NEW YORK ( TheStreet) -- Doug Kass of Seabreeze Partners is known for his accurate stock market calls and keen insights into the economy, which he shares with RealMoney Pro readers in his daily trading diary.Among his posts this past week were entries about reward vs. risk and haters. Please click here for information about subscribing to RealMoney Pro.
Know When to Dial It Back
Originally published on Friday, June 7 at 9:24 a.m. EDT. Every day should not be played as a playoff game for investors and traders. "Life will always throw you curves, just keep fouling them off. ... The right pitch will come, but when it does, be prepared to run the bases." -- Rick Maksian In the past, I have written that playing defense not offense is a key to delivering superior investment returns and that time frames and risk tolerance are important ingredients in positioning. To be sure, it is important to bring intensity to the investment business, but today I want to discuss why every day shouldn't be played with the intensity of a playoff game. Every day shouldn't be played with the same degree of confidence and positioning. To me, assessing one's confidence in the reward vs. risk in every stock position is the key determinant. I size my positions according to my assessment of each stock's reward vs. risk rather than a specific price target of a long (the upside target) or a short (the downside target). I superimpose on top of this whether the primary market trend is up, down or trendless.
Let's look at my SPDR S&P 500 ETF Trust (SPY) short as an example. Given the same economic/data assumptions, a SPY short provides better reward vs. risk at $167 compared to $163. If there is no change in data, I am typically inclined to have a lower SPY short exposure at lower levels (with an inferior reward vs. risk). If the data has deteriorated more dramatically, however, I will typically maintain the size or even increase my weighting. Now let's look at my SPY short if it goes against me, rising from $167 to $171. Again, playing defensively, I will typically reduce the position if it goes against me, especially if the data points are unchanged. This is playing defense and controlling risk, an integral part of managing money.