Avoid These 3 Pitfalls to Book Gains in a Volatile Market
Traders and investors are scrambling to adapt to the “new normal” now that volatility has found its way back into the markets.
Thanks to the internet, you can find countless forums and message boards filled with anonymous mouth-breathers who are ready to spout their unprofessional opinion on whatever topic you ask.
But advice from so-called “professionals” in the mainstream financial media is sometimes just as bad…
Your best bet when it comes to figuring out the cutthroat trading game: Don’t trust anyone.
No one has your best interests in mind — except you. That’s why you can’t just listen to anyone. Most people have no idea what they’re talking about.
In fact, I’ve identified three stock market forces that are screwing you out of winning trades and why how to steer clear of them.
Here they are (in no particular order):
1. The Financial Media
Nothing’s better than a finance reporter if you want to make some money. Just do the opposite of whatever he says.
Don’t get me wrong, there are some great columnists and bloggers out there. But finance reporters — whose main job is to make up reasons why stocks are up or down on any given day — have no idea what’s actually driving the market. Don’t buy or sell based on what they say.
Think about it. By the time a major investment theme hits the newsroom, it’s probably too late to hop onboard. Plus, reporters are susceptible to prevailing investor emotions. If the herd is worried, the media’s worried. If investors are crazy bullish, so are the journalists.
Oh, and did I mention they’re mostly clueless when it comes to trends, the main drivers behind Wall Street’s winners and losers?
Don’t believe me? Just check out this Barron’s cover from 2012:
Today, shares sit around $180.
If the headlines attract eyeballs, they’ll print it. Doesn’t matter if it’s good advice, bad advice, or no advice at all.
Yes, you read that correctly. Analysts, the professionals who rate stocks as buy, sell, hold, overweight, underweight, neutral, and a ton of other nebulous designations, aren’t going to help you pick winning trades or investments.
Because analyst ratings don’t mean jack, especially when it comes to bigger stocks that command a ton of coverage. These analysts have only one task: don’t stray too far from the pack. Don’t make any bold statements. And certainly don’t swim against the current. Analysts can lose their jobs if they stick their necks out.
Whenever you see a popular stock begin to crash, analysts start popping up out of the woodwork defending their bullish price targets.
While they’re trying to save face, the stocks will probably continue to drop. Whenever you see analysts mount a staunch defense of any company, it usually means it’s a good time to cut and run. When they finally capitulate and lower their price targets or tell you to sell, you could (eventually) have a nice buying opportunity.
3. Fund Managers
According to a recent study, active fund managers who outperform their benchmark in one year usually don’t post similar gains in the following years.
“If you have an active manager who beats the index one year, the chance is less than a coin flip that the manager will beat the index again next year,” a senior analyst at S&P Dow Jones Indices writes in the report.
That’s why you should never, ever, ever (ever) scoop up a stock because some “smart money” fund manager is talking it up on television.
Most of the time, when a money manager is talking up a stock, it’s because it’s one of his worst performing positions. They call it “talking your book” for a reason. Again (and I can’t emphasize this enough) these guys are in it for themselves. They don’t give a damn if you make money or not. They just want their holdings to go up so they can keep their rich clients happy.
Investing is a war. These are the forces that want to pillage your brokerage account for every cent you have. Ignore them and you’ll have a fighting chance at banking some serious gains.