By Alex Salomon
Let’s face it, this column should be short, sweet, and to the point. Something like this: “The single most consistent investment advice is, “don’t ever think you have the market figured out, because it will quickly remind you that you can never completely have it figured out!” Done, over. Easy column, right? Wrong!!
See, the problem with this lesson is that although it’s very true, it’s also very false.
True, because just when you think you ever have the market figured out, ever as in always, the market finds a way to humble you. And false, because if you keep a certain discipline, along with a consistent approach, you can really, truly beat the market over longer time frames. Not always, mind you- but frequently enough that you can actually think you have it figured out!
And it is with this in mind that a broader discussion on beating the market begins: I believe you can actually figure out the market and have frequently, statistically good returns, as long as you follow a few rules:
1) If you are not a pro, do not trade every day, every whim, every move. And further, if even if you don’t have a boss breathing down your neck demanding actions and returns, know that you can figure out the market without over trading. Get out! Reload. Stop. Breathe. Basically, you should trade the way you’d practice a sport, any sport: you have to stop, eat, think, refresh, sleep, live, love, laugh in between practices. It’s the same with Mr. Market! And at your own pace.
2) In general, it is okay to buy despair and sell utter joy. This refers to understanding market psychology and taking the contrarian point of view and buying when it feels like everyone should be selling and selling when if feels like everyone should be buying more; you can actually figure out the market and trade less by understanding when the crowd is starting to become a herd. Again, sometimes the market will humble you (you, us, all of us), but in general, whenever the masses believe the world is going to stop and vanish and disappear, the masses are usually wrong… and vice versa.
3) Learn, understand, and follow key oscillators and watch oversold/overbought signals (MACD). Follow other indicators like RSI (Relative Strength Index) and McClellan, and use tools like Worden … when everything is deeply red, there is usually some green at the end of the tunnel!
4) Just in case the market wants to humble you, always (ALWAYS!) have stops in place. Losses hurt, but learn how to take small losses, and quickly: they’ll help book stronger gains!
5) Lastly, you can be both an investor (research, buy & hold, fundamental analysis) and a trader. But don’t let the rules of each style mingle. Remember that even non-professional traders just need 10 to 20 ideas per year to outperform the market indices. Just 10 to 20 ideas, good execution, stop losses and pressed gains.
The list goes on, but these basics are reminders that with discipline, common sense and contrarian timing, you can actually figure out the market frequently. Not always, but often enough that your returns are likely to beat the other side of the crowd.
Any opinions expressed herein are solely those of the author and do not in any way represent the views or opinions of his employer or any other person or entity.