STUDY:
INVESTORS WHO DO NOT SMOKE CRACK - LOSE ON STOCK
by James
West
forever a student of the markets
April 29, 2006
Markets ebb and flow because of buyers and sellers. For whatever underlying reason - be it news or hype, if you have more buying than selling the markets tend to rise, and conversely if you have more selling than buying the markets tend to decline. And if the pressure is roughly equal from both sides � the bulls and the bears � markets tend to stay in a trading range.
Obviously! Oh my, is this guy on crack or something?
Yes I am actually; it is what keeps me going after all these years.
No seriously, if EVERYBODY knows what drives the markets up and down, why do average investors � time and time again � buy when there are more sellers than buyers in the market? And why do these investors sell or worse sell short when there are more buyers than sellers? Why do the vast majority of investors lose money on Wall Street over time?!
Why? Why? WHY? WHY!??!?!? SJDFLkjSLDKfjlKSDJfkjSDLfjL:kjfJSE ! WHYYYYY!!!???
Are all these investors incompetent? Are they illiterate? Are they unwilling or lazy? I do not think so. I think they are all quite capable. In fact I think the answer has more to do with their lack of experience than anything else. (On a side note, a rarely mentioned statistic: most investors who LOSE money in the market are NOT on crack, hmm...an interesting correlation, I say more research is required to investigate this matter.)
Lack of experience (or know-how)
Do
you need to go to school to become a doctor? YES
Do you need to go to school to become a lawyer? YES
Do you need to go to school to become an electrician? YES
Do you need to go to school to become an investor? NO! Who the heck
needs education, when I know this AMAZING stock! It will go up forever,
and then some more! I swear it; it’s taking off right this second!
BUY! BUY! BUY!
Here lies the real problem � all jokes aside - we think we �get� the market, but in reality the vast majority of investors have no darn clue. They see things go up and down, and make up ridiculous and totally bogus causation extrapolations as to why things happen. Often to satisfy their own biased point of view. How ridiculous and how bogus? Sometimes even more ridiculous than my reasoning that since most people that lose their shirts investing are not crack users, that's precisely the reason why they lose. So I am in a sense suggesting you try some crack if you want to make some money on some trades. But before soon it gets even worse: picture an investor who made a �killing� on Google 3 trades in a row, what they consider fundamental and/or technical analysis or whatever is in reality pure gambling. But do not tell them that, they are now masters of the art, and just made a 4th profitable trade on Google. They bet more heavily now in anticipation of a good earnings report. Google beats, but the tax expense is more than expected, and the stock sells off. In one trade they lost more than what they gained in the previous four. And herein is their greatest mistake: they get out of the markets. Instead of learning from their own mistake, in frustration they turn their back on the market and leave. Oh, do not worry too much, they will come back to trade Google another day. But did they learn anything? (Like selling a speculative issue � or hedging - before earnings hit). Except that Google sucks and that everybody in the market should burn in hell for it? No, not really. (True story)
The solution
�Read more, learn more, change the globe� � Nas
Or at least make some money trading!
It is really quite simple; to be a competent investor one must first invest in himself. All you have to do is educate yourself, and keep learning until the very end. It is an ongoing process, just because you were successful in the 90s does not guarantee any future success. In fact one�s failure to re-adapt and re-educate himself can lead to significant losses in a heartbeat.
I never said it was easy, I only said it was simple. I mean think about it, all you have to do is get educated; the caveat is that it takes years and years before you can make a living from trading.
Whatever, James, you big loser, what makes you think you know everything?
I do not know everything; in fact I do not claim to know anything at all. But that is precisely why I study the markets extensively and learn of their behavior. The markets are a game of probabilities, and in terms of risk to reward ratio, my chief goal in investing is to select trades that minimize my risk and maximize my reward potential. How? Through knowledge; and knowledge comes through education also known as learning.
I am a new contributor for Financial Sense, and I hope to meet new people, learn new things, share my own ideas and most importantly help others to learn. I want to help others like others helped me before I knew anything at all.
Next week I plan on writing an essay titled: �Commitments of Traders Report: The 1987 Crash�. It is going to be one of several essays on the COT (Commitments of Traders) report which will all share three common objectives:
- To identify commercial activity (are they buying, selling or neutral on the market)
- To analyze how and when this very activity moves the markets
- And finally, to discuss how an investor can profit with this knowledge in mind
Remember the introduction? If there are more buyers, the markets tend to go up and if there are more sellers, the markets tend to go down. This is exactly what the COT report does, it gives us a snapshot of demand and supply or in other words are there more buyers or sellers? Please make note: we do not care as much for the reason(s) behind the buying or the selling, we are simply trying to find out if there are more buyers or sellers in the market. And as we all remember, for the tenth and final time, more buyers leads to higher prices, while more sellers leads to lower prices.
There is an excellent archived interview with Larry Williams � a user of the COT for more years than I have been alive for. I highly recommend you listen to the interview, if you are serious about investing. It is only 40min in length, and when you have some free time, go and read the book mentioned in the interview.
Here is the link - http://www.financialsense.com/Experts/2005/L_Williams.html
Sorry for the long rant, future posts will be very direct and to the point. Hope you had a chuckle; all references to crack are just that, references. Old addictions die hard, so please: no call police!
Think for yourself
Attached below is a chart that will be discussed in my next essay. I removed all the labels, so for now, it is unbiased fact. Look at it, study it, sniff it a little for good measure, but think for yourself, and come up with your own conclusions.
Until next time,
All the best,
James West
© 2006
James West
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James West
Toronto, Ontario, Canada
Email: westjam @ gmail.com (Remove the space before and after @ when
sending your email)
