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Almost Trading For A LivingMy passion is trading |
The money train is leaving the station
The Dow is at a new all-time high. All of the major financial publications can't hype this market enough. Are you fully invested? If you haven't been fully invested, you probably feel a bit frustrated that you could have had more "in." Perhaps, you feel that everyone else must be doing better than you. You almost can't take it if this market goes up one more day and you aren't fully invested. These emotions that I am talking about are perhaps some of the strongest feelings that you can have about the markets according to behavioral finance. The feeling that everyone else is doing really well, and you may not be doing as well as all of "them." Your natural instinct is to get on board as quickly as possible so they do not "pull away" so far that you can't catch up. You will be "left behind." And no one likes to be "left behind," whether in the stock market or doing anything is else in life. Interestingly, investors aren't as bothered when they are losing money when the market is doing poorly because they feel that everyone is losing money along with them. Misery loves company. So, your feelings really are not derived as much from you making or losing money as much as how you are doing relative to everyone else. Your instinct is actually to be like everyone else more than it is to be successful and stand out from the crowd. That is how we survive as a species- by following, not by being different.
Unfortunately for us, our instincts tell us to take the wrong actions in terms of beating the stock market. As a matter of fact buying the markets at new multi-day/week highs significantly underperforms over the next 5 days versus just buying at any random time in the markets. To be more specific in terms of individual stocks, over the past 10 years if you bought every stock that made a 10 day high and held on to it for 5 days-you made an average of 0.19% per position. Yet the average for all stocks for a 5 day period was 0.31%. In other words (but without sharing all of the different perturbations of this), buying at new highs consistently underperformed any other time to buy. As you can probably guess, buying at new multi-day lows significantly outperforms buying at new highs (or just buying randomly). Just remember, I am talking about how the market performs over the subsequent week, not month or year.
The point of all of this is that when you see the hype, and when you feel that you are missing out on something...just stop. Go away. Turn off the TV. That is not the time to buy. Everyone and their mother feels the same way you do. You can't beat the markets by going with the herd. If you want to buy, wait for that time when people are afraid of the market, when it's been down for several days in a row. When there is a multi-day low. When people think that you are stupid for buying stocks. That is the time to buy.
My one take home point from this is...when you feel that the "money train" is leaving the station all filled with people without you on board, wait back at the station, more often than not-that train is headed for a wreck!
Don't get suckered in.
Steven
special thanks to the CC for this topic
- How Often Should You Be "all In"
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NOTE: Please click on the charts below to enlarge them if [read more]
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10 Comments:
Thanks for this advice. It makes me feel a whole lot better.
Shash
Your negativity about the market is good. When there's still a fair amount of pessimism in the market, the rally can continue. When everyone is optimistic, get out.
Steven - Thanks for the excellent article - Highlights investor pshycology. I'd say there is potential to gain from this mentality and take a short position in the market.
You are quite negative on the markets and you keep missing the rally. Such pessimism is unhealthy. This market is headed for no wreck, just Dow 12,000 and beyond. Sorry you missed the train!
Mutual fund cash levels are currently at 3.8%. Similar to the cash levels at the 2000 market top. Mutual fund managers are extremely bullish and this is bearish for the markets ahead. They have spent virtually all of their cash. There is nothing else left to fuel this market forward.
True mutual funds don't have alot of cash, but there is a ton of cash in money market funds. The truth is that the retail investor has really never come back to the market after the 2000 crash. If that money comes into the market then it can go much higher. The advance is not frothy by any means. It is grudingly going higher. If that money doesn't start to come in then we probably correct in first quarter of next year.
Bull,
Just remember my comments reflect how I feel (felt) over the next 3-5 days.
Don't underestimate the ability of manipulators of the market to hype the Dow to 12193 (short term TA) and beyond. Bush didn't appoint Bernanke and Paulson (heck, he was the head of the biggest manipulator, GS) so that the market will tank before the Nov 6 election. After that, watch out.
it sounds like you have great insite into the psychological aspects of being a trader. have you written any other articles on that?
I am a realtor in arizona and I think we have seen the bottom of the real estate market. greg moser
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