Weathering stormy markets

Njabulo Nsibande Latest, Village Trader

Umbrella protecting money from debt storm against grey roomOn the 8th of March 2022, my portfolio was down 31.9%. It had recovered slightly after being down 35%, but it was a windy couple of days in the markets. That wind was strong enough to shake the tree that is my portfolio, but I can still come out the other side of the stormy weather in pretty good shape. Here’s how I manage to ensure that the roots of my tree are strong.

Firstly, look at the leaves on the floor

Only give away singles

Your portfolio will consist of a group of securities that churn as they move in and out of your portfolio. There’s going to be a fair bit of randomness in the process. Using a cricket analogy, you want to make sure that you only give away singles. A couple here and there, but do your very best not to get sent to the boundary rope.

Keep those losses small. It’s going to make it easier to pay for them

When it’s your turn to bat

There’s nothing wrong with taking a couple of singles here and there. Maybe 3 runs, but just ensure that you stay at the crease. When the time is right, recognise the opportunity for a big hit to the boundary rope; and do it. Otherwise, just keep bat to ball, or let them go. Until you find the perfect one to send sky high.

What’s left on the tree

Looking at what’s left on the tree – 46.76% is stuff that’s making money, up from 20%. 53.33% is stuff that’s kind of losing money, down from 80%. Where on average each win is 21.83 times bigger than the average loss. Which is just one position that’s 66 times bigger than the largest loss (this information is hidden in the averages). I really like what’s left.

 

None of the remaining positions will in a worst-case scenario, hurt me too much. The very fact of their survival is significant. It shows their strength. So, you want to give them a chance. Just in case they’re going to turn around and surprise you. You just never know.

Ever heard the old saying, “80% of the profits come from 20% of the trades”? Sometimes it’s only 6% of the trades. You just never know. The sky is the limit for a branch that reaches out, but the downside is well protected. That’s an asymmetric opportunity. However, if you know your worst case, it should be a number that allows you a good night’s sleep. Mine is +85.84% now, but this could be a different number tomorrow. It doesn’t matter what the number is, just as long as you are comfortable with it. 

In some sense, it doesn’t matter how much P&L you have on any random day. As long as you can accept the worst-case scenario.

Whatever it is that I hold in size, must be the one that earns me the most

The other 80% will pretty much cancel each other out. Maybe one of them will turn out to be the big hit that reaches the boundary rope. They keep me amused and in touch with the market. The purpose of the 80% is to help me find the 20% that moves the needle.

Forget the scoreboard for a moment. At any moment in time on any random day, the number on the scoreboard will be random. Focus on your long-term performance. Not on the fluctuations of your equity curve on a random day. But you must be able to stomach those fluctuations. Don’t be quick to judge yourself simply because you’re down, or be arrogant because you’re up. Markets are not an annuity; you can’t expect specific amounts. Business things take time and go round in circles.

All in all, the system acted exactly as it was intended to act on a windy day. It’s important to understand how your system reacts to different market environments, and circles. What do I expect the system to do if markets crash?  I expect it to have me in cash. Until a few start to move back higher.

Normally in summer, the sun shines again after the rain. Even after a hailstorm. If you didn’t die in the storm, you’re going to be fine, and who knows, maybe even lucky too.


Village Trader blog

Njabulo Kelvin NsibandeTraders share a peculiar characteristic: they’re fiercely competitive, but only with themselves. In practice this means that they see every outcome as an opportunity to learn, and they’re brutally honest about both their failures and successes. This also means that they’re hungry for knowledge. They don’t sleep easy with unanswered questions. And they’re seldom satisfied with just one answer.

Njabulo Nsibande is a founder of Village Trader, and Sakha Ingcebo investment club. His interest in trading began in 2016, alongside a rash of Instagram ‘fx traders’…

Find him on Twitter: @njabulo_goje.

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