How I Avoid Being Blindsided by Market Price Swings

The following is adapted from The Trades of March 2020 by Alex Gurevich.

In March of 2020, a few days after shelter-in-place was ordered in the Bay Area, my wife woke up in the middle of the night when she heard me collapse on the bathroom floor. I didn’t quite pass out, but I was experiencing shortness of breath, palpitations, chills, and severe sweating.

I was certain I didn’t have COVID. It was stress — and the path that led me to that point in my health and personal life is inseparable from my journey in financial markets.

COVID-19 blindsided everyone; the markets were on the verge of a meltdown. It was a tumultuous time, but even still, it’s far from the only crisis we’ve seen. And, despite how challenging it was, it demonstrated one powerful lesson: with the right trading strategy in place, it is possible to weather any storm, even one as dire as a global pandemic. Let me explain.

Think of Investing as a Battle

In my first investment book, The Next Perfect Trade: A Magic Sword of Necessity, I compared formulating a trading strategy to preparing for a battle. You have to get in proper shape. You must learn your moves, and you must acquire your armor, your shield, your helmet, and your battle horse.

A magic formula (or magic weapon in this context) will be wasted if you get killed by the market’s first arrow. But with proper training and equipment, this weapon may give you a devastating advantage.

Along with proper preparation, trading (or winning a battle) also requires patience. That’s why we named our investment company HonTe, after a Japanese strategic term applied to the game of Go. Hon stands for truth and Te in this context stands for move. A “true move” or an “honest move” is one that applies a patient strategy, which may appear slow but is the best at delivering long-term results.

In the chaos of the pandemic, it was difficult to decide what would be a perfect portfolio. I had to deal with so many unprecedented developments and uncertainties that betting on short-term outcomes was virtually impossible. I had my weapon, though, my Magic Sword of Necessity, which allowed me to select trades with odds skewed in my favor. But I also had to avoid being destroyed by wild market fluctuations.

Focus on the Facts

My approach was to exclude variables of which I didn’t have expert understanding. I didn’t speculate on epidemiological peculiarities of COVID-19, the effectiveness of mitigation measures, the timelines for vaccines, or the details of policy response.

It was enough to know just two facts:

• Eventually, the pandemic would pass.
• The monetary and fiscal policy response would continue building until it overwhelmed any lack of liquidity.

By focusing on trades, which capitalized on these simple concepts, I avoided being blindsided by price swings. This was my shield — more specifically, what I refer to as my Shield against Uncertainty.

Protecting yourself against market swings in this way may sound too easy: “just put on the trades which will work eventually and wait till they work.” That was indeed the true move, but the wait was often tedious and painful. The year 2020 was long and weird. I recall someone tweeting, “Do you remember Australian wildfires? That was 2020.”

Accept the “New Normal”

Back in the spring of 2020, I made my own joke: “Every trading day in March felt like a month, so on this scale, the bear market we experienced was of average duration.” But that month was also when the financial markets really came unglued.

Like everyone else, we were living through everything that was going on, and of course we did not yet know how it would end. COVID cases were on the rise, the timing for vaccines was uncertain, and macro analysts were divided in their predictions regarding inflation and growth.

But, again, this wasn’t our first brush with chaos. In the two previous crises — 9/11 and the global financial crisis (GFC) — we lost the sense of security and some measure of innocence. We moved on from those events with a new understanding and new concerns, which were there to stay.

We got used to taking off our shoes at the airport and distrusting collateralized debt obligations. Yet, the perception of stability did return gradually in both cases. It was a “new normal” but a “normal” nonetheless. I believe that in two or three years, we will look back at the time of the pandemic in the same way: as a brief but intense episode, followed by normalization to a somewhat altered world.

For more advice on how to weather chaos in the financial markets, you can find The Trades of March 2020 on Amazon.

Alex Gurevich is the founder and Chief Investment Officer of HonTe. After earning a PhD in mathematics from the University of Chicago, he leveraged his passion for strategic gaming into a lucrative Wall Street career. He was hailed by the Wall Street Journal in 2003 as the star trader of J.P. Morgan, where he served as Managing Director in charge of global macro trading. The author of The Next Perfect Trade, Alex Gurevich led HonTe’s macro strategy in 2020 to rank second by net return according to BarclayHedge — and in the top ten of emerging managers in all strategies by Eurekahedge.