Today the stock market reached new highs
, but I choose to sell out my stocks, going into cash, last Wednesday, when the stock market was up in the morning. It was down that day and fell dramatically the next. I felt pretty good about my timing at the time, but today, the stock market is up strongly again. It will probably be up again tomorrow. Does this mean I made a bad decision on strategic timing?
The simple answer is no. The most non-intuitive part of strategy is that it teaches that trends cannot continue in a straight line. They must reverse themselves at some point. A long term trend is defined by a series of reversals where one direction, the up or down, has predominance over time. A straight line is not a trend. It is a fad or a bubble.
Sun Tzu teaches that all sustainable dynamic systems exist as a balance of complementary opposites. In markets, fear and greed are two sides of the same coin. The pressure of greed is balanced by the counter-pressure of fear. A system without such balances cannot sustain itself. It is a skyrocket: zooming in the air only to explode. Dynamic systems develop solid positions over time in a certain pattern. Greed builds up the position. Then fear knocks down all but its most solid elements. Then greed uses those elements as the foundation for a new building phase.
Remember, uncontrollable chance, in the form of the key element of climate, is a part of every position. You cannot plan to win every move because chance plays a role. So you plan to lose as few moves as possible and win an advantage in the safest way possible.
Someone not schooled in strategy looks that the recent trends in the market and thinks: this marketing will continue to go up. For a strategist, a continual trend in one direction makes a reversal seem more and more unavoidable. You feel the tension build toward a reversal. I have decided to stay out of the market until it comes. I may miss weeks or even months of upside, but consistent success comes from avoiding the downside. I have been consistently successful because I refuse to gamble.