of the second quarter in 2021, and those that stuck around had their first encounter with a full-fledged bear market. We’re now a month into the fourth quarter of a year that has the dubious distinction of having had the third worst start to any year ever, and even seasoned investors are wondering how long they’ll have to wait given the long list of headwinds facing the market. As I’ve often said over the years, bear markets don’t scare you out, they wear you out.
That said, several market technicians have been pointing out lately that investors who have been hiding in their bunkers for a while at least need to be ready to shift gears should positive seasonal tendencies begin to take shape. Notably, midterm election years have the tendency to start off weak and finish strong, while more bear markets have died in October than any other month of the year going back to WWII.
Accordingly, here are some things that active investors can do to develop the right mindset in order to be prepared in case positive seasonality begins to take hold once again:
Let go of your baggage. The last 19 months have been a slog, and we do need to keep in mind that the primary trend remains down. However, it’s also important to shed the mental weight that we’re carrying after the extremely poor action. The way to do that is by “marking to market”. Or put another way, forget the price you paid for your various positions and look at each individual stock in your account as if you just bought them today. Would you own that stock here? What would be your stop level given the current chart? Is your position sizing appropriate for the dollar amount you’re willing to put at risk (again assuming that you just initiated the position and set your stop)? Where would you look to take profits from your new positions and where would you increase size? If you wouldn’t have “re-initiated” the position, then should you throw it into the proverbial volcano as a sacrifice to the market gods?
Double down on your risk management. The thing that gets most active investors into trouble is not setting a clear stop after they buy a stock. And even when they have an idea where they should take a loss and move on, they talk themselves out of it. Sometimes, they’ll get lucky and a stock will bounce right back, but that doesn’t happen nearly as often in bear markets.
Have a plan for various outcomes. Positive seasonality can often occur simply because market players are expecting it to happen. In other words, it can become a self-fulfilling event even in an environment where the headwinds are glaringly obvious. On the other hand, seasonality is never a guarantee. The good news is that we don’t have to guess which path the market will take ahead of time. By embracing the fact that we absolutely can not (and don’t need to!) predict the future, individual active investors gain a tremendous advantage over other traders who think that they need to follow the lead of all the yammerers on the financial media who incessantly make forecasts. Let go of the belief that you need to know what’s going to happen and instead gameplan for how you’re going to react as conditions develop.
Keep plugging away. The most important thing to remember when it comes to finding long-term success as an investor is that there will always be new opportunities in the market. As Angela Duckworth found, the number one predictor of success in individuals is grit. If you keep showing up, stick to your process and plan, stay disciplined, and continue digging for new ideas, then positive results will follow.
Ultimately, I am optimistic about what lies ahead. Not because I think that all the historical comparisons will hold this time around or that the post-CPI reaction on Oct.13 was a capitulatory event that marked the end of the bear market. I’m optimistic because I know that the opportunities that are forming as a result of this bear market will create wealth for those who have absorbed what market gods have taught us over the past two years and can put those lessons to use and are prepared to react to what the coming weeks and months hold.
