So to command the market, one must obey the market. That means our actions can't stem from a gut feeling of how the market "should" be acting, but rather the objective reality of how it's acting in the here and now.
So when a stock we're fond of is weak and continues to notch new lows month after month, it's not just foolhardy to buy it and confidently declare "the bottom is in," but outright destructive. Our thoughts, opinions and proclamations about a stock have no impact on it whatsoever, but only on our own ego, which grows larger and more dangerously committed the more we opine. It's a lot harder to take a loss in XYZ after having told your friends, family (or national TV audience) that "the bottom is in."
The same scenario exists for strong stocks as well. For years I can recall traders insisting to me that gold was in a bubble, that it had no value or worth and that it was a fool's trade, despite the fact it continued to rise. That commitment to an outlook or belief even when conforming price action does not support it isn't discipline. It's dogma. The same stubbornness will present itself amid gold's decline as well.
Think of our job not as proclaiming how the markets will act, but observing how they are acting now, and attempting to position our own portfolios to hop along the trend.
That perspective is important not only when initiating new positions, but when dealing with existing ones as well, both winners and losers.
Every portfolio-crushing loss, for example, stems not poor stock picking, but from an insignificantly small bet and a trader who insisted on commanding the market rather than listening to it. So after having bought shares of XYZ only to watch it slide 30% lower over the course of a few months' time, it's delusional to insist XYZ is poised to rise just as we commanded.
Conversely, when we sell a winning investment and earn a profit, our celestial ego prompts us believe that the moment our sale hits the tape, the stock should plummet and never rise another dime, validating our vision that XYZ was ripe to be sold.
More realistic (and common) is that a strong stock we sell would continue to rise, even after taking gains, simply because strong markets tend to stay strong, whether we participate in them or not.
We often have a script in our mind of what the market's going to do and an accompanying belief that our scenario can be expected to play out the moment we log into our E*TRADE (ETFC)
So rather than command the markets to act as we think they should, investors should instead rely on the price action to observe how they're performing and position him/herself accordingly. Because we're not all-knowing: not you or I or Ben Bernanke, Bill Gross, Barton Biggs or anyone else. The market doesn't know, care or consider anything we say or do.
That humility offers a more honest and realistic context by which to evaluate our next move.
Images affiliated with this story: Mike Flippo / Shutterstock.com—Jonathan Hoenig is managing member at Capitalistpig Hedge Fund LLC.