Why focusing on risk is more important for long term success in the market

Apparently it is not only me who stands on the bearish side against the mainstay in the past few weeks. My trading friend forwarded me a note from a very successful trader who makes his living by trading and has retired by age 40. Here is what he said in the context of his bearish view for the market in the past few weeks and being obviously also too early timing-wise:  

“But, being a successful trader over the long run isn’t about maximizing profits. It’s about minimizing risks… Rather than trying to squeeze the last penny out of a profitable trade, traders are usually better off moving to the sidelines when the risk of an adverse move outweighs the potential reward.

Most folks lose money in the stock market because they let their emotions dictate their trades. They buy stocks into overbought conditions because they fear they’re missing out on potential profits. Then they end up selling stocks in a panic when the market falls because they fear the world is ending.” 

As I’ve acknowledged, I was too early for sure this time. I basically started to actively short the market when S&P reached 3030ish as I doubted any gain above that was sustainable. I was wrong of course in terms of timing and S&P kept moving up all the way to 3150. It seems I have not only missed the opportunity completely for the up move but could have lost hefty for my shorts. NOT AT ALL! Here is the note I sent to my Family group Tue:

First of all, it is a great day for me when the market is "plunging" (although just a mini crash so far). As I have said, when I'm looking increasingly foolish by betting for the downside while the market is making new highs every day, I know the turning point is not far away. I have been experiencing this many times before. No difference this time. Yes, I have been too early by many weeks but given my conviction of the downside risk, I was also increasing my short positions when the market kept increasing. So my average cost for the shorts was substantially reducing as well. That's why such kind of fast downside move, even a bit tiny from the overall perspective, is still very meaningful for me, especially I'm playing with options. That's why I'm taking many gains off the table today given the short term nature of my option trades.

Basically I was doing two things in the past few weeks when being “foolishly” betting against the FOMOs: I was adding more and more shorts to have my average costs cut down. This has allowed me to make some good short term gains when the market finally shot down with VIX jumping up about 50% within two days early this week. 

 I was also adding some value dividend stocks for DRIP that have been beaten down but showing a good sign of bottoming. While for such long term DRIP stocks, short term gain is not really what I’m looking for but some of them have also been brought up quite nicely along with the euphoric market. No complaints here as well!

I’m glad that I took off my gains from the short term shorts quickly as the past 3 days of rebound has been enormously strong. I expected there would be a good rebound to climb above 3100 again but I doubted it could straightly make new highs without another leg down first. Oh, boy, today’s frenzy buying was unbelievable! S&P is just a spit distance from its all time high. We are quickly approaching the seasonally bullish period with a Santa Clause Rally brewing. While I’m still not totally convinced about the sustainability of this rally, as a trader, I don’t want to blindly fight against the seasonal trend. Right now the market is driven by two major tailwinds: the very strong jobs report (you really need to thank Trump for his pro-business policies regardless you like him or not) while still no inflation in sight and an olive branch from China by waiving the tariffs on soy beans and pork, which may hint an anxious desire on the China’s part to get the phase one deal done by Dec 15. I’m cautiously playing the long side now betting on some stocks that are seasonally bullish in the next few months. I’m also very selectively betting on the short side on those overbought stocks showing technical weakness. If the market itself goes into extremely overbought condition, I will then also short it outright but this time I want to be patient and don’t want to be too early as I tend to be.