Being Smart Does Not Make You Money
Stockscores.com Perspectives for the week ending September 18, 2012
In this week's issue:
This week's Market Minutes video shows how to find stocks trading on the important new information that can drive a strong trend plus Tyler's weekly analysis of the markets. Check it out by clicking here.
I wrote a new book over the summer, it will be available in a pre-release version to Stockscores subscribers before the end of the year. Over the next few weeks I will share excerpts from the book, The Mindless Investor - Make Money in the Market by Overcoming Your Common Sense. Here is a piece from the chapter, Don't Try to Be Smart:
I never try to be smart when trading the stock market. It's not that I lack confidence in my intelligence or ability to gather information, but I realize that my knowledge of companies and markets, no matter how in-depth, may not matter at all. The stock market doesn't care what I think.
It's comforting to make decisions with your money based on what you know. Most traders will be more at ease if they have confidence in their trade, and that confidence usually comes from insight. Knowing what a company does, who runs it and what experts think about it makes us feel better about owning it. The question is, does any of that knowledge have value beyond creating comfort?
I have watched many traders pile all of their liquid assets into a single stock because they had a personal relationship with the person running the company or had learned of some private information that they were confident would drive the price higher when the rest of the world found out about it. So many times this kind of common-sense, smart trading has led to losses.
Many traders have looked to industry experts or market gurus for their trading ideas, trusting that the wisdom of their words proves their ability to predict price movement. There will be times when putting faith in the individual, whether it's you or someone else, will lead to a profitable trade. There will also be many times when trying to be smart will cause you to lose a lot of money. The reality is that no one-no company insider, industry expert or stock market guru-is smarter than the market.
You could spend countless hours studying a company's business. Reading the company financials, learning about the industry the company operates in, talking to the businesses customers and identifying catalysts for future growth are all pursuits that make a lot of intellectual sense when you're considering buying a company's stock. After this long and arduous process, you should know just about everything there is to know about the company and have a very strong sense that the stock is undervalued and destined to go up in price. What about the little bits of information that you don't know? What if you missed something important?
All of your analysis could indicate that the stock is worth buying, but if you miss out on one critical negative factor, you could end up making a losing trade. I have seen it happen countless times: the company story sounds great and ownership of the stock seems like a no-brainer. Yet this "can't lose" type of trade leads to a loss because of a relatively unknown fact that eventually causes investors to sell the stock aggressively. We don't usually know what the problem is until it's too late.
Don't assume that you know everything there is to know about a company, but understand that the market does. Every little piece of available information will have been priced in to the stock by someone. With thousands of investors trading a stock, you can expect that nothing will go unnoticed. There is always a reason why a stock is doing what it's doing, and listening to the message from the market is the best way to analyze the stock.
The people who are able to uncover information that is not widely known are usually experts in that industry and often have the resources to uncover facts that most people don't know. They also tend to have more capital to invest, which makes how they show their opinion much more noticeable. An investor with billions or hundreds of millions to invest will leave a trail when he makes a move on a stock.
No matter how much you know, you probably don't know enough, and it's the information you miss that can lead to a bad trade. Fortunately, the market misses nothing, and as long as you know how to interpret market activity, you can benefit from its message.Back To Top
This week, I used the Stockscores Market Scan to search for stocks making abnormal price gains on strong volume. When I inspect the charts, I look for stocks that are making a move after a period of sideways trading. I want to find them on the first day of strength, not after they have been going up for a while. Here are a couple that had charts that stand out:Back To Top
1. ANTH
ANTH is a stock that I featured to my daily newsletter readers today, it is breaking higher today on strong volume after showing pretty boring trading activity recently. The company is in Phase 3 trials for a Lupus treatment that should drive speculation.
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2. BPAX
BPAX has been stuck trading around $1.50 for a few weeks but today came to life with heavy volume and a 22% gain. The stock has a long way to go to get back to old highs but this sign of strength is encouraging.
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References
Get the Stockscore on any of over 20,000 North American stocks.
Background on the theories used by Stockscores.
Strategies that can help you find new opportunities.
Scan the market using extensive filter criteria.
Build a portfolio of stocks and view a slide show of their charts.
See which sectors are leading the market, and their components.
Disclaimer
This is not an investment advisory, and should not be used to make
investment decisions. Information in Stockscores Perspectives is often
opinionated and should be considered for information purposes only. No
stock exchange anywhere has approved or disapproved of the information
contained herein. There is no express or implied solicitation to buy or
sell securities. The writers and editors of Perspectives may have positions
in the stocks discussed above and may trade in the stocks mentioned. Don't
consider buying or selling any stock without conducting your own due diligence.
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