Stop Working Hard
Stockscores.com Perspectives for the week ending September 25, 2012
| The Mindless Investor |
Tyler's new book is coming this Fall, watch this newsletter for advanced purchase.
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In this week's issue:
If you follow what is said by experts in the media, there is a good chance you will buy and sell too late. This is because the media reports are you reactionary rather than predictive. For more on this, check out this week's Market Minutes video 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, Stop Working Hard:
Traders, particularly those who need to make money rather than those who would like to make money, tend to have a fear of missing out. They hear about a trading idea or find an opportunity with their own effort and make the trade with less thought than they might put into buying a microwave. They can invest thousands of dollars on an impulse, much like the drunken gambler who throws down $1000 on Five Red.
One reason for this sort of reckless approach to trading is the belief that trading ideas are like gifts. They only come along from time to time and you should feel grateful for the opportunity. If you spend 10 hours researching a company or receive the occasional bit of insight from someone who should know more than the rest of us, it's easy to understand why you wouldn't want to let a seemingly promising trade slip through your fingers. The problem is that this gratitude for trading ideas leads you to lower your standards and place trades that are not much more than a gamble.
Have you ever made a trade and then, just a few minutes or days later, asked yourself what the heck you were thinking? If you are normal, then it's likely that you have because it is easy to focus on the dream of making a profit. You should focus your attention on the trading situation as it has been presented to you by the market rather than the words of an expert. Some trading opportunities are so well marketed that it's hard to see the truth because you fixate on the profit potential that has been dangled before you as the prize.
It is critical to only take trades that meet the criteria of a strategy that you have found to have a positive expected value. Rather than look for a reason to take the trade, which is easy, look for a reason not to. Ask yourself, "If I buy this stock, who will be selling to me, and what does she know that I don't know?" Looking at the other side of the argument will often highlight considerations that you have missed.
Being fussy is a lot easier when you recognize that the market-even a slow market-will give you opportunities. On the day I am writing this, a very slow summer trading day when the overall market is down, there are 63 stocks that made statistically significant abnormal gains. Out of the 15,000 stocks that trade in North America, you can usually find some kind of opportunity.
And if you can't find a trade today, tomorrow or in the next week, eventually you will. There is always another bus coming down the road. If you miss one, just wait for the next.
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After strong gains in the first half of September, the market is cooling as investors take profits. This profit taking removes some of the emotion from the market and makes it more attractive to buyers. I expect this process to take at least another week, possibly longer. Until prices have pulled back to the long term upward trend lines, I think it is best for position traders to be defensive and not initiate new trades.Back To Top
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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