People suffer because they are on the wrong side of the asymmetric information axis. They buy when the smart money’s selling and sell when the smart money’s buying. So how do you beat the insiders?
Just after placing bets people are much more confident of their horses’ chances of winning than they are immediately before laying down bets. Like other weapons of social influence, this one lies deep within us, directing our actions with quiet power.
You’re going to risk your money in the markets because you believe you will win. You’re probably stupid – Wall Street will empty your wallet and won’t even say thanks.
In 2009 the United States and much of the world was awash with a tsunami of cash flooding from the orifices of spendthrift central banks and governments. Bull markets are nearly always based in easy money. In a year’s time, the major stock indices will be lower than they are today, or will they?
If the answer is “cyclical” the question must be “commodities?”. Some investors – disciples of Malthus – believe the cyclical commodity paradigm will not persist in future. They believe ongoing shortages of commodities will drive prices ever higher.
I’ve lost count of the number of times I’ve heard trading described as a zero sum game. Believe me, it isn’t. Let’s imagine a commodity in which there are only 5 active traders, each trading $10,000 and watch what happens.
John Maynard Keynes was one of the world’s most successful investors. He said, “When you find any one agreeing with you, change your mind. When I can persuade the Board of my Insurance Company to buy a share, that, I am learning from experience, is the right moment for selling it.”
It’s easy to make money investing during a boom. You don’t need skill. You just need to know the market’s rising. You then need to borrow $50 for every dollar you’ve actually got, and put the whole lot in an index fund. A couple of years later, the market’s risen 30% and for every $100 invested, you’ve got $1,500. No special investment skills required whatsoever.
If you accumulate some capital, the most important thing you can do is not lose it. A trader who wants to survive and prosper must control his losses. You do that by risking only a tiny fraction of your equity on any single trade.
Analysis is simplifying, breaking down things into parts, picking out strands and elements. Analysis is comparing unknown things with things that are known. Analysis also involves picking out relationships and putting them back together as a whole.
Watch out for performance fees charged by mutual funds and investment trusts and investment managers who, instead of saying, “hey, wasn’t I lucky”, say, “hey, it’s time to charge a fat performance fee.” They are a drag on your investment performance.
ETFs are becoming an increasingly popular investment because of low costs, liquidity and tax efficiency. They also offer individual investors the chance to diversify in ways that would previously have been beyond their reach.
It’s generally accepted that to be successful in stock trading we need to hold rising stocks for as long as possible and sell losers quickly. This is summed up in the trading maxim:
“Cut your losses and let your profits run.”
Do you have the instincts of a successful trader? Most people don’t. It’s not so much that they hate uncertainty – but they hate losing.
Your answers to two simple questions tell you whether your gut instincts are those of a successful stock trader.
Technical analysis has been around since at least the 1600s, when Japanese rice traders began using candlestick charts to track the market price of rice. Is there any evidence in its favor, or – as some fundamental analysts suggest – is it a sophisticated superstition?
It’s fair to say that pure fundamental analysis can make life unnecessarily hard for most investors. Stockbrokers employ large numbers of economics and accounting graduates to carry out fundamental analysis and stock valuation. Although many authors like to propagate the myth that you can easily beat such analysts, the reality – measured by the success of small investors in the stock market – is that most small investors invest rather poorly.