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A post every trader should read, especially new traders.

December 18, 2017

Having a 34 career as a stock trader, I’ve experienced some incredible times in the stock market, good and bad. Today I’m going to talk about a few of the more tumultuous times.


For those of you that think it’s different this time around or that the market simply won’t go down 5 or 10%, let me offer the following bit of perspective:


In 1987, the Dow Jones Industrials fell 22.61% in a single day! It was the worst one-day decline in history known as Black Monday.


I was there.


I saw the carnage, and fortunately I was out before it occurred. But many weren’t so fortunate. I remember seeing on the news people jumping out of windows committing suicide and investors walking into brokerage offices and shooting their stock broker. Oh yeah! This actually happened.


Now think about that for a moment in today’s terms. That would equate to a 5,800 point drop in the Dow in one day! What do you think would happen if that occurred?


To say it is amusing that some investors actually get offended from a Twitter post about a possible 5% market pullback, would be to put it very lightly. Actually, it is the most comical, complacent, arrogant, neophyte sentiment I have ever witnessed in my more than 3-decade trading career. And I’ve seen some bubbles.


Remember the flash crash back in 2010, when the Dow Jones Industrial Average dove 1,000 points in a few minutes. It appears many of today’s traders don’t, probably because many of them were wearing diapers at the time (at least metaphorically in terms of market experience).


I was there. I saw the carnage.  Fortunately I was out before it occurred. But many investors weren't so fortunate.


The 2000 bear market took the NASDAQ Composite down more than 75%; the average tech was down 80-90%!  And just when you thought it was safe to go back in the water, just five years after the conclusion of one of the worst bear markets in stock market history, the 2008 bear market came along and took the Dow down more than 50% with many of the largest companies on earth (like GE, Citgroup, AIG) shedding more that 90% of their value and some even going bankrupt.


I was there. I saw the carnage. Fortunately I was out before it occurred. But many investors weren't so fortunate.


So, here we are in 2017. And the bullshit is starting all over again. Bitcoin is going to a million. The market can’t go down 5%. People I haven’t heard from in 20 years are calling me to ask if they should quit their day jobs to trade. Folks, if you don’t see the writing on the wall, then you deserve whatever is coming to you.


I think we are likely in a secular bull market. But I also know from experience (like 1987) that those cyclical swoons can be real doozies. Like 1998 for instance; a 512 point slide on the Dow or 8.5% on the NASDAQ Composite in just one-day! That turned out be right in the middle of a cyclical bear market a year before the secular top was formed in 2000. 


This market seems to have all the makings of a mania. Could it go higher? Sure. Most manias go further than everyone expects. But will there be a price to pay if you don’t respect risk? Absolutely!


Just remember, those who fail to study and learn from history are doomed to repeat it. And, a fool and his money eventually part.


If you don’t have a plan for dealing with the opposite side of your long trade, then all I can say is good luck, because you’re going to need it.

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