No Thanks for the Memories

The fact is that those who dwell on the past often live there as well. The problem having vivid memories about a stock's history is that it often clouds any analysis of its future. And while we often point out that trends tend to persist, none last forever. Yesterday's chopped liver is often today's filet mignon. So when the market's fashions change, you've got to be flexible enough to change along with them.

For example, consider technology stocks. Over the past five years or so, we've seen technology stocks go from red hot (1998-2000) to ice cold (2000-03) to red hot again (2003-?). There've been opportunities to trade both long and short — but only if you've been able to keep an open mind.

Yet many people still remember getting burned on technology or dot-com stocks, which is exactly what has made them so difficult to get back into over the past few months. If you got taken to the cleaners on Cisco (CSCO) during the boom, for instance, it's darn near impossible to consider owning it again, even at a significantly lower price. Losing money hurts, and when it comes to a particular sector it's often once bitten, twice shy.

The same holds true for winning investments. For example, those of us who profited handsomely from the bond market over the past few years have had to readjust in recent months. And although memories of bonds providing double-digit returns are still fresh in our heads, today's market environment is quite a different animal. This is the jungle, folks: You've got to adapt or die.

The point is that vivid memories, whether painful or pleasant, make it harder to analyze the market in an objective fashion. So although it can be difficult, I've found a sound strategy is to attempt to put aside past experiences and to the best of my ability live in the now. Because the stock doesn't know if you've owned it or not, and what matters isn't an investment's historical performance but its behavior at the time of analysis. Don't focus on how a stock used to act, but how it's acting now, and perhaps even more importantly how it's represented within your portfolio.

And that's where a sharp memory is a real asset. Because as we've said from the start, it's not what you trade but how you trade that has the biggest impact on your bottom line. And what we should remember from past trading experiences aren't the investments themselves but the approach that either hindered or helped our profitability.

When I lose money, for example, it's way too easy to find fault with the company, the CEO, Bush, Greenspan — everybody else but myself. And although every trade can't be a winner, the truth is that those particularly painful losses are usually a result not of a bum stock tip but of bad technique. Whether it's dangerously large position sizes or the lack of stop-loss orders, what usually hurts me isn't the market but my own lack of discipline. My memories shouldn't center on the stock, but rather on my approach: Where did I go wrong?

Consequently, on those occasions in which I'm fortunate enough to make money, what I try to remember isn't what stock I picked but how I approached establishing, maintaining and ultimately exiting the position. Was I diligent in evaluating the market? Did I trade an appropriate product relative to the size of my account? Was I patient in letting the trade run its course? This is what's important to remember from previous trades. Because over time the ticker symbols will always change; good discipline, however, never wavers.

Jonathan Hoenig is managing member at Capitalistpig Hedge Fund LLC