Don't predict but be prepared!

First of all, let me share what I wrote a year ago (Feb 28, 2020) when the market started to fall apart, following weeks of roaring bull run: 

I must confess with some sort of guilty feeling that it is quite a fun to see the mood swing from one end to the other. I know for those who are stuck in the sudden and drastic sentiment change either way (up or down), it is no fun to them at all. And it can be quite painful I know. On the other hand, have I warned repeatedly about the coming risk that can be severe and sudden?! I have seen some feedback to such kind of friendly early warning that without the exact timing, such warning is meaningless. Really? As I said many times before, trying to squeeze into each inch of highs by FOMOs without caring the downside risk is a sure way to lose and those are the ones who may deserve to be punished. I may sound brutal but it is always better to be bluntly honest about the potential risk when it is incrementally elevated during a euphoric phase. One thing I have learnt to judge the severity of a euphoria is that when I have to actively defend my warning for a risk, it usually means the turning point is near if not yet in. That's because when people are so high in mood, it is really annoying for them to hear anything different from the current trend. I call it "dreaming syndrome". You see, when people have a good dream and if the dream is interrupted in the middle, it can indeed be very annoying! But I'm sorry, it may also be a good thing to stop such kind of dreaming, especially if that good dream may lead to some dangerous behavior like dream walk. So do pay attention to my warning from time to time, even if a bit annoying!!😋

I have the feeling that the market is setting us up again that may eerily follow the exact same script to fool people in first and then strike with a seemingly out of blue event leading to a bloodbath panic! The feedback I have got these days to my constant bearish talking is quite similar to what I got a year ago. If I turn out to be correct, it will be another powerful proof to the statement: History may not repeat but often rhymes! 

But my real purpose for today's blog is somewhat different in angle: I think most folks out there are asking the wrong question regarding the market risk. For them, their only interest seems to be: what the exact timing that the market will correct and if so to what extent. If you cannot give them the right timing, then you are just a stupid crying wolf. Here is the typical feedback I often see: 如果你不断预测市场会跌，你总有一天会猜对的。Sound like very "wisdomful", right? In addition, a general assumption is that, if you are bearish overall for the market, you won't invest or trade for the upside and therefore you must have missed the great return from the bull run before it ends. Sounds also clever, right? Wrong! Actually if you are those keeping asking this kind of questions or making such assumptions, you are really naïve and gullible to say the least!!   Here is why.

For the smart money, those who are really experienced in the market, the critical question they care most is not how much money they can make but rather how much money they may lose if they are wrong. So the right question for smart money is not when the market may fall or crash but if anything devastating happens suddenly, am I well prepared and to what extent? With this kind of mindset in place, you can imagine how much they will stay away from the hotly chased stocks but become more conservative in trading and investing as a whole. While I'm not really smart, I do have a lot of direct or indirect connections to very smart people in the Street; some of them are gurus of gurus with a great track record of decades long successful investing career. So here let me share a few quick tips what smart people are doing when the market is going roaring highs with substantially increased risks. Just be aware, below I will share a few examples of my personal trading or investing just for the purpose of explanation but none of them are good for buying anymore due to great risks already piled up for them.

•   Accumulating cash

This is typically what smart money are doing during the euphoric and bubbly market condition. This is also the safest way to ensure any black swan event, when hitting, won't cause too much damage to the overall asset. They can accumulate cash via newly earned money as well as by selling red hot positions that they are holding, partially or fully. There is the Wall Street cliché: you will never get broke by taking profits!

• Looking for low risk opportunities

Yes, even in a nosebleed bubble market, there are still some sectors that are greatly lagging behind and showing great values for trading or investing. Smart money are generally more interested in such deals with a much greater safety margin than chasing highs to red hot stocks. Below are some of my examples that I bought (often via options) when they were quite depressing and their current gains since I bought them. Again, just for information purpose and by no means for recommendation.

These include income generating stocks, uranium, cannabis, EV, biotech and bitcoin etc. Sure none of them are cheap now by all means but when I bought them, all of them were deeply down into the water and hardly anyone was interested in them! I'm pretty sure a lot of smart money is making killing by just doing conservative investing without high risk chasing. I'm also selling part of these positions for accumulating cash nowadays or using selling options to hedge the paper gains. 

   

• Buying insurance

When the market is boiling, the VIX tends to be depressing. As such put options tend to be cheap. So buying some cheap put options is a great way for smart money to hedge their portfolio for protection. I often play with VXX call options when there is a clear sign it is ready to pop. Using VIX put/call ratio, it often gives a nearly crystal ball signal for the near term volatility trend (either up or down).

• Lastly, speculatively shorting fervent stocks

This is of course not for most people but for smart money, they often do so to make some quick money. One great example is the recent crazy GME short squeeze saga that drove a few famous hedge funds out of their shorting businesses but I'm pretty sure a lot of naïve FOMOs were chasing GME all the way to its epic high nearly $500, expecting it would continue to do moonshot to $1000! I was speechless to watch all the sage playing out and could not help but short it. If you follow me closely, you certainly know my nearly perfect call timing wise: Long squeeze, almost to hours. Below are some gains from my short that I have closed just within a week or two:

Per the information from some friends, some kids got so crazy that they even used their wedding money or line of credit to chase GME. Unfortunately most of them got killed terribly by losing tons of money from the epic up and down gyrations. 
By the way, after losing over 90% within days from its all time high, GEM is struggling around the level of $50ish at the moment. I think there is a good chance it will try to mount another rally attempt that may bring it up towards $70 or even higher. Right now, I'm trying to go long for GME for the potential rebound, followed by another short if indeed it follows the script!

I hope this blog can help you to truly understand what is the most important question for investors if you want to be consistently successful in the market. Understanding the market risk does not mean you cannot trade or invest. It only means you need to be prepared appropriately when the inevitable market bombshell that will come eventually. You don't need to know the exact timing but by doing so, you will feel safer when most of naïve market players are often caught off guard and then immediately turn from extreme euphoria to panic! Remember this:  The market has a habit to punish the most people the most!    

PS:

I have registered as 深山老林 at SafeChat (SC) (You need to download the SafeChat app first) and have set up a new SC chat group. I'm gradually shifting our major social media interactions to SC instead of WC. If you'd like to join my group, sign up a free SC account easily and search for me and connect me as friends.  For friends sharing  similar conservatism views, let's come together to form a better chatting group that won't be constantly disturbed and harassed by the insane radical censorship!