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Apprenticed Investor: Nothing Doing

The Lesson of Folding

At the RealMoney.com panel discussion at the online expo in New York in January 2002, I actually overheard someone in the crowd say: "Stocks suck lately."

That's the equivalent of the poker player who says: "Man, that deck was cold for me tonight!" This player thinks it was the cards' fault. Guys like that helped pay for my undergraduate education.

When I'm playing poker, if I don't like the cards I'm dealt, I fold. It's that simple. Lose the ante, wait for the next shuffle. Unlike the professional baseball player, I don't have to face a wicked knuckleball pitcher. Likewise, you don't have to force a trade or an investment.

Unlike the poker player, investors don't have to even lose the ante. If you don't like the look of the table, you can say "deal me out."

Think about how people have been describing the investing environment in the past year: "What a tough, lousy market." If that's the case, then why play if you do not have to?

Focus on your decision-making process. Ask yourself these questions: How active should I be now? What sectors are working this quarter? What size lots should I buy now?

All too many investors are on autopilot; they always buy 1,000-share lots, they trade the same stocks, they make about the same number of trades per week. Why even trade if you don't like the market? That's a decision that too many people make without actually considering their options carefully. In short, they do the same things regardless of the conditions.

If you are not a card player, consider skiing: It requires constant adaptation to rapidly changing terrain conditions. If the mountain gets too icy, I like to sit in the lodge with the ski bunnies, drinking hot toddies. We have a phrase for those skiers who fail to recognize changing conditions and adapt to them: badly injured. So, too, can investors get badly injured by forcing the situation when they don't need to.

Participating in a given market or stock should be a conscious, well-thought-out choice. All too often, it appears to be one made on autopilot, and that is never good for anyone's returns.

I can trade from the long or short side, hedge with options, choose sectors, lot sizes, activity. In short, I can control the trade.

On occasion, I even choose to sit out a hand.

Try it sometime.



1. Expect to Be Wrong 2. Your Fault, Reader
3. The Wrong Crowd 4. Bull or Bear? Neither
5. Know Thyself 6. Prepare for Battle
7. Bite Your Tongue 8. Don't Speak, Part 2
9. The Zen of Trading 10. The Folly of Forecasting
11. Lose the News 12. Tracking Elephants, Pt 1
13. Tracking Elephants, Pt 2
Check back for more of Barry Ritholtz's
Apprenticed Investor series

Barry Ritholtz is chief market strategist for Maxim Group, where his research and market analysis are used by the firm's portfolio managers and clients in the U.S., Europe and Japan. He also publishes The Big Picture, his macro perspectives on the economy and geopolitics, entertainment and technology industries, and is a member of the board of directors of Burst.com, a streaming media software company. At the time of publication, Ritholtz had no position in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Ritholtz appreciates your feedback; click here to send him an email.

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