When I worked on the institutional buyside, we had the opportunity to hear from lots of brokers, strategists, and analysts in the industry. And I was thrilled to have some of the top technical analysts around coming through to talk charts with us. One of my favorite questions to ask was, “What was your worst call in the last six months, and what did you learn from it?”
For a professional strategist, dwelling on bad calls is certainly not how you want to spend your time. You’d much rather talk up your exceptionally prescient calls that everyone should hear about! But if you want to become a better investor, you need to spend less time celebrating your wins and more time dissecting your losses. And if you want to become a more successful investor, these are the kinds of questions you should be asking after a big miss:
- What evidence did you miss that would have pointed you to a more ideal conclusion?
- What tools could you add to your toolkit to better manage this sort of environment the next time it comes around?
- How could you better spend your time during the day/week to make sure you’re better equipped to understand what’s happening around you?
- What could you do to improve your money management processes to more effectively manage risk when you are wrong?
These are the questions that are really only answered if you approach year-end as a time to reflect constructively on your experiences as an investor.
That brings me to the ten questions that I ask myself every year, with the goals of improving my investment performance, reviewing missed opportunities, and upgrading my routines. I’m happy to share with you now my answer to probably the most painful question of the ten: “What was your worst trade, and what did you learn from it?”
While, overall, I feel pretty good about remaining bearish through most of 2022, I had a couple big misses. And that brings us to the chart of YOLO, one of the US-listed cannabis ETFs.
Now to be clear, I very much consider myself a trend-follower. My goal is not to buy the bottom, pretty much ever. Rather, I’d like to wait until there are some “signs of accumulation” in the form of price improvement and bullish momentum characteristics.
Knowing this fact, you may reasonably ask yourself why I thought YOLO was a good buy at $6.
The non-technical reason is that I believe in the long-term potential for the cannabis industry, similar to how I feel about the long-term potential of blockchain technology. I see the signs now that tell me there is tons of upside for these emerging themes. But, as Jon Markman so aptly described in his book Fast Forward Investing, even if you know that a certain theme is going to work over the long-term, there is no guarantee as to which products, companies, and trading vehicles will benefit the most as these themes become more developed over time.
That brings me to the clear technical evidence against buying YOLO at $6, which I clearly ignored at the time. Here’s my chart, but with some additional annotations to help illustrate what I could only describe as confirmation bias run amok.
First off, the chart started making lower highs and lower lows in early 2021, after the excitement from the 2020 election cycle had all worn off. Cannabis stocks had experienced a big upswing in the fourth quarter of 2020, but, by spring 2021, a downtrend was clearly in place.
I remember exactly what caught my eye in July and August of this year. Quite simply, I noticed that YOLO wasn’t going any lower. The lower lows (which had been a signature move on this chart for about 16 months) had dissipated, and the chart appeared to have stopped its endless decline.
Now did the price actually break above resistance? No. And that’s where I missed one of the basic tenets of the Dave Keller investment process–to wait for confirmation of any change.
I’ve spoken and written about follow-through days, or the two-day rule, or whatever you want to call the idea that you need confirmation of a breakout before declaring the breakout. I did not have the patience to wait for a break above $6. So, instead of waiting for a breakout, I placed the order around $6. And I’m still waiting for that upside follow-through, with YOLO having broken below $4 this week.
Next, I ignored the momentum characteristics, which were clearly still negative. Note how many times the RSI bumped up to around the 60 level on short-term rallies, only to see the price revert lower soon after. In early December, the RSI briefly broke above 60, but, as this was happening, the price was forming a shooting star candle with an intraday high right at the well-established resistance level of $6.
Finally, and perhaps most embarrassingly, we have the long-term chronic underperformance, as illustrated by the relative strength ratio in the bottom panel.
So, in this case, I ignored something I tell our viewers at least 12 times a week: focus on charts with improving relative strength.
Full disclosure: I still own the position in YOLO. It’s in a retirement account and I’m happy betting on long-term upside for this industry group. But, in my excitement at seeing a stalled downtrend in a group of which I’m fundamentally bullish, I managed to ignore what now appear to be clear signs that the chart was still bearish.
Why am I taking the time to relive this colossal miss at year-end 2022? Because I want to become a better investor, every single year. And the only way I’m really going to do so is by owning up to mistakes, reflecting on my decision-making process, and making changes to minimize the chances of having a similar mishap in 2023.
Your turn. What was your worst trade in 2022, and what did you learn from it?
By the way, want to see the other nine questions I ask myself at year-end? Just head on over to my YouTube channel.
P.S. Ready to upgrade your investment process? Check out my YouTube channel!
David Keller, CMT
Chief Market Strategist
Disclaimer: This blog is for educational purposes only and should not be construed as financial advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional.
The author does not have a position in mentioned securities at the time of publication. Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.
David Keller, CMT is Chief Market Strategist at StockCharts.com, where he helps investors minimize behavioral biases through technical analysis. He is a frequent host on StockCharts TV, and he relates mindfulness techniques to investor decision making in his blog, The Mindful Investor.
David is also President and Chief Strategist at Sierra Alpha Research LLC, a boutique investment research firm focused on managing risk through market awareness. He combines the strengths of technical analysis, behavioral finance, and data visualization to identify investment opportunities and enrich relationships between advisors and clients.