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The True Secret To Success In The Financial Markets

You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right. In the world of securities, courage becomes the supreme virtue after adequate knowledge and a tested judgment are at hand. -Ben Graham

There are plenty of folks out there that want you to believe that there’s only one way to make money in the markets (and they’re only too happy to show you how). This is just not true. I truly believe that there are as many ways to make money in the markets as there are unique human beings on the planet.

One thing I hear more and more, especially on social media, is that when it comes to investing, “one size fits all.” Usually, this takes the form of some sort of “passive” program akin to what the robo-advisors are doing. (In other cases, and this is far worse, somebody’s got a “secret sauce” to sell you. When you hear this you should grab your wallet and run the other direction.) And if you’re not doing it their way you’re an idiot.

Now I believe that the growth of index investing is a good thing, generally, and I’m especially excited about the fact that investment costs have been plummeting lately. This has huge benefits for individual investors. But don’t feel bad if it’s not for you.

The problem I have with the way some programs or services are being promoted by some is that one of the biggest mistakes I see investors or traders make is trying to be someone they’re not. They try to assume someone else’s investment style and it just doesn’t work for them. They eventually find themselves in an uncomfortable or painful situation. They don’t handle it well and they make a costly mistake.

So-called “passive” investing may be suitable for lots of people. But just because it may be the right thing for many, it may not fit the unique dispositions of another group of individuals. That doesn’t make them idiots. On the contrary, understanding what best suits your own sensibilities before you run into the inevitable bumps in the road makes you wiser than most, in my book.

If there’s one lesson to be learned from Jack Schwager’s terrific “Market Wizards” series of books it’s that there are a million different ways to be wildly successful in the markets. Every “wizard” does it differently. If there’s one thing they have in common it’s that they’re all unique.

The true secret to success in the financial markets is to find your own unique style, your inner market wizard. Find a style that suits your unique values and natural abilities – your personal circle of competence. In fact, the only way to achieve your own idea of success in the markets is to develop your own style that you can have complete confidence in. And don’t let anyone tell you you’re an idiot for trying.

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Respect The Trends In These “Widowmaker” Trades

“Bull-markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.” -Sir John Templeton

There are a couple of trends out there in the markets right now that are becoming so-called “widowmakers.” Specifically, I’m referring to oil and long bonds.

Oil has been crashing while long bonds have been soaring. Oil is way oversold and long bonds are way overbought. They should both probably retrace a bit of their recent moves simply because they’re both so overextended right now.

However…

See the massive inflows into the oil ETF in the chart above? That is not the sort of “pessimism” that forms a major bottom.

Conversely, in bonds…

Investors have been drastically underweight and heavily short bonds for over a year now. This is why I’ve been writing for some time that bonds may be more likely than stocks to see a “blow off” sort of move.

Now traders are clearly trying to anticipate a trend change in both of these asset classes. They are getting heavily long oil and they remain heavily short long bonds. Now, to be clear, I think they may revert a bit if only to work off their overextendedness (if that’s even a word).

But the big problem with these trades is that the trend is plain as day and traders shouldn’t forget, “the trend is your friend!” Oil is nowhere close to breaking out of its downtrend and long bonds are nowhere close to breaking down out of their uptrend.

Trying to anticipate these trend changes must have been inordinately painful for these traders over the past few months. And the odds are neither of these trends will actually change until we see some real despair in oil and some true euphoria in long bonds, as witnessed in ETF flows or some other similar indicator. At least, that’s what I imagine the brilliant Sir John would have told us.

Follow me on Twitter: @jessefelder

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Does This Pattern Ring A Bell (At The Top)?

Let me preface this post by saying this is really more of a curiosity than anything actionable but I found it rather interesting. My last post focused on the possibility of 2015 being another 1999. This post looks at one indicator that may suggest 2015 rhymes better with 2000.

There has been a fair amount of talk recently about the fact that we have seen a couple of powerful short bursts of buying power that have resulted in the stock market surging 3% in only 2 days time. It happened coming out of the mid-December lows and again over the past couple days (and coming out of the October lows, too):

sc-2As @ukarlewitz points out (guys’s a must follow on Twitter), this is not a very common occurrence during bull markets:

And as I responded, it happened at the peak of the internet bubble in March/April of 2000:

sc-3It’s pretty remarkable how closely these patterns fit, actually. They start will a selloff which evolves into a scary powerful rally to new highs. Then another selloff quickly followed by a matching 3% rally in 2 days.

In 2000, stocks were unable to make a new high on the second attempt. It will be very interesting to see if stocks can manage the feat this time or if history will rhyme and this will end up being a signal that volatility is staging a comeback after another long absence.

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Easy Game

A few weeks ago social media was buzzing with a New York magazine story about a teenager who made $72 million trading stocks during his lunch break at high school. It turned out that was just a farce.

Even before that Business Insider ran a profile of 18-year-old Julian Marchese who is planning to launch a hedge fund from his dorm room at NYU.

Today, the Telegraph bring us the story of 17-year-old Brandon Fleisher who has doubled his parents $50k by picking stocks over the past year. He’s now making recommendations through his new website.

Maybe this game’s just too easy…

Related: Why Dollar-Cost-Average When You Can Just Go “All In”?

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Greatest Hits 2014

Here are the most popular TFR posts of 2014:

  1. Why Mr. Market Is Still Wrong About Apple
  2. This Is Probably The Second Worst Time In History To Own Stocks
  3. For Everyone Who Thinks Tom DeMark’s 1929 Analog Is A Joke…
  4. How To Time The Market Like Warren Buffett
  5. ATTN: DUMB MONEY – The Smart Money Is Selling To You (Yet Again)
  6. Don’t Believe The Hype Of Rising Interest Rates
  7. The New Wolves Of Wall Street
  8. Seeing The Forest For The Trees
  9. The Creative Destruction Of Wall Street
  10. The Problem With Index Funds

So we were bullish on Apple (up 70%) and bullish on bonds (up 20%) and bearish on stocks (up 15%). Well, two out of three ain’t bad.

Thanks for reading. I wish you a very profitable new year!

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