Don’t Be Careful, Be Competent

Don’t Be Careful, Be Competent

Posted On December 27, 2022 2:40 pm

There’s a behind the scenes clip of Tom Cruise filming some amazing stunts for the next installment of the Mission: Impossible franchise, in which, as he prepares to ride a motorcycle off a cliff, he tells the stunt crew “don’t be careful, be competent.”

I think this is a great mindset for traders and investors to adopt. If we want to have success, taking risks is unavoidable. While boldness and belief in yourself may help you take initial action, it is clear minded confidence that will result in lasting success.

To say the past few years have been highly challenging would be an understatement. At some point in early 2022, it seemed things would return to ‘normal’ as the disruption caused by the pandemic shrank into the rear-view mirror, although not entirely disappearing.

While the worry of COVID from a healthcare standpoint has been greatly diminished, the economic and social repercussions of the unprecedented incident have actually increased. The unintended consequences of multiple policy decisions, from school and business closures to fiscal and monetary responses, continue to ripple across the world. These ripples have led to the transforming of both the societal and economic landscape.

The forces and trends set in motion will likely carry into 2023, bringing both new and unpredictable challenges creating fresh opportunities. Will you be ready?

It’s not worth rehashing the policy mistakes of government agencies and central bankers, those have been well documented and debated to death, it’s all hindsight at this point and would be a profitless endeavor.

However, it is worth highlighting what I think will be the three largest changes that have been brought about by the pandemic and all its ripples. In addition, and perhaps more importantly, how these ripples will continue to impact us all during the coming year.

The three main things that have changed are; reduction in globalization, the increased politicalization and polarization on nearly every topic, and lastly, the emergence of inflation. These issues are intertwined as they all cause and exacerbate each other in what is starting to feel like an unbreakable loop. I’m going to focus on inflation.

We know the Fed has made it a priority to break inflation, even at the risk of a recession, before it gets too embedded in the system. But, it seems to me they are once again getting it wrong. Most elements, from supply-side constraints to commodity prices to housing are all coming back in line towards pre-pandemic levels thanks to a basic normalization of supply and demand. Yet, none of this is because of the Fed’s aggressively belated interest rate hikes.

The Fed’s inflation fighting focus is now on the job market as it wants to prevent a wage/price spiral. They are misguided and nuts… in my humble opinion.

For the past 40 years, labor has fallen behind capital causing a surge in inequality. Over the past three years, workers’, especially at the lower end of the pay scale such as manual labor or service jobs, have made up some ground and now Powell wants to squash those gains? Remember, in 2022, the average worker saw wage gains of just 5.7%, which is below the 7.8% rate of inflation, meaning workers are still falling behind in real terms.

I am hopeful the U.S. economy is strong and dynamic enough to maintain a strong labor market and avoid a broad recession.

So far, layoffs have been contained to white collar jobs and the mostly tech sector, which became bloated with overpaid workers during a surge in hiring from both start-ups and large corporations. That’s all fine and good; there was too much bad investment and pie in the sky projections… if not outright fraud.

Businesses need to rightsize their staff, focus on profitability, and wean themselves from the free money they were living on.

The companies that survive or make the appropriate changes will be healthier and get back on the growth path quicker.

Likewise, in our trading and investing many people had become too comfortable with “buy the dip” and 2022 disabused them of the notion that markets only go up.

As you know, Options360 kept a steady hand on the wheel and returned 27.6% in 2022, marking the 8th consecutive year of beating the S&P 500 by at least 15 basis points. Ok, technically that’s not official yet as there are still a few days remaining.

For others that got caught up in the mania or simply suffered with a traditional 60/40 portfolio, but remember, bonds posted their worst year on record. 2023 will be a chance for redemption.

With inflation likely to remain sticky, you can’t sit on cash for too long without serious erosion of its value, but you still need to be careful; more people have gone bust reaching for yield through aggressive tactics like leverage than just bad stock picking.

I think we still have several months of treacherous waters ahead, but my experience tells me that operating with competence will result in a successful mission.

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About author

Steve Smith

Steve Smith have been involved in all facets of the investment industry in a variety of roles ranging from speculator, educator, manager and advisor. This has taken him from the trading floors of Chicago to hedge funds on Wall Street to the world online. From 1987 to 1996, he served as a market maker at the Chicago Board of Options Exchange (CBOE) and Chicago Board of Trade (CBOT). From 1997 to 2007, he was a Senior Columnist and Managing Editor for TheStreet.com, handling their Option Alert and Short Report newsletters. The Option Alert was awarded the MIN “best business newsletter” in 2006. From 2009 to 2013, Smith was a Senior Columnist and Managing Editor for Minyanville’s OptionSmith newsletter, as well as a Risk Manager Consultant for New Vernon Capital LLC. Smith acted as an advisor to build models and option strategies to reduce portfolio exposure and enhance returns for the four main funds. Since 2015, he has worked for Adam Mesh Trading Group. There, he has managed Options360 and Earning 360, been co-leader of Option Academy, and contributed to The Option Specialist website.