Tuesday, April 21st, 2009
Energy, cycles, and short selling
I try to jog at least three or four times a week. Each time I run I notice my energy moves in cycles. I oscillate between high-energy surges to low-energy, painful dips where your mind and body scream to stop. Bizarrely, the worst dips are actually at the start of my run.
For a while I tried to “muscle through” the dips; ie I’d tell myself to be strong and adopt an aggressive posture. But in the last few weeks I tried something new: I’d just try and relax when I experienced a dip.
An interesting thing happened: the dips still happen, but they don’t last as long; I also seem to explode out of them when they end. There are other benefits: I can run longer and faster and my running style overall is more fluid and relaxed. It’s clear now that I was wasting an enormous amount of energy fighting the normal rhythms of jogging.
THE POWER OF FULL ENGAGEMENT
Recently I’ve been thinking a lot about cycles, their benefits and how to handle them. One of the reasons is that I’m re-reading The Power of Full Engagement, an ebook I downloaded years ago by performance psychologist Jim Loehr.
The book has a simple thesis: we need to focus on managing our energy; not our time. Energy – physical, emotional, mental and spiritual – is used optimally in waves or cycles, with energy expenditure balanced with periods of rest or energy renewal. “We are oscillatory beings,” he says.
That may seem obvious, but as most of us know it’s easy to end up ‘flat lining’. We’re all so busy, it’s easy to forget to schedule in breaks – or what Loehr calls ‘strategic disengagement’.
Loehr says a good example of cycles is in tennis. He found the top players created rituals between points that served as rest periods where energy levels were rejuvenated. Elite players over a long match were able to perform at higher levels because they were constantly recharging.
CYCLE TIME FRAMES
Cycles occur in all time frames: daily, weekly, monthly, annually and even longer periods. Every trader should analyse what they do at all those time frames to see if they are using energy optimally and to schedule in “strategic disengagement” rituals.
At the daily level, a few things I’ve done are to alter my diet, and working and reading habits. I realised one bad habit I’d developed is eating a sweet snack for morning tea. It meant I’d get a short lift, but then get a nasty blood-sugar crash. I’d lose energy between the morning tea and lunch periods and become very unproductive. I’ve also learned to schedule in more breaks; that’s simply a matter of getting up and walking around, and doing some deep breathing every 40 to 60 minutes.
As Loehr says, managing mental energy is also crucial. As an information junkie I had a tendency to read even during breaks: either mindless surfing on the internet, or reading books, particularly trading books. My brain never really got a break. I now ban any non-fiction reading after 6pm and try and get away from the computer during breaks.
At a longer time-frame I’ve realised how important it is to plan holidays properly. We’ve always had a rough idea of when we’d go on holidays, but lately it’s been coming down to taking a break when we’re exhausted. It would be much better to, say, plan to work for 11 weeks, then schedule in a week’s holiday after that. With maybe a smaller break somewhere in there as well.
I’ve found that accepting cycles is actually psychologically liberating. There is nothing more draining than looking forward and seeing never-ending activity. As Loehr says, life should be a series of sprints, not a marathon.
CYCLES AND SHORT SELLING
The stock market is another obvious place where cycles are important. One thing I’m curious about is people who have longevity in trading; ie are still trading in their 50s, 60s and 70s.
One of the keys is they seem to engage in ‘campaigns’ – they prepare for a certain market scenario, when it arrives they go full throttle, then when the conditions stop they retreat into the less strenuous activity of waiting and preparing for the conditions to return.
That, of course, is easier to do as a private trader. A hedge fund trader can’t wait out a bear market for a year or two in cash. Yet that’s what many of the great private traders, such as William O’Neil, do.
I think this is perhaps one of the major reasons for not short-selling – at least during a bull market. Combining long and short selling effectively means a trader is constantly at war; or flat-lining. That obviously is the whole basis of short selling: to try and remove the market’s natural fluctuations.
But from a performance perspective, it removes the natural engagement, disengagement nature of market cycles. Of course, a viable option when both buying and shorting is to schedule in breaks. But that’s easier said than done; when you have tool available, there’s a tendency to use it when you can. (One caveat is to being long-only, is that you need a profit-taking or market-timing system).
From my own perspective, looking back at past bull markets, my failure to accept corrections as part of the normal bull movement probably affected my performance. My system was to be long and leveraged, but then try and quickly go short when we entered a short-term correction.
Short selling did limit my equity drawdown somewhat. But I’m now convinced I should use those corrections to look for opportunities on the long side, rather than frantically trying to avoid a bigger drawdown. The constant activity meant there was no natural cycles or breaks, which resulted in me being ill-prepared and defensive when the market moved out of the correction and made another big leap.
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