Tuesday, July 13, 2010

The Kirk Report

The Kirk Report

Everything Evens Out

Posted: 13 Jul 2010 08:19 AM PDT

Good breaks. Bad breaks. We all have them, don't we?

Bad Lie

Thinking back to the past six months, this has been an unusual year for me both in the markets and on the golf course. So far in 2010, for whatever reason, I've had a unusually high number of really good and bad breaks. More so than I can ever recall over a six-month time span.

On the golf course I've recently had some of the best and luckiest golf shots of my entire life. From three very close hole-in-ones, to holed bunker shots (one even from 180 yards), to three eagles on par fours, to several crazy pitch ins, a few 30 foot double-breaking putts and crazy drives where I've hit rocks out of bounds in the rough and have the ball bounce back to the middle of the fairway, it has not been boring on the golf course this year!

Likewise, I've had some really bad breaks as well. From plugged lies in the bunker, golf ball stuck in a tree, golf balls laying under tree roots in the fairway, several times I've hit the pin to only have the ball bounce off the green, and so on. Several times this year it has felt that the Golfing Gods were dead set against me. If you've played any golf, I'm sure you know that feeling!

The very same has been true for me with my trading this year. For example, over a dozen times since the start of the year I've made a trade just before a big positive and unexpected catalyst that has been quite profitable. I have also sold several large positions (i.e. taken profits) just before a major price reversal. However, just as often, I've had positions blown out of the water from completely left field. In fact, I don't recall a six-month period filled with so many great trades and really ugly ones. None of which I really could have avoided very much by simply following my own strategy.

Through both the good and bad on the golf course and in the market, the key for me was to simply to remind myself each time that both really good breaks and really bad breaks even themselves out over time. Things sometimes go very wrong, while sometimes everything goes very right and without any excuse or justification. But, over time, I firmly believe skill ultimately proves out and will make the key difference between long-term success and failure.

I remembered this lesson last week after watching Goydos shoot a 59. Here is a guy that has been playing poorly and who has had his fair share of bad breaks, but for at least a day, he could do no wrong (even though he didn't win last week's tournament). I've seen the same thing happen when watching not only myself, but also others on and off the golf course. For example, I've seen traders go through periods where everything they touch is gold and then switch to having a colder hand than a snowman sitting in Minnesota in January. It is just the way things go and we all have to realize the ebb and flow to both life and the markets.

No matter how much we would like to, we can't control what happens to us entirely BUT we can control how we react to good and bad breaks we experience.

Traders by nature tend to be control freaks and when things go wrong, most of us will naturally look for specific reasons to explain or blame on the poor result. It is just our nature to do that. But, sometimes bad trades happen when every decision you make leading up to the trade was the correct one. I've seen more traders than I care to think about change their whole entire strategy and mindset after just one big beat down and in doing so their trading often spirals out of control. Please resist the urge to do that when, not if, that happens. Many times you've just got to accept the fact that bad things happen even when you're doing all of the right things. Sticking with your same trading and investing strategy is often the right way to go even though it doesn't seem like it at the time.

Likewise, the same is true in when everything swings in your favor. Whether or not you are willing to admit it, I'm willing to bet that some of the best trades you've ever made were the direct result of being lucky rather than smart. Although not many traders will not readily own up to that fact because our large egos are so intertwined with our trading results, I can say with confidence that if you're blaming all of your bad breaks on other things while claiming full credit for all of the good breaks you've had, then you are not honestly evaluating your performance. In my experience, if you really took a good look at your track record to this extent, you'll find as I have that the good and bad breaks usually balance each other out. For the past several years, in my trading journal I've actually been trying to keep track of the lucky breaks I've had versus the unlucky ones, and while they tend to run in cycles, in general I've found that over time they cancel each other out. I never thought that was true until I actually started keeping track.

Those who win and achieve long-term success I think are those who eventually learn to take the bad breaks in stride and maintain their confidence while not letting their lucky breaks go to their head and overfeed their egos. They learn that sometimes you can do all of the right things, and still lose money in the market and vice versa.

The next time you get a bad break, or even a very lucky one, remember this lesson as it will help smooth out the edges, give you much needed perspective, and keep your emotional state where it should be.