Monthly Letter January 2013
Any time the market moves strongly either up or down we get overloaded with calls that it has gone too far, too fast with too little reason behind it. These calls could be right at times, but they are just as often very wrong. We guess this is just a sign that it is easier to imagine what it would be like to go back where you came from rather than imagine what’s in store for you around the corner. Human beings are addicted to mean reversion. The investment implication is that you risk being too cute with your positions. You will end up selling something you think will perform over the next few months or you buy back a short that you believe is in a structurally difficult position.
Overtrading is another word for it. We at Madrague do not change our positions if we believe that the market is poised for a pullback in a longer trend. We find that we more often than not end up selling out of positions that we struggle to get back. Trying to market time those types of moves is futile. We find it better to be strict in risk management. We do however scale back a bit on the margin to give us some more room to add and build positions in a balanced manner.