React, Don't Predict

As I grow older, I pay less attention to what men say. I just watch what they do.
-- Andrew Carnegie

The bulls tell us that the worst is over, the recession (if we have one) will be mild, the dollar will strengthen, commodity prices will moderate and inflationary pressures will cool. The bears tell us there is another shoe to drop, we haven't seen the end of the woes in the banking system, the housing market has more downside and market players are way too sanguine about the problems we face.

So who is right? We all have our opinions, and we believe that our insight into what lies ahead is not only reasonable but likely. Unfortunately, that doesn't make for a very good investing approach.

Profitable investing is more about managing risk than it is about making predictions about the economy. While we may want to formulate theories on how events will unfold, we must never take our eye off the action in front of us. There is no doubt that no matter what happens in the market, the bulls will still be bullish and the bears still will still be bearish. There is never a shortage of great arguments for both sides of the market.

So what we do is watch the action. It doesn't much matter what the pundits are saying if stocks are trending in the opposite direction and ignoring their wisdom. The price action will always be far more informative and insightful than the views of any pundit or market expert. We need to stay focused on that and not be overly influenced by the siren call of intellectual arguments.

Right now, the uptrend is still intact. There are some cracks appearing and things are a bit extended, but the market is not yet rolling over. Intellectually I believe quite strongly that there is some fairly significant downside coming soon, but I have to wait until there is price action to back up my thinking. If I simply act on my theories at this point, I will be making a very risky more. I need to manage my risk by reacting to the market rather than trying to predict it.

It is very tricky out there right now with oil prices and the dollar whipping us and lots of debate over the degree to which we will suffer a recession and whether or not the worst is over. I am a skeptic, but I'm sticking with the long-side plays until I have some solid proof that I shouldn't.

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James "Rev Shark" DePorre is the author of Invest Like a Shark: How a Deaf Guy with No Job and Limited Capital made a Fortune Investing in the Stock Market. He is founder and CEO of Shark Asset Management, an investment management firm, and he also operates sharkinvesting.com, an interactive online community that serves and educates active investors. DePorre holds business and law degrees from the University of Michigan, is a member of the Michigan Bar Association and a former tax attorney and CPA. He lives in Anna Maria Island, Fla., with his wife and two children. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Rev Shark appreciates your feedback; click here.