Conviction Is A Good Thing… Just Tune Out The “Big Calls”

A large segment of Wall Street – analysts, news pundits, etc. – is paid to make calls for individual stocks and the broader stock market indices as a whole without personally committing capital towards these predictions. Do you see any conflict there?

If your prediction is wrong, the majority of people seem to forget about it.

On the other hand, if your prediction that oil will never trade back above $44 in your lifetime or that it’s time to sell everything actually proves to be true, then you look like you are this omniscient being who can predict tomorrow’s weather. Of course, some folks making big calls have some “skin in the game” so-to-speak, while others don’t. But regardless, the financial news and media offers huge advertising for these pundits they often attempt to make the boldest call or prediction since it leads to greater attention and clicks. It sounds like a strong trading conviction… but some times

I recently read an article that stated it perfectly – From Globe and Mail:

“The more dramatic those calls are, the more publicity their firms receive. Clients and the public expect these forecasts: Nobody wants to read a report headlined, ‘Our 2016 Forecast: Don’t Know.’…But the truth is, forecasters don’t know…In the vast investing-entertainment complex of financial websites, TV shows and chat rooms, their predictions generate short-term buzz and are quickly replaced by the next headline-grabbing call. The financial industry thrives on this sort of excitement and action.” 

The consequences of these click-bait headlines are worse than the simple possibility of tarnishing these firms’ reputations. Investors hear these predictions being professed by these so-called professionals with seemingly no doubt, leading many to make sub-optimal decisions. If investors followed the calls by many analysts, strategists, and pundits to get out of the market earlier this year, they missed out of a market that has rallied over 16.5 percent off its lows, in the case of the S&P 500 (the Russell 2000 has rallied over 21 percent off its lows). There is also psychological trauma that accompanies missing a move like the one we have seen recently. Some investors may even go as far as to blame the market as being rigged against them in their fiery storm of anger and despondence. Someone has to be responsible and it certainly can’t be me!

Now I recognize that bold calls and predictions aren’t going away any time soon on Wall Street and most likely never will; to think that is to think that the general concept of advertising and marketing will cease to exist as well. But it is imperative for investors to realize that most of these calls – especially the obnoxious ones – are merely Wall Street’s version of marketing.

Investors need to realize that a more efficient and less hazardous use of their time as a market participant is to focus on what they can control. You as an investor have absolutely no control on the market, but you have all the control in the world over your actions.

contrarian investor sentimentEven if you are an individual retail trader – opposed to a long-term investor saving for retirement – it is still just as important that you focus on what you can control as well. Hypothetically, let’s say you have a thesis that the broader U.S. market is about to drop for whatever reason (technically, fundamentally, your fortune cookie said so, etc.). It would be rather unwise and, frankly, reckless to just hit the bid and get short the market without any consideration of basic risk management. At what point will your thesis be proven incorrect? At what point will you stop yourself out of the trade and move on? Answering these simple questions will save you both money and frustration in the long run.

As a shorter-term trader, there are times when I have great trading conviction about a setup. All the stars align according to my personal trading playbook, and I put on a large position (within my risk parameters of course; I never put on a position that will make or break my account). But at the same time, I always outline where I will be wrong and where I’ll hit out of my trade. While I may have a strong trading conviction at the time, I also recognize that I am one market participant, trading a particular trading product, trading a one particular style, trading one trading setup. I never forget that the market does not care what I think and has no regard for my open positions. When I’m wrong, I cut my losses and move on to the next trade. There is no need to be stubborn. When your trading thesis is no longer valid, get out of the trade. Plain and simple. This isn’t to say that losses don’t hurt, but limiting your losses when you are wrong will allow you to stay in business and hopefully maximize your gains when you are right.

In summary, no matter who you are as a market participant – a long-term investor saving for retirement or the more active retail trader – always take bold calls and predictions with the smallest grain of salt. Recognize that “professional prognostication” is Wall Street’s word for marketing. Do not focus on what is outside of your control. Instead, focus on what you can control: your actions.

Thanks for reading. And please let me know if you have any questions or comments.

More from Jake:  2016 Stock Market Update: Key Charts & Indicators


Twitter:  @MarketPicker

Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.


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