How This Bear Market Is Different

March 22, 2020

When the NASDAQ peaked and crashed in 2000, that was something. In hindsight, it was an appropriate ending to an unprecedented rise in speculative investing that the markets hadn’t seen in generations. It was really the only way that could resolve.

And when the bubble popped, a bunch of Johnny-come-lately speculators who’d never been on the other side of the margin blade got cut. Forced liquidations were inflicted upon thousands and thousands of amateur speculators who levered up as much as they could to ride the wave that was being powered by the then new internet that was changing the world.

Lots of people lost a lot of money. Savings and retirement accounts were wiped out. It sucked. But it was only money. People learned expensive lessons about risk management and life went on.

In 2008 when the financial crisis started spinning out of control, a similar tale to the NASDAQ speculative bubble was unfolding in the housing market, outside of the stock market. Of course, everything in finance is connected and the troubles in the housing and banking & lending sectors infected the stock market and crushed stock prices.

A bunch of Johnny-come-lately house flippers and households that took the bait on low interest, adjustable rate loans for houses that were way above a reasonable price range for their circumstances got burned.

Lots of people lost a lot of money. Savings and retirement accounts were wiped out. It sucked. But it was only money. People learned expensive lessons about risk management and life went on.

The thing about both of those Bear Markets was that as painful and as scary as they were, it felt — to me — that the troubles it wrought were only felt by a subset of our population. And as cold as it might sound, many of the people who suffered financial losses during those periods were people who probably deserved to suffer those losses (myself included). This is a very broad generalization, don’t @ me.

The bigger thing that was important during those two previous Bear Markets was that as much as the financial losses sucked for a lot of people — most of us still got up and went to work the next day. We still had paychecks coming in. We still went out to restaurants to eat. We still shopped. Our kids still got dressed and went to school every day. We still visited our doctors for our regularly scheduled checkups. We still enjoyed picnics with our friends. We went to concerts. We went to the beach. We made plans.

This time is different.

What we’re all feeling and experiencing now is nothing like what we’ve endured in the past. This is affecting everyone — worldwide. It doesn’t matter who you are, where you live, and what you do for a living to earn income. This effects everyone.

And nobody knows how long it will last.

As a trader, the goal of risk management is not to protect against losses. Losses happen. They are the price of admission in this world. Anyone who tells you they can entirely remove the risk of loss from their trading is lying to you. If there was no risk, there would be no profit. The goal of risk management is to protect against catastrophic loss. Big losses are game enders. Career enders. Family finances destroyers. Mental and physical health devastators.

I’m trading in this environment. I’m defining my risks to the best of my ability. And I’m closely watching my positions and making adjustments as needed, according to my risk management plan. My executions are a little bit sloppier than I’d like as markets gyrate all over the place in a blink of an eye. There’s only so much I can control, but I’m executing on my plan.

Know what’s important, know what I can control, and focus on that.

~ @chicagosean

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