Don’t Fall in Love: Why Your Ideology Can’t Blind You to Risk Management
Picking up from yesterday, I want to talk about the relationship thing — not falling in love with your trades.
It’s very difficult when your P&L is going berserk and you’re cranking. You feel like you’re onto something, you’re doing it, it feels good. Now you and the market are a couple. You’re smashing your trading rules and you feel self-actualized.
But at the end of the day, not everything goes up.
The Cautionary Example: QQQ, March 2000
Look at an extreme example: QQQ from March 2000. It was full of all the names everybody loved. You had to have these names, all of them.
Some of you may not have been trading back then, but there wasn’t a magazine that wasn’t in on it. Even the magazines are out of business now. Where’s Red Herring? From 1995 to 2000, especially toward the end, magazines were going crazy — the internet was still new to many people, and every issue had “the 10 names you have to have for the new economy.” A lot of them aren’t even around anymore. It’s criminal to think about.
I have a sense that something similar is happening now with AI and crypto. So you have to be careful. Once you start losing money, you have to get out.
You can be madly in love with the idea of what you’re seeing — with Bitcoin, or any other crypto, or certainly with AI. But you have to understand: what’s happening now might not be representative of what you’ll see in the future.
Your job, no matter how you feel about the theme or how well you understand it — you might be a coder who really gets how important Claude could be, or you might be sold on the fact that Bitcoin will only ever have a set number of tokens — as a risk manager, you can’t lose your objectivity. Only the price tells you the truth.
Know Where You’re Getting Out
You don’t want to be in an instrument that ends up looking like QQQ in March 2000. Know where you’re getting out. You can’t let your ideology blind you. It’s just like politics.
You need a predetermined exit. First, you need to know how much you’re going to put up — that’s the diversification part. Then the risk management part: here’s where I say uncle.
With QQQ, and I know it’s an extreme example, you saw an 80-plus percent drawdown, and it didn’t break even for 16 years.
This is why I wanted to talk about this today. If you took a 40-year-old with a 20% stake in QQQ in 2000, versus a 70-year-old with the same 20% stake and the same cost basis, the losses they suffered are not symmetric.
Just because both were down 20% might fool you into thinking it’s not that big a deal. But look at the break-even math: the 40-year-old was 56 by the time it came back. After a 16-year drawdown on that portion of their account, you can’t afford that kind of loss. The compounding effects of drawdown are real.
Even though trend followers are getting demolished right now, the one thing they have going for them — almost always — is predetermined stop placement. They know where they’re getting out if they’re wrong.
The Sandwich Generation Problem
The 70-year-old in that example might be a grandparent. They might have two sets of parents to care for, plus their own children (adopted or not), plus grandkids. You’re talking about a massive sandwich generation where you cannot let ideology blind you from risk management. You need a predetermined spot.
And shame on the investment advisor who says, “We’ll sell when the fundamentals change.” That’s nonsense. By the time the fundamentals change, the price could be off 50%.
I know about CFAs — I’ve coached them at the CFA Institute at NYSA. It wasn’t part of Level 1, 2, or 3. It was an elective class on commodities and how commodities work for hedging. These are people working at big corporations that deal with physical commodities.
You absolutely can time the market. And you can use technical analysis to play superior defense. That’s the name of the game. Because what you don’t lose, you don’t have to earn back.
Appreciate the Thesis, Define the Exit
When I say don’t fall in love, what I really mean is: you can appreciate the ideology or the thesis of the investment, but that doesn’t mean you can just let things go. You need a defined exit strategy.
I don’t care if you’re investing for 20 or 30 years. You could have watched QQQ, sold it, paid your taxes (or offset them), let the thing come down, watched it base, and had other opportunities to buy back in cheaper. Cash has time value. Don’t lose sight of that.
You don’t need to keep your money constantly in motion, but you absolutely have to keep your losses small.
With or without your investment advisor, you should be able to define your portfolio heat — across all your positions, how much of your capital is actually at risk before you’d get stopped out? You can’t afford a 25% drawdown. That’s no man’s land.
I don’t predict the future. But I see a lot of folks who have turned blind eyes to crypto, semis, and AI — just like people did in the late ’90s. They thought that stuff was going to go on forever. It very well may, but not necessarily in the form you see it now.
Protect your account balance. No one is going to care about your money more than you.
Thanks for being here. Keep the questions coming. Leave some comments. Get your free copy of The Inner Voice of Trading audiobook at TraderMindset.com. See you tomorrow.
