Of Convictions and Assumptions

With stocks, bonds and commodities on a too-good-to-be-true rampage since March, many market participants are struggling with the age old question of when to sell while their bearish counterparts are having a similar internecine conflict over when to throw in the towel and get long with the herd.

I found a quote that I believe would be beneficial for all of us to think about on this Sunday after a week of record amounts of options activity signified the mass uncertainty amongst traders of all stripes:

“You must stick to your conviction, but be ready to abandon your assumptions.”

– Dennis Waitley, motivational author and speaker

Waitley was not specifically referring to trading when he made this observation, but no observation could be more perfect for this moment in time, with the Dow seemingly on a collision course for 10,000 in the days ahead.

Whether you’ve been on the train or have watched it roll by, or for that matter, have tracks across your back from having stepped in front of it, you’ve acted either out of conviction or lack of conviction.

The quote above tells us to stick by our convictions, but not forget that underlying these convictions are certain assumptions that are not necessarily worth standing by, especially as they are proven wrong.

If you’re a bull with conviction and have made your long bets based on an assumption of improving demand for commodities in China and higher factory orders, then beware if it turns out that the demand or orders were strictly the result of inventory restocking.

Conversely, if you’re a bear with conviction based on your assumptions that unemployment will remain above 10% while housing prices continue to plummet, then take caution not to hold on too tightly to those assumptions if and when it turns out that the signs of housing stability in some markets are spreading, and the velocity of jobless claims slows to a trickle.

My message to all traders and investors is to reexamine their assumptions often, as what is conviction but a fervent, unshakable belief in our own ideas of what is true and false, what is right and wrong?

Good luck and be careful out there.

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