The Entry Points
One of my buddies, a very bright and intuitive guy, sent me an email which included a recent conversation with an acquaintance of his. My buddies’ acquaintance (we’ll call him WH – Weak Hands) certainly sounds well-read and intelligent, but he has no conception about what markets are truly about, and how they actually operate in the real world. WH seems to have developed his “crash mentality” via what others have been touting for years – the stock market is going to crash because of….the Fed, the debt, Obama, Trump, the Plunge Protection Team, blah-blah. So unfortunately this gentleman’s mind has been hijacked by the scam artists, and he has put his money on the line/made bets based upon total hype and emotion. During the last 8+ years there have been so many “low-risk” profit opportunities, but WH has chosen to “fight the huge uptrend” in the stock market. And the other unfortunate thing is he has been fighting the uptrend for so long, that when there is the totally,100% normal huge selloff in an uptrend, he still won’t break even. And he may even add on to his losing position, probably right into the incredible buying opportunity which is coming down the road. I hope he’s right about the “stock market bubble” and the “stock market crash”, because it will be an awesome buying opportunity.
WH is an official member of the Weak Hands Club. How do we know that? Because he is guessing. predicting, using economic statistics, and making his bets based on emotion. Why? Because that’s what the geniuses having been telling him to do for the last 8 years. They’ve been wrong this whole time, but for millions of people, they have no ability to discern competence from incompetence. He should have learned by now, and transformed his ways, thus becoming an ex-member. But it sounds like he’s getting more cocky and boisterous. He has proven that by buying, and holding 3x leveraged ETFs, and by seeming to be more confident – even though he’s getting clobbered. Never, ever hold the leveraged ETFs. They are for daytrading, or for a few days max. That includes the gold miner ones NUGT, JNUG, JDST, etc. There are many brokers who have gotten their clients into all of these leveraged types of ETFs – truly disgusting. Of course, during the conversation WH references the VIX, yet he has no idea what it even is. But who cares, the stock market permabears love talking VIX, it makes them sound smart. My friend did his part to try and get WH to listen to some sanity. But most everyone involved in markets fixates only on the outcome (which they have no control over), instead of the entry point (which we have total control over). In other words, the RISK is no where in their calculation.
Here is the email with the conversation:
I was chatting it up with an acquaintance of mine, nice guy, intelligent, mature(60’s) etc.
We start talking about world events, the economy a bit and he’s like: “I’m buying 3x leveraged ETFs – UVXY, VXX, FAZ – to short the market, been buying them since last November” (Trump play I guess).
In chatting, he thinks the market is propped up (by banks, governments etc). And PMs are suppressed and the stock market is going crash, (he referenced the VIX). But the positions he’s taken have gone against him and he’s down like 35% and 45%…. he says it’s like an insurance policy, and he’ll keep buying (I guess til the cows come home).
So I asked, “what if the market corrects, are you ready to take a profit?”
He’s like: “correct how much?”
Me: “5%”
Him: “15-20% is a correction, but I think it’ll go down 50-70%”.
I kinda leave it there and ask, do you have yourself in anything else?
Him: “I’m in real estate. I bought my house (manufactured housing, nice park) for 8k. I put 15k + sweat equity into it and just sold it for 60k… I’m gonna rent a year… I expect the RE market to correct, and then I’m gonna buy land and build and sell”.
Me: “If it corrects, it may go on longer than a year” (hinting at his timing logic making no sense).
Him: “Yeah I bought in 2006 and tried to sell in 2008, that wasn’t fun…don’t want to do that again… (implying that waiting till just after the peak is a better entry point I guess).
He goes on: “I’m not going to live in it… just build and sell”.
Me: “What about capital gains” (thinking that selling within 2 years you get the tax hit).
Him: “You always will have taxes, and I plan to use an S-corp”. (I’m thinking, is that a legit loophole?)
In the following days he sent me a couple confirmation biased echo chamber videos about markets etc… one on the day when things started to go down a bit….(hinting that the SHTF is about to happen).
I’m like : “Yeah, market is ready for a good correction…you might consider taking a profit when able. Then maybe be able to play with other people’s money at that point (remember, pigs get slaughtered) – maybe try not to hit a home run, but a base hit and stay in the game”.
His approach to me seemed to be about hitting home runs, and catching falling knives long enough to take a profit, but miraculously not get cut.
His space rent on his manufactured home is like $600, his rent now likely $1100-1300/month…but he’s got the timing of RE market so dialed that he thinks:
1) it’ll correct in about a year
2) he’ll be able to buy land (scarce around here in the Northwest, urban growth boundaries). Build (using a builder he knows), and sell, pay taxes and make a worthwhile profit.
3) until then he’ll be paying $5-7k more a year on where he lives..eating into his profits… tick tock….tick tock…
And it seems like the only time he’ll be prepared to take a profit on his leveraged ETF (which price decays every single day), is when the market corrects 50-70%. The only things which will fall 70% are his 3x leveraged ETFs.
My final take away was how I used to be where he was… and how glad I’ve given this arena my attention – and that I’ve got a good mentor. (Thanks for the lessons bro!)
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