10 Inconvenient Truths About Investing & The Markets

Tyler Durden's picture

Authored by Lance Roberts via RealInvestmentAdvice.com,

This morning, as I was catching up on my reading, I stumbled onto this gem from Business Insider of an interview with the founder of Robinhood, a mobile app to let individuals trade stocks with no commissions.

“It’s [Robinhood Gold] serving a need that we saw in a part of our core user base, which includes people using Robinhood for the first time as well as those who have been with us since the beginning. A really large percentage of those users have become more mature investors. The No. 1 thing they kept asking for was the ability to use a margin feature.

With margin debt levels at already record high levels, the demand by individuals to leverage themselves into the financial markets has always, without exception, ended extremely poorly. Since the vast majority of users of the Robinhood app have never seen a bear market, the real lessons of trading have yet to be learned. 

It also brings me to today’s post.

One of the first rules that any successful long-term trader or investor will tell you is to keep a written record of your activities. This provides the basis for you to learn what you are doing right, but more importantly what you are doing wrong. The secret to investment success is actually quite simple and can be summed up as follows:

“Do more of what works and less of what doesn’t.” – Dennis Gartman

As I was reviewing some old trading notebooks this past weekend, a folder sheet of paper fell out of one of my 2011 binders. It was a printout of the “20-Truths Of Investing And The Markets” by Ivan Hoff of Ivan Hoff Capital.

I wanted to share my 10-favorites with you by adding some illustrations as well.


1. Stock prices run in cycles. Periods of re-pricing are usually quick and powerful.

Read: Soros – A Rudimentary Theory Of Bubbles

2. Stocks are very highly correlated during drastic sell offs and during the initial stage of the recovery. In general, correlation is high during bear markets.

Read: I Bought It For The Dividend

3. Try to trade in the direction of the trend. It is not only the path of least resistance, but also provides the best profit opportunities. Have a simple method to define the direction of the trend.

Read: Managing A Trend Change

4. Being wrong is not a choice. Staying wrong is.

Read: You Can’t Time The Market?

5. The overall market conditions will never be perfect and when they seem so it is probably a good idea to decrease exposure and take profits. With that in mind, you don’t have to be in the market all the time. When you don’t see good setups, it just makes sense to watch from the sidelines.

Read: 7-Myths Of Investing

6. If you understand the incentives of the major market participants, you will be able to predict their likely behavior. Technical analysis is a lot about understanding incentives and recognizing intentions.

Read: 7-Trading Rules You Won’t Follow

7. Your first loss will often be your best loss. No one is right all the time and you don’t have to be. There are market participants that are immensely profitable by being right only 30% of the time. It is good to have conviction in your investment thesis, but discipline should always trump conviction.

Read: The Psychology Of Loss

8. Optimism and pessimism in the stock market are contagious. Investor psychology often loses its logic and become emotional. The news media and the most recent price action play a particularly important role in developing moods of mass optimism or pessimism.

Read: 5-Universal Laws Of Human (Investment) Stupidity

9. Rising P/E is an indicator of rising expectations and confidence in the future of the stock. The P/E ratio reflects the enthusiastic optimism, or the gloomy pessimism of investors.

Read: Valuation Measures And Forward Returns

10. It doesn’t matter how smart you are, how ingenious your idea is or how cheap your stock is – if the market does not agree with you, you will not get paid. Period.

Read: The Big Lie Of Market Indexes

These are just reminders to keep you grounded in the reality of how money, and investing, REALLY work over the long-term. While it is easy to get lost in the excitement of the moment, the brutal return to reality has always been a costly lesson to re-learn.

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Croesus's picture

Check your White Priviledge:

Make sure it's loaded.

Nothing's picture

This time "is different".  FOR REAL.

Because this time, there are so many smaller investors aware that something big is afoot, and armed with margin accounts, options experience, and instructions from Zero Hedge.

 

I am betting there are going to be some serious, face-ripping short squeezes before the dust settles .....

DavidC's picture

What, you mean like all the face ripping short squeezes there have been since 2009 and the central banks' absolute fear of ANY fall in the stock market?

DavidC

Iconoclast421's picture

I love how the giant "BUY!!!" in 2013 has now conveniently become a meager little "Buy?"

LawsofPhysics's picture

LMFAO!!!!

Stop it!  This is NOT 1920 or 1933 or 1974 or 2003 or even 2009... 

 

ALL of the central bankers/financiers have been working together on a global scale to destroy any and all mechanisms for true price discovery!!!!  Remember, all stimulus is fungible!!!  This time is different in so much as this time we are eventually going to be dealing with a global currency crisis (a.k.a. Global fucking Weimar)!!!!

In the meantime...

"Full Faith and Credit"

Hikikomori's picture

Reading the "Psychology of Loss" post on this fellow's blog, he was saying the end was here on February 9, 2016.  Since then, the S&P500 is up about 30%.

Caveat Emptor......

PUNE's picture

some good info here. I know the readings of Shep Wave have been on target.  Thanks.

Expat's picture

Basically, the summary of this is that markets grind upwards and collapse downwards.  The upward grind is slower because the real economy does not expand by 20% a year.  Additionally, greater fools must be hunted down and enticed into the market; it is a truism that most bull market investors invest near the top.

A bear market is either a panic or economic reality setting in.  When you are losing or think you will lose more, you will sell at any price.  If the market was in a bubble, suddenly investors eyes are opened and they discover that this time isn't different after all, but heck, no one could have guessed that on the way up, right?  If it's an economic let-down, then the drop tends to be less violent but this still creates panic.

Americans are trained by Bloomberg and CNBC to believe that 1% up days are normal and should take place 250 days a year while 1% down days are catastrophic corrections brought about by irrational panic or misinterpreted Fed minutes.  BTFD, etc.

Hoi_Polloi's picture

Lost me at "Gartman."

ThanksIwillHaveAnother's picture

Escalator up, elevator down.  Trending is backward looking.   CB's can always jump in at wha?t looks a top (see recent history charts).   But are CB's all powerful?   Especially when TPTB want to get rid of Trumpster?

Let it Go's picture

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