A strategy to steadily recover from a steep downturn with a “no-cut loss investment strategy”

“I can calculate the motion of celestial bodies, but human madness I cannot handle.”

Isaac Newton

Michael Batnick

“Big Mistake (Nikkei BP Marketing)”

September 24, 2019, First Edition, First Printing

From P.63

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Hello, this is Shimoyama.

Stunned by the sudden crash.

“Huh, why is it dropping so much!?”

and,

with my heart rate rising,

I rush to check the economic news,

the headline reads, “Decline due to concerns over the spread of the coronavirus.”

With unrealized losses that feel like a hole in my stomach,

my emotions become unbearable, and I end up hitting a stop loss.

But even now those emotional wounds have not healed…

There are probably many people in such a situation.

What’s done is done; there is no helping it.

You must accept it.

Even if the amount is so large that it’s hard to shift your mindset,

there are still those who struggle, but

the only way to save yourself is to use it as a valuable lesson for the future.

The worst thing is when your mind runs wild and you think,

“I must recover the money I lost at all costs,”

and engage in high-risk trades.

When your mood is down, you can’t make a sound judgement.

It ends up widening the wound.

You must calmly accept reality for a new future.

There is no life without mistakes.

Even Warren Buffett makes mistakes many times.

But what truly sets Buffett apart from ordinary people is

that he acknowledges those mistakes.

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In reality, acknowledging that mistakes are part of the game is a strength of Buffett.

Buffett has, over the years, in his annual letters, used the word “mistake

163 times.

Like ordinary investors who place small bets, Buffett is not completely free from sloppy investments.

Michael Batnick

“Big Mistake (Nikkei BP Marketing)”

September 24, 2019, First Edition, First Printing

From P.135

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If you’re currently in a painful situation,

there is only one thing you should do.

Admit your mistakes honestly and shift your mindset.

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Remove rather than add

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However, one caveat here.

When you suffer a major failure,

many people have a tendency to add something new.

For example

“Next time I’ll study more about economics to avoid losses.”

“I’ll study investments.”

“I’ll read the Short-Term Market Reports (Shikiho).”

Many people think, “I was lacking this or that.”

But is that what you should do for the next profit?

No, it isn’t.

Instead of trying to add something, you should remove what you don’t need.

ruthlessly strip away what is unnecessary and devote yourself to discerning the essence of stock trading.

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Economic news is really arbitrary

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So what should you strip away?

One thing to strip away is

“looking for a reason for stock price movements.”

For example, consider this:

When stock prices fall sharply, what is the first thing you think?

Probably, “Why did it fall?”

Many traders want to know the reason when prices move dramatically, but…

my view is that

for the fallen price, reasons for the move are often irrelevant.

Because, in most cases, the reasons reported in the media are arbitrary. (Not all, of course.)

For example last week, both the Dow and the Nikkei average fell sharply, and there were big reports that it was due to concerns about the coronavirus,

but in the first place, no one knows the real cause of the decline.

Someone sold stocks, and that caused the price to drop; that’s all.

It is impossible to ask every seller why they sold, so we don’t know whether they were worried about the coronavirus.

There are likely sellers for reasons other than the coronavirus, too.

But, reporting in the news as “the reasons are not well understood, but prices fell” is impossible, right?

So usually, reporters simply guess the most plausible reason and report it.

What is the point of knowing such uncertain reasons?

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People who feel anxious when they don’t know the reasons

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Of course, the feeling that “not knowing the reason makes me anxious”

is understandable.

For example, when the train stops during your commute.

If the reason isn’t announced,

it feels very uncomfortable, doesn’t it?

If someone is sick, or if luggage is stuck in the doors,

without some reason announced, many people get irritated.

Like that, when stock prices fall and the reason isn’t known, you feel anxious, and that’s understandable.

That is human psychology.

However, knowing an uncertain reason afterwards to feel relieved is ultimately meaningless, and

a person who is swayed by such things cannot become a winner.

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Investment strategy to survive a crash without a stop loss

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And another thing to strip away is

“Stop loss.”

Stop loss is described as fundamental in every investment book, but

I oppose that teaching.

Can you actually execute a stop loss when you want to?

Even if you resolve, “If it drops to this point I’ll stop loss,”

you may fail to keep up with the rapid decline, miss the timing, and

drag it out until your mental limit is reached,

and eventually you sell at the worst possible moment,

having stopped out at the worst timing.

Stop losses are easy to say, but very hard to actually execute.

Therefore, I believe you should hedge risk using methods other than stop losses.

For example, holding both long and short positions.

I’ll illustrate this concept with a simple example.

If you buy at 23,000 yen and the price falls to 22,000 yen,

you should not stop loss at this point

but instead place a short position to halt the growing unrealized loss temporarily.

That would be a 1,000 yen unrealized loss.

Then you aim to gain more than 1,000 yen in another position and offset the loss through a close-out.

Roughly, that’s the flow of the method I actually use to realize profits.

Of course, this short hint cannot fully explain it,

but those with good intuition will likely feel the usefulness of this method from this brief explanation alone.

Crashes will happen again.

Sometimes the Nikkei Average can fall by 1,000 yen in a single day.

I hope you do not make a big mistake and instead can gain substantial profits when that happens.

With that, please continue to the end today as well.

Thank you for reading until the end.

Keizo Shimoyama