Best of the Week
Most Popular
1.U.S. Inner City Turmoil and Other Crises: Ron Pauls Predictions for 2015 - Dr_Ron_Paul
2. What’s In Store For Gold Price in 2015? - Ben Kramer-Miller
3.Crude Oil Price Ten Year Forecast to 2025: Importers Set to Receive a $600 Billion Refund - Andrew_Butter
4.Je ne suis pas Charlie - I am not Charlie - Nadeem_Walayat
5.The New Normal for Oil? - Marin_Katusa
6.Will Collapse in Oil Price Cause a Stock Market Crash? - OilPrice.com
7.UK CPI Inflation Smoke and Mirrors Deflation Warning, Inflation Mega-trend is Exponential - Nadeem_Walayat
8.Winter Storms Snow and Wind Tree Damage Dangers, DIY Pruning - Nadeem_Walayat
9.Oil Price Crash and SNP Independent Scotland Economic Collapse Bankruptcy - Nadeem_Walayat
10.U.S. Housing Market Bubble 2.0 Meet the Pin - James_Quinn
Last 5 days
Bitcoin Price Tense Days Ahead - 27th Jan 15
The Most Overlooked “Buy” Signal in the Stock Market - 27th Jan 15
Gold's Time Has Come - 27th Jan 15
France America And Religious Terror War - 27th Jan 15
The New Drivers of Europe's Geopolitics - 27th Jan 15
Gold And Silver - Around The FX World In Charts - 27th Jan 15
It’s Not The Greeks Who Failed, It’s The EU - 27th Jan 15
Gold and Silver Stocks Investing Basics - 27th Jan 15
Stock Market Test of Strength - 26th Jan 15
Is the Gold Price Rally Over? - 26th Jan 15
ECB QE Action - Canary’s Alive & Well - 26th Jan 15
Possible Stock Market Pop-n-drop in Store For SPX - 26th Jan 15
Risk of New Debt Crisis After Syriza Victory In Greece - 26th Jan 15
How Eurozone QE Works: A Guide to Draghi's News - 26th Jan 15
Comprehensive Silver Price Chart Analysis - 26th Jan 15
Stock Market More Retracement Expected - 26th Jan 15
Decoding the Gold COTs: Myth vs Reality - 26th Jan 15
Greece Votes for Syriza Hyperinflation - Threatening Euro-zone Collapse or Perpetual Free Lunch - 26th Jan 15
Draghi's "No-growth" QE Money for Stocks, Zilch for the Economy - 25th Jan 15
Unjust and Undeclared Wars - 25th Jan 15
The European Central Bank Commits Monetary Suicide - 25th Jan 15
Stock Market ECB EQE week - 25th Jan 15
Gold And Silver Timing Is Most Important Element - 25th Jan 15
The Best Way to Invest in the Next Alibaba Internet Stock IPO - 25th Jan 15
The Outpatient Surgery Business Rains Cash into Healthcare Stocks - 25th Jan 15
Stock Traders Flock to Gold GLD ETF - 24th Jan 15
10 Reasons Why You Need an Offshore Bank Account - 24th Jan 15
Goldman Sachs Blankfein - Regulation is Like Background Noise - 24th Jan 15
Gold in Euros Surges As ECB To Print Trillion Euros and Greek Election This Sunday - 24th Jan 15
Gold Bear Market Rally or New Bull ? - 24th Jan 15
Euro-zone 'QE already Working' Says IMF Lagarde - 23rd Jan 15
ECB and EU LTRO and QE for Dummies: Or, Make These Trades - 23rd Jan 15
Debt and Deflation: Three Financial Forecasts - There's More Than Falling Prices - 23rd Jan 15
Market Should Not Doubt' Mario Draghi ECB QE - 23rd Jan 15
Francs, Bonds, Barrels, and Bail-Ins - 23rd Jan 15
Are Plunging Petrodollar Revenues Behind the Fed’s Projected Rate Hikes? - 22nd Jan 15
Stocks Bear Market Lessons from History - 22nd Jan 15
Russia's Plans for Arctic Supremacy - 22nd Jan 15
166 Trillion Reasons Why Bank Stocks Are So Cheap - 22nd Jan 15
Will Gold Price Break Out Once Again? - 22nd Jan 15
The Cult of Central Banking - 21st Jan 15
Five Stock Market Questions Wall Street Hopes You’ll Never Ask - 21st Jan 15
China's Yuan Enters the Currency "Big Leagues" to Take on the Dollar - 21st Jan 15
Investor implications of QE by the ECB - 21st Jan 15
Deflation Bonanza! And the Fool's Mission to Stop It - 21st Jan 15
Messin' With My Financial Brain - 21st Jan 15
Are Stock Market Buyouts Checking Out? - 20th Jan 15
Legal “Steroids” Are Making This Tech Stock a “Buy” - 20th Jan 15
Are Stock Market Storm Clouds Massing? - 20th Jan 15
The Swiss Release the Kraken! - 20th Jan 15
The European Union, Nationalism and the Crisis of Europe - 20th Jan 15
Swiss Say No to QE - 20th Jan 15
Gold Demand Explodes as Volatility and Fear Stalk Market - 20th Jan 15
The Truth About This Stock Market "Meltdown" Indicator - 20th Jan 15
Markets 2015 More Of The Same? - 20th Jan 15
Is Market Sentiment Shifting to Gold? - 20th Jan 15
U.S. Dollar’s Major Breakout and Gold’s Simultaneous Rally - 19th Jan 15
Silver Price Breaks Out on Swiss France Euro Decoupling - 19th Jan 15
Gold Bullish Inverse Head and Shoulders Pattern - 19th Jan 15
Bundesbank Announces Repatriation of 120 Tonnes of Gold from Paris and New York Federal Reserve - 19th Jan 15

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

State of US Markets 2015 Report

Trading Volatility, How to Beat the Stock Market at its Own Game

InvestorEducation / Learn to Trade Apr 17, 2012 - 06:52 AM GMT

By: Money_Morning

InvestorEducation

Best Financial Markets Analysis ArticleKeith Fitz-Gerald writes: Many investors are convinced the market is stacked against them.

It is.... but not for the reasons you might think.

Dismal returns actually have very little to do with super computers, research, insider information or access to the trading floor.


The real issue comes down to something very simple - the difference between how individuals and professionals approach stock market volatility.

Most investors head for the hills when volatility rises.

Successful traders, on the other hand, embrace it because they know stock market volatility represents an opportunity.

I find this especially ironic considering how often I hear individuals tell me they invest because they want the "big gains."

Because most of the time they choke at the very moment when the upside potential is highest. Instead of buying when prices are low, they head for the exits.

This costs them big time.

The Perils of Stock Market Volatility
A 2011 study from DALBAR, a Boston-based research firm, shows that investors achieved a mere 41.9% of the S&P 500's performance over the 20 years ended December 31, 2010.

In other words, investors left 58.1% on the table.

The DALBAR study also shows that the average investor achieved only 3.8% a year versus the 9.1% annualized returns of the S&P 500 because they tended to jump in and out of the markets at the worst possible moments.

Adding insult to financial injury, Berkeley Finance Professor Terrance Odean's analysis of more than 10,000 retail brokerage accounts shows that the stocks investors sell tend to outperform the ones they buy.

In fact, Odean found that winning stocks went on to gain an average of 3.4 percentage points more in the year after they were sold than the losers to which investors clung.

The pros have a very different view.

While they do sell on down days, many are also buying, sometimes very heavily depending on their objectives and market outlook.

In contrast to individual investors, who tend to fly by the seat of their pants, the pros I know keep a short list ready of quality companies they want to own.

And they don't hesitate to add to positions at predetermined price points when the markets get carried out feet first or suffer a protracted downdraft.

Quite a few, including myself, actually prefer to wait for big down days because we know the odds are firmly on our side. It may appear as though we're timing the markets but nothing is farther from the truth.

We're simply waiting until we know that we have a quantitative advantage associated with upside potential.

Think about it.

Stocks that have run up are extraordinarily susceptible to a fall. They're expensive and far more likely to lag the markets or get cheaper than they are to continue into thin air--especially if they're media darlings.

What's happening to Apple right now is a good example. After rising 59% this year to a peak of $644, the stock is once again under $600 and has fallen five straight sessions in a row.

Stock Market Volatility and the Other Side of the Trade
People often ask me if there's any sort of confirming indicator that helps me know if it's okay to wade into the fray. There is...

When I see a big spike in volume on a heavy down day, I know the stocks I want to buy have likely undergone a change in sentiment amongst the retail investors who are jettisoning them.

This means they are primed for a reversal.

But again, I cannot stress this enough. I really don't care about "timing." I am very content to be early to the party or even a little late because I know that changes in sentiment, more often than not, coincide with changes in market direction.

I have studied my market history and behavioral finance. Most individual investors have not, which is why they fall back on their emotions, rather than logic, when the stuff hits the fan.

What I am looking for is the opportunity to beat the "casino" - i.e. the market - at its own game. My goal is to benefit from the absurd decisions of other market participants.

The legendary Jim Rogers has this down to a science.

He doesn't believe in "timing" either. In fact, Mr. Rogers has referred to himself as the "world's worst market timer."

I asked him about this a few years ago. He put it to me very simply: "When everybody goes to the same side of the boat, it's logical to take the opposite side of the trade."

My take is similar...when it's easier to scare the hell out of people than it is to attract them to the markets, the smart money almost always goes long.

People forget that the U.S. stock market - as measured by the Dow Jones Industrial Average using weekly data - fell more than 89% from 1929 to 1932, more than 52% from 1937 to 1942, and more recently experienced a decline of more than 53% from 2008 to 2009. That doesn't even include the four 40+% declines beginning in 1901, 1906, 1916, and 1973.

Each of them was a great buying opportunity.

Following those epic meltdowns, the markets rose more than 371% from 1929 to 1932, more than 222% from 1949 to 1956, more than 128% from 1937 to 1942, and more than 95.68% in just over two years starting in March 2009 - one of the fastest "melt-ups" in market history.

If you didn't buy in, you missed out.

Successful Traders Never Fall in Love
Over the years, I've observed something else that relates to how investors approach volatility. They tend to think only in terms of rewards.

Most are more concerned with being "right" about an investment than they are about being profitable.

As result, few can think clearly when the markets get bumpy. Fewer still can admit defeat even when doing so may actually save them money.

For example, Professor Odean's data shows that investors are far more likely to sell winners and incur capital gains than sell losers and avoid them in the first place.

Pros, however, view investments with clinical precision. They tend to wake up each morning wondering what will cause them to lose money that day.

They go to bed asking themselves, "did I manage to avoid those things?"

Successful traders never fall in love with their assets. They don't care about being right, but place a premium on being profitable. If it takes three or four tries to get it "right" they're okay with that.

Retail investors constantly hunt for the next best thing. They confuse hype with actual potential.

Many wind up so far behind that they'll never catch up.

Worse, they grow desperate and take on disproportionately large risks just to break even. Having seen their portfolios cut in half twice in the last decade, that's the mindset many find themselves in today.

Pros, on the other hand, tend to take measured steps based on carefully defined objectives.

They never lose sight of the fact that stocks are what they are...ownership in a company and the cash flow it generates.

Three Ways to Trade Stock Market Volatility
When things begin to get bumpy, here are three ways to beat the market at its own game.

•Buy the VXX any time the VIX drops under 12. The iPath S&P 500 VIX Short Term Futures ETN (NYSE: VXX) reflects the implied volatility of the S&P 500 Index, closely tracking the VIX. Low readings reflect complacency. But to professionals, protracted periods of low volatility suggest things will get rougher ahead. Why doesn't really matter. What you're doing with this trade is simply establishing a position ahead of time before the markets experience their next "black swan" event and volatility skyrockets.
•Pick up shares in the RYURX. The Rydex Inverse S&P 500 Strategy Fund (RYURX) rises when the S&P 500 falls. Studies suggest that investing 2% - 5% of overall assets in non-correlated assets like the RYURX can reduce overall portfolio volatility. I think of it in much simpler terms...having a source of profits like the RYURX can help average investors embrace volatility while everybody else panics.
•Create a "Buy" list of 3-5 companies that you would purchase if you got the chance to do so at a deep discount. This could be stocks like Apple (NASDAQ: AAPL), Google (NASDAQ: GOOG) or Berkshire Hathaway (NYSE: BRK.A) that are prohibitively expensive under normal market conditions, or simply flyers like the upcoming Facebook IPO. Set aside the required capital if you can and issue the appropriate instructions to your broker ahead of time. Then, celebrate if your order gets filled on a day when most investors will be crying in their beer.

At the end of the day, you can blame anything you want for dismal returns. But in reality the ultimate arbiter stares back at you every morning in the mirror.

History suggests that if you listen to your emotions at every fork in the road, you'll panic and make decisions that carry you farther away from what you crave most - big returns.

But if you listen to your head and capitalize on the opportunities that chaos creates, chances are that you'll do all right.

Source :http://moneymorning.com/2012/04/17/stock-market-volatility-how-to-beat-the-market-at-its-own-game/

Money Morning/The Money Map Report

©2011 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2014 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Free Report - Financial Markets 2014