Why boxing is quite like investing
So a friend I have made over the last couple of years, and who has become one of my closest, was once an amateur boxing champion winning essentially all of his 60-odd fights by knockout as a heavyweight. I've only known him for 2 years, but I have heard stories of fights outside of the ring and, despite him being about as mellow of a person as I have ever met, there are a couple of folks out and around who are leary of him.
I like asking him about boxing and fighting, because I have no experience with either. Here is an approximate conversation we had the other day:
Check: "So do you think you could knock that guy out?"
Check: "he has you by 50 pounds and his forearms are the size of my thighs"
Zeke: "Size doesn't matter that much, Check"
Check: "what about that guy?"
Zeke: "Check, you just don't udnerstand fighting because you've never really fought anybody. The whole fight is decided when the first punches get landed. Before the fight, everybody thinks they are tough and when they get hit it won't hurt and everybody has a plan. But getting punched hurts, it really hurts, you see stars like in the cartoons sometimes. I bet I have seen stars 100 times."
Check: "i imagine"
Zeke: "And that is why I won all of my fights, check, is because I have been hit before plenty of times, and I know its going to hurt, alot, and I am ready to deal with it. The other guy gets hit, it hurts him, and that surprises him, because he thought he was so tough that it wasn't going to hurt, and so he more or less just stops fighting, for a second or two or even for good. That big guy over there might be able to beat me in arm wrestling, but he has never been punched in the face by anybody as big as me that would hit him as hard as I would hit him, and he would get surprised and stop fighting for a second, get hit two more times, and that would be the end of the match. If he hit me it would hurt, it would really hurt, I'd see stars, but I'd keep fighting"
And it occured to me as Zeke was giving this nice little speech on the art of boxing - his point is that its the ability to take a punch that makes a good boxer - that this is quite a great deal like trading/investing. If you get hit (are wrong or leaning the wrong way or possessing of bad timing), how do you react?
So many people (self included at times) see stars when the market punches them, and I think that a great deal of our long-term returns are defined, like in boxing, in that moment, when you got hit, and it hurt, and you're seeing stars. How do we react?
The real question is, whats the best thing to do today?
Each day or week or month (depending on your style) you have to sit down and rationally decide what the best choice is as though you just walked into the market fresh. When you've been up for 28 straight days, you have to sit there and make sure that staying in the same position on that 29th day (week month) is the best choice. If you're down 30% in a week, same thing, you have to sit there and figure out what is the best choice as if you were fresh to the market and hadn't experienced that drawdown.
For me, today, the question is do I continue to hold my basket of financials (which has been the biggest piece of my portfolio for 26 months, and which has underperformed since roughly October of 2009), or do I take my lumps in the tax department, sell them, and roll the money into a hedge fund or something else? If I was fresh to the market, would I invest 80-85% of my money into a hedge fund or another strategy, and throw away 15-20%, or would I put 100% of my money inot that financial basket (BDCs with ARCC and MCGC being the biggest, insurers with XL, HIG, and CNO being the biggest, and not much in the way of bank stocks, although I have a meaningful stake in BAC). The 18 month underperformance of financials is the punch, I guess, although my basket has outperformed broader financials. I have a date with 3 reb bulls, 3 cups of coffee, one laptop, some headphones, and this question this evening.