The casino is open and we
must go play now."
That seems to be the
attitude that infects all too many investors. When the opening bells ring on
the NYSE every morning at 9:30 am EST, traders seem to feel the need to do
something.
The ticker tape is
running, the talking heads on the media are cheerleading different stocks and
sectors. The advertisements are almost constant, urging out to trade more
efficiently and smartly, using the new super-duper platform that has all sorts
of charts and the information you need to beat the market.
The sad truth all of this
is done not to help you trade better, but to pay the bills needed to keep the
studio open and keep commission dollars flowing into coffers of brokerage
firms. It creates an atmosphere that encourages activity much like the casinos
set the stage to keep you gambling.
Behavioral Analysis
Virtually every study ever
done on the behavior and results of individual investors has shown us that
retail investors badly underperform the stock market over time. The chief
culprits for this lack of profits are trading too much and have a propensity to
chase the hot stocks and stories of the day.
Year in and year out,
roughly 90 percent of them are set to lose money. Only 10 percent turn a profit
and far fewer beat the market returns, much less squeeze a living out of all
the frenetic in-and-out trading in a short period of time. The brokers do
pretty well off all the activity, but the traders themselves do not do nearly
as well.
Investors and wannabe
traders need to accept a simple fact. If you have a career, a profession, run a
business or are otherwise occupied during the day, you are not going to win the
trading game. Wannabe traders are trading against people with more information
who spend eight to 12 hours a day doing nothing but studying the stock market.
Would you take on LeBron?
Serious traders have a
flock of analysts and more than likely are getting technical advice from the
people who invented the indicators and patterns novices are trying to master.
When trying to beat the market by engaging in short-term trading or switching
from hot stock to hot stock, traders are engaging in the financial equivalent
of playing LeBron James in a game of one-on-one. You are not going to win, and
the statistics and studies have proven that it is a losing game.
It is worse when
individual investors decide to jump over and try to trade options. The depth
and level of knowledge needed to successfully trade options requires full-time
concentration on these markets and in-depth extensive knowledge of math and
statistics. The guy on the other side of your trade is not making directional
bets on markets and indexes and there is a good chance he is a literal rocket
scientist.
The rocket scientist is
armed with enough computing power to conquer the world and that option will be
priced so as to take advantage of your desire to make a bet. The worst thing
that can happen to a retail options trader is to make a few winning bets and
start to think they understand how to trade options. That's when you run the
biggest chance of losing an enormous amount of money. Most individual options
traders are swimming with the sharks while wearing meat suits and just don't
know it yet.
The amazing part of all
this is that individual investors have a huge advantage and simply choose not
to use it. They seem to prefer the excitement of the ringing bells and ticking
tape to actually making money in the stock market. Individual investors have no
mandate that dictates the type of stocks they must buy or which ones they must
avoid.
They do not have to endure
the quarterly performance pressure the larger investors face constantly. They
can buy much smaller stocks than the institutions and hold them for as long as
they like. They have a size and time advantage that is substantial and most
choose not to use it.
It seems simplistic to say
that buying cheap stocks in a bad market is the most profitable way to invest
but it is exactly the truth for investors. If you look at the Forbes list of
rich people the ones who made their money directly from investments and not
just fees like Warren Buffett and Wilbur Ross made their money in exactly that
fashion.
Be a boss like Schloss
Consider an investor like
Walter Schloss who never aspired to be the biggest and kept his fund small but
constantly just bought all the cheap stocks he could find and held them until
they worked. Schloss earned about 20 percent gross for his investors for almost
50 years simply by buying cheap stocks in bad markets and holding them for long
periods of time. He took advantage of the size and time advantage and made an
enormous amount of money for himself and his investors.
There is a reason private
equity is consistently one of the highest performing asset classes. Investors
buy businesses when condition in the economy, or a specify sector, are not very
good and they can buy a business at a bargain price. Investors hold them for a
full business cycle or two and sell them in five years or so at a huge gain
when conditions have improved substantially.
Investors could care less
about the ticker tape or the candlestick pattern of a portfolio company and
focus only on the business value. This is exactly the approach individual
investors need to use to make money in the stock market.
Price and patience is the
key to stock market profits. Buy businesses at a cheap stock price and hold
them until they are no longer cheap. Ignore the bells, patterns and noise
coming from Wall Street.
Your broker may not like
it, but your accountant will.
Author: Tim Melvin is a value investor,
money manager and writer. He has spent the last 27 years as in the financial
services and investment industry as a broker, adviser and portfolio manager. He
has also written and lectured extensively on the markets with his work
appearing on RealMoney.com, DailySpecualtion.Com as well as several print
publication including Active Trader and the Wall Street Digest. You can learn how Tim invests in low risk, high yield stocks by clicking here andwatching his FREE webinar now.
