FLOW Cycles

[PebbleTrader]

Flow:
This is probably the easiest phase to recognize. It?s John Paulson in 2007 and 2008 managing a portfolio that was designed to take advantage of market conditions. It?s Michael Jordan in 1989 sinking the shot over Craig Ehlo in the Eastern Conference finals. It?s Tiger Woods at Augusta in the 1997 Masters or at Pebble Beach in 2000 making the best golfers in the world look insignificant for a weekend. And most importantly, it?s YOU taking that trade or making that investment when the idea matches the market. This is when success seems effortless.

Fall:
This is toughest part of the cycle to identify as it?s happening. Statistically we fully expect it?the return toward the mean after a period of outperformance. The fall, however, can often be a hazy time when bits of that flow feeling still linger, but the results start to decline. We may find it easy at first to ascribe the changes to outside influences: news affecting the market or distractions affecting our performance. But as we continue to fall, we begin to realize that things aren?t like they were when we were in the flow. Results drop, and things don?t seem easy and effortless like before. Uncertainty starts to dominate and lack of confidence begins to creep in.

Fight:
Quite simply, this is when nothing seems to fit?our trades don?t match the market. It?s when hedge fund managers invest heavily in the rebound of financial stocks and they drop lower, or portfolio managers bet on rising rates and a catastrophic drop in US Treasuries that just never seems to come. This is when a golfer can?t find the fairway with his driver or the cup with his putter. This is the time when you and I fight the trend trying to pick a top or bottom for a turn. Or when we keep praying for a breakout or breakdown that seems to never come as the sideways market keeps on going.

Fume:
Eventually we realize that we have been ?fighting against? instead of ?flowing with.? Different people react in different ways during this phase: some people withdraw, and some fight even harder for a while. While the name I chose for this phase may seem negative, it strikes me as truly necessary. We need to break our pattern of fighting. We need a time out. For those that truly recover and head back to the Flow state, this Fume phase usually ends in a cathartic moment when we realize why and how we were fighting against the markets, our natural tendencies and abilities, or our golf swing. And we free our minds once again to flow with what works.