The Value of Conviction

The flipside of this U.S. market skepticism — for myself and many members of the Taipan team, at least — is a strongly bullish stance on emerging markets. Where does this conviction come from? Well, not to be too fancy about it, it comes from looking around and seeing what’s happening.

This isn’t rocket science. Part of the trouble with the U.S. economy right now is that consumers are tapped out and the banks are hemorrhaging cash.

If you flip that around, you get a much-preferred scenario where banks are sitting on massive piles of cash, and consumers are sitting on big savings piles of their own with low to no leverage on top. Does that scenario exist anywhere in the world? Yes it does — in many of the emerging markets.

Or to put it another way, just look at where the growth is. Look at where the money is being spent, and what it’s being spent on. Look at what China is doing in places like Africa. Look at countries like Taiwan, where they’re about to drop a cool 1.2 trillion in New Taiwan dollars (that’s almost $40 billion U.S.) on a massive airport renovation. Look at the banks in countries like India, where they don’t need insane leverage to turn a profit because the line for new credit cards and bank accounts goes out the door and half a mile down the street. When you put aside the hoopla and just think about the long-term logic of it for a moment, the picture becomes clear.

Conviction is key because it gets you through the head fakes. Few investors like head fakes. It’s not fun seeing your portfolio get shaken, rattled and rolled. And yet, without head fakes, it would be harder to make a lot of money by being right. How so? Because head fakes shake out the “weak hands” and let you take on their positions at favorable values. Head fakes make conviction valuable… and conviction is almost always in short supply.

What’s more, there’s nowhere head fakes dominate more than in the short term. The rise of fast-moving hedge funds have only made this more true. Down big one day, back up again the next — it’s all part of traders playing the game. Short-term movements are all about the technicals; long-term movements are all about the fundamentals. (This is why it’s impossible to make money as a swing trader without paying attention to charts… yet also why long-term investors like Mark Mobius or Warren Buffett can make do with no use of charts at all.)

In the shorter time frame, gamesmanship is everything. It’s all reading the charts, shucking and jiving. In the longer time frame, it’s all about patience. If you’re strong enough and patient enough, you can just wait.

The trouble with these breathless pundits who get all excited because the dollar has gone up for two trading days in a row, or because gold has given back a few bucks, is that they’ve got their time frames all screwed up.

They see a little gamesmanship — a little technical riff-raff — and all of a sudden they’re throwing out hopeful ideas with a longer-term flavor that are pretty much grounded in nothing at all. You don’t want to buy into that.

Two Ways to Lose Money

One of the joys of poker is observing other players and learning from what you see — taking in the good, the bad, and the just plain ugly. In poker, the Yogi Berra maxim holds true: “You can observe a lot just by watching.”

Yogi’s maxim also holds true in markets. What’s remarkable is how many people don’t observe; they just swing from one emotion to the next without really stopping to assess what’s happening.

One of the things I’ve observed over the years, in both poker and markets, is that there are two kinds of player who consistently lose money: the tricky-trappy types and the ever-hopeful types.

By “tricky-trappy,” I mean players who are always trying to be too cute for their own good. In poker, this means trying hard to salvage a bad hand out of position when you really should have folded, or slow playing a dangerous board when you should have bet out strong. In markets, this means trying to catch every little market turn, getting fancy when the wind direction shifts even the tiniest bit.

And by “ever-hopeful,” I mean players who don’t really have a plan or any type of working analysis. Instead they have a gut feeling and a “hope” that whatever they’re mixed up in will work out for the best. In poker, this means chasing after that four flush even though your odds were garbage from the start, or calling down to the river with your medium Ace because, well, “maybe” your hand is best. In markets, it means listening to pundits who are mired in the bad habit of mixing up short-term technicals with long-term fundamentals, and showing no real working knowledge of the two.

Go Big or Go Home

If you really want to make big money — real money, the kind of money you can retire on — you’ve got to go with the big trends. There is a lot of money to be made in short-term trading, too, but even there, it’s easier to trade in the direction of the prevailing trend.

To illustrate my point, check out the following monthly dollar chart.

As mentioned, many a pundit right now is excited about the dollar’s chances for a short-term rebound. To which I say, “You want to go long that thing? Go right ahead… be my guest.” As for me, I’d rather not waste my time. Why sail into the wind?

There are indeed times to be tricky and trappy, but they are relatively few and far between. One difference between a pro and an amateur is that the pro has learned, often the hard way, that being cute is usually more trouble than it’s worth. And when you can look for great entry points in markets where the trend is working for you, instead of against you, why would you want to mess around for a few bucks trying to catch a dead cat bounce?

Yikes, didn’t mean to get off on a rant there. Oh well, too late now. This type of thinking, though, helps explain why Taipan on the whole is so excited about certain opportunities in areas like commodities and emerging markets.

When you look at the big trends — the big, BIG trends — some of this stuff is really plain as day. Trade on and trade well, but don’t lose sight of where true opportunity resides.

The poker room is calling. Enjoy your weekend!

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