So often as I speak with traders and investors, both new and experienced, I realize they are talking about something they think they completely understand, when in reality their perception of reality is way off. I thought a two part article on “reality” vs. “perception” in markets would hopefully benefit you.
- “Buy and Hold is the best strategy for safe and secure long term investing.”
The two things that people hear and are so attracted to are: 1) Buy and Hold and 2) the market goes up about 6% a year. So, do the quick math and you see how you simply park your investment capital in the stock market and in a certain number of years with compound interest, you will have a big safe pile of money. The full and real definition of Buy and Hold is one that most people never hear or consider. The reality is you “buy into the stock market with no focus on price, no plan for risk and no plan for profit or exit. You can now understand why hardly any retail investors ever come close to achieving their financial goals. Even worse, most 401k holders buy into the market on the 1st and 15th of each month and exit the market at age 65. Obviously these two strategies make no sense. You would never think this way when buying and selling anything else in life because you would never be successful. When you buy and sell things you focus on price. Why do people spend more time on their grocery list than they do on their investment strategy? Great question.
- “Invest as much money as you can, as soon as you can, because of time.”
Wall Street pushes people to invest as much money as they can, as fast as they can, because they say time and compound interest are key to growth. While there is truth to that, the most important factor is one you never hear, which is price. Have you ever been to a magic show? The magician is so good at getting you to focus on what’s going on with the left hand that you don’t even think about looking at the right. Welcome to the Wall Street money machine… They give you the perception of security by having you so focused on investing as much money as you can (which is in their best interest) as fast as you can (again, in their best interest) and the push is so hard because they don’t want you to think or ask about PRICE. Meaning, what price am I entering the market at? The reality is that when Wall Street invests Wall Street money, it’s all about what price they are buying and selling at. I know all of this because I started on that side of the business. Most retail investors don’t ask what price they are buying at in the market and this is the single biggest advantage for Wall Street.
- “The Spot Forex markets are a trillion dollar market.”
While this is true, the reality is that you and I (retail investors and traders) don’t exactly trade that market. Many Retail Forex brokers make markets from quotes they get from banks and then typically widen that spread and pass it on to the retail trader. Essentially, a retail Forex trader at broker “X” is trading the Forex market made by broker “X”. This is why people often ask me the following question: “Why is it that the bids and offers on multiple Forex trading platforms are sometimes a little different, at the same time?” The answer is because they are market makers. If you are a struggling Spot Forex day trader, you may want to consider trading Forex Futures instead as that is typically a more level playing field with many benefits not found in the Spot Forex market. If your swing or longer term trading the FX markets, the spot market is fine.
- “They have good earnings and a broker upgrade so the stock must go up.”
As a trader who needs novice money to come into the market each day, I would tell you to please buy every time you hear good news on a stock. As your friend, educator and proponent for truth, I suggest you look at upgrades, downgrades and earnings for what they really are, news. While the price of a stock will certainly move on earnings, an upgrade or downgrade, which direction they will move and where price will move to is 100% a function of the willing supply and demand at each price level for that stock. Quantifying supply and demand can only be achieved by analyzing a price chart. Often, good news will bring price to a supply level where the astute market speculator will have a quality shorting opportunity. Just as often, bad news on a stock will quickly bring price down to an objective demand level where the astute trader is offered a low risk buying opportunity. The goal is to buy low and sell high; when the news is good the price of the stock is hardly ever low, so use caution regarding that risky market trap disguised as opportunity.
The goal of this piece was to open your eyes to certain issues that may impact you in the financial markets. Next week we will discuss 3 more of those important issues. The more you understand how the markets REALLY work, the more you understand how the industry REALLY works, the better the odds are that you will succeed. The best advice I can offer to prevent you from falling prey to illusion and misinformation is to use your simple logic filter. If a deal sounds too good to be true, it likely is. If a strategy sounds complicated, it likely does not work. You can also always email me if you have any questions.
Always remember, education is NOT the answer, often it’s the problem. Proper education based on reality is what separates the astute market speculator from everyone else.
Hope this was helpful, have a good day.
Sam Seiden – firstname.lastname@example.org