There are times when investors ought to take a cue from Congress and try the "do nothing" approach. Because it's never the trading itself that makes you any money; rather, it's making the right trades at the right time and having the conviction to fully participate in them that makes the difference.
We think of investments and markets in terms of analyzing companies or estimating earnings, but at its most basic, trading is about switching one position for another. While always unpredictable, markets do historically tend to trend over time. So when you're lucky enough to be in a good spot, why jump out at the first opportunity?
To that end, after the worst week for U.S. Treasuries since last July, I'm desperately resisting the temptation to snatch the quick gains accrued since I stuck my neck out and called a top for bonds one week ago. While it might seem quixotic, "quick gains" are among the best example of how oftentimes the best trade is no trade at all.
It would be true in bonds, shipping stocks or any other trade for that matter. It's an old market adage that winning trades are usually born right from the start. It's much more likely that a profitable idea continues on rather than a weak trade reverses, recoups your unrealized loss, and marches on to a significant advance.
After last week's declines, yields on U.S. government bonds are at their highest levels since last October (yields move inversely to prices). The move was attributed to a number of factors, including a more positive economic outlook from the Federal Reserve, a slightly stronger dollar and decreased fears about Greece.
Yet from a portfolio perspective, why bonds have fallen is of no valuable concern -- only that they've fallen. That's because it unequivocally demonstrates that, at least for now, the market is confirming my outlook. Beyond monitoring the trade, insuring the wager doesn't overwhelm my total portfolio or that the herd's participation hasn't spiked, there's not much else for one to do.
Successful investing doesn't come down to cashing in winners, but letting them run, a fact best illustrated by the multi-year surges in assets like gold and Apple (AAPL)
Inflows into bond mutual funds -- that is, investors betting interest rates will either drop further or stay at current levels -- have continued unabated, with positive inflows nearly every month for years. Even as risk assets have rallied, investors have withdrawn $2.28 billion from American stock mutual funds through February. They've invested over $65 billion into bond mutual funds over the same period, which has been a losing trade as bond prices have fallen.
Meanwhile, interest in products like ProShares Short 20+ Year Treasury (TBF),
Shortly put, the proof is in the open, winning profit. When sailing is smooth, stay the course.—Jonathan Hoenig is managing member at Capitalistpig Hedge Fund LLC. At the time of writing, Hoenig's fund held positions in many of the securities mentioned.