Best of the Week
Most Popular
1.The Brexit War! EU Fearing Collapse Set to Stoke Scottish Independence Proxy War - Nadeem_Walayat
2.London Terror Attack Red Herring, Real Issue is Age of Reason vs Religion - Nadeem_Walayat
3.The BrExit War, Game Theory Strategy for What UK Should Do to Win - Nadeem_Walayat
4.Goldman Sachs Backing A Copper Boom In 2017 - OilPrice_Com
5.Trump to Fire 50 US Cruise Missiles To Erase Syrian Chemical Attack Air Base, China Next? - Nadeem_Walayat
6.US Stock Market Consolidation Time - Rambus_Chartology
7.Stock Market Investors Stupid is as Stupid Goes - James_Quinn
8.Gold in Fed Interest Rate Hike Cycles- Zeal_LLC
9.The BrExit War - Britain Intelligence Super Power Covert War With the EU - Nadeem_Walayat
10.Marc Faber: Euro to Strengthen, Dollar to Weaken, Gold and Emerging Markets to Outperform - MoneyMetals
Last 7 days
Damn the Deficits, Huge Trump Tax Cuts Ahead! - 29th Apr 17
Gold Hostage to Stocks - 29th Apr 17
Warren Buffett Hates Gold… But Here’s Five Reasons You Need To Own It - 29th Apr 17
Stock Market Sentiment, Re-Fueled Along the Way - 28th Apr 17
Calling out the Central Bankers - 28th Apr 17
Fed's Third Inetrest Rate Hike and Gold - 28th Apr 17
USD/CAD - Invalidation of Breakout or Further Rally? - 28th Apr 17
What Happened to the Stock Market Crash Experts Were Predicting - 28th Apr 17
Earth Overshoot Day - Human Population Growth - 28th Apr 17
Misunderstanding GDXJ: Why It’s Actually Great News For Junior Miners - 28th Apr 17
What Makes Bitcoin Casinos So Remarkable? - 28th Apr 17
Financial Markets Improvised Explosives - 27th Apr 17
More Stock Market Short-Term Uncertainty As Stocks Get Close To Record High - 27th Apr 17
Elliott Wave Theory: Is Elliott’s Theory Enough? - 27th Apr 17
Billionaire Investor Paul Tudor Jones Says Stock Market Valuation Is “Terrifying” And He Is Right - 26th Apr 17
The Great BrExit Divides - Britain, USA and France - 26th Apr 17
10 Facts That Show Our Taxes Are Worse Than You Thought - 26th Apr 17
What Trump’s Next 100 Days Will Look Like - 26th Apr 17
G20: SURPASSING THE 2nd GLOBAL STEEL CRISIS - 26th Apr 17
What A War With North Korea Would Look Like - 25th Apr 17
Pensions Are On The Way Out But Retirement Funds Are Not Working Either - 25th Apr 17
Frank Holmes : Gold Could Hit $1,500 in 2017 Amid Imbalances & Weak Supply - 25th Apr 17
3 Reasons Why “Spring Forward, Fall Back” Also Applies To Gold - 25th Apr 17
SPX may be Aiming at the Cycle Top Resistance - 25th Apr 17
Walmart Stock Extending Higher - Elliott Wave Trend Forecast - 25th Apr 17
Google Panics and KILLS YouTube to Appease Mainstream Media and Corporate Advertisers - 25th Apr 17
Gold Price Is 1% Shy of Ripping Higher - 25th Apr 17
Exchange-Traded Funds Make Decisions Easy - 25th Apr 17
Trump Is Among The Institutionally Weakest National Leaders In The World - 25th Apr 17
3 Maps That Explain the Geopolitics of Nuclear Weapons - 25th Apr 17
Risk on Stock Market French Election Euphoria - 24th Apr 17
Fear Campaign Against Americans Continues Nuclear Attack Drills in New York City - 24th Apr 17
Is the Stock Market Bounce Over? - 24th Apr 17
This Could Be One Of the Biggest Winners Of The Electric Car Boom - 24th Apr 17
Le Pen Shifts Political Landscape- The Rise of New French Gaullism  - 24th Apr 17
IMF Says Austerity Is Over - Surplus or Stimulus - 24th Apr 17
EURUSD at a Critical Point in Wave Structure - 23rd Apr 17
Stock Market Grand Super Cycle Overview While SPX Correction Continues - 23rd Apr 17
Robert Prechter Talks About Elliott Waves and His New Book - 23rd Apr 17
Le Pen, Melenchon French Election Stock, Bond and Euro Markets Crash - 22nd Apr 17
Why You Are Not An Investor - 22nd Apr 17
Gold Price Upleg Momentum Building - 22nd Apr 17
Why Now Gold and Silver Precious Metals? - 22nd Apr 17
4 Maps That Signal Central Asia Is at Risk of War - 22nd Apr 17
5 Key Steps For A Comfortable Retirement From Former Wall Street Trader - 22nd Apr 17

Market Oracle FREE Newsletter

Why 95% of Traders Fail

Five Total Wealth Stock Market Investing Principles to Use Today

Stock-Markets / Investing 2015 Apr 09, 2015 - 09:51 AM GMT

By: Money_Morning

Stock-Markets

Keith Fitz-Gerald writes: I’ve talked to thousands of investors over the years who are absolutely convinced that they need to understand the market’s most complicated nuances to get ahead.

In reality, though, success comes down to just five things that I call the Total Wealth Principles.

Get ‘em right and you can make more money with less risk while enjoying a peace of mind that the vast majority of investors will never have. I know that sounds like a tall order, but it’s not. Or, at least, it doesn’t have to be.


You see, most investors fight the markets instead of going with the flow. And in doing so, they doom themselves to pathetic returns that do nothing but pad Wall Street’s pockets.

I want you to understand these five Total Wealth Principles because they will help you harness the awesome power of the markets themselves. Then you’ll have the perspective needed to build the financial future and, specifically, the profit potential, that you so richly deserve.

Especially now, when weak economic data is building yet another wave of panic among the 99% of investors who will never understand what I’m about to share with you.

Here are five Total Wealth principles to invest by – and pitfalls to avoid.

Total Wealth Principle No. 1: Think Long-Term to Harness the Markets’ Incredible Upward Bias

I often joke during my presentations around the world that we are all born with common sense… and that it’s just bred out of us as adults. Usually that gets a good laugh, especially since we’ve all touched the proverbial “hot stove” at one point or another in our lives despite knowing better.

Nowhere is that more clear than when it comes to money.

That’s why investors assume that whatever is happening right now is going to happen in the future. It’s also why millions try to find patterns in random data that they believe are meaningful, while ignoring the information that actually means something.

Case in point: history. Data show very clearly that the markets have a tremendous upside bias over time. There are all kinds of reasons, but really it comes down to the fact that there is a constantly increasingly supply of money chasing a finite number of stocks. So prices increase.

If this doesn’t make sense, think of it by imagining eggs at the grocery store. If there are 1,000 eggs and only one shopper, the price of those eggs will be pretty darn low. But if the situation is reversed and there are 1,000 people who want the last egg, the price will go through the roof.

So why is it that investors panic and do exactly the opposite of what they should be doing?

Simple… because they don’t understand what I’m telling you: namely, that capital is an expansive force. By its very nature, capital ties into the growth of the companies that make up today’s markets. Growth translates into revenue, revenue to earnings, and, ultimately, earnings into higher share prices.

Ergo, bear markets are not the excuse to run for the hills that everybody thinks they are. They’re nothing more than a short-term event that does not mitigate the larger, longer-term picture.

I realize that runs counter to conventional wisdom, but hear me out.

Even the dot-bomb blowout and the Financial Crisis of 2008 are nothing more than speedbumps in the grand scheme of things. In fact, if you had bought a fund tracking the S&P 500 on July 1, 2007 – the point at which it reached an all-time high before the Financial Crisis began – and held those shares, you’d still be sitting on total returns of more than 31% today.

Source: Yahoo!Finance

To be clear, I’m not advocating “buy and hold.” What I am trying to demonstrate is that you can buy at an absolute peak and still have double digit potential if you have the right perspective. Buy and “manage” is always a better way to go… but that’s another Total Wealth Tactic for another time.

I want you to understand that periodic downturns are a fact of life. More to the point, bear markets are normal because what they really signify is opportunity in the bigger picture.

Buy low and sell high is how the game is most profitably played – especially when you confine your investments to growing companies in Unstoppable Trends like we do.

Total Wealth Principle No. 2: Be Mindful of Markets’ “Reversion to the Mean”

The second involves a concept called Mean Reversion.

Mean Reversion (in financial terms) states that stocks have an average rate of return, or movement, that they will deviate from and then return to over time.

For example, if stock ABC has historically returned 7% on average over the last 50 years, but it returns 15% this year, traders can reasonably – though not always – expect the stock’s price to record smaller-than-average growth the following year, to bring its growth for that period more in line with its mean return.

Of course, sometimes companies see “game changers” that enable the stock to see improved returns that are not just sudden, but sustainable. That means stocks can experience  a breakout (Tesla in 2012, Jazz Pharmaceuticals in 2009) from which there is no reversion to the old mean – merely the establishment of a new one.

Of course, this works in reverse, too. Stocks can see death blows that result in an unrecoverable decline. Like RadioShack, Blackberry, or even Kodak, for instance.

My point is that understanding whether you are above or below the trend line can tell you a lot about whether short-term market conditions favor buying or selling.

If you’re significantly above trend, the markets favor a retracement lower. If you’re below trend, an upward move.

It all comes down to perspective.

Speaking of which…

Total Wealth Principle No.3: Beware of the Market Timers

Understanding the historical returns of the markets and having a good understanding of whether a correction or bull run is likely should never be confused with market timing.

People who try to time the market – buying when they think the market has hit a nadir, or selling when they have a feeling it won’t get any higher – are wrong a staggering percentage of the time.

Nobel Laureate William Sharpe observed in a 1975 study that a market-timer would have to be correct 74% of the time to outperform a simple index fund. SEI Corporation updated Sharpe’s work in 1992 with a much longer time frame, dating from 1901 to 1992, and found that timers would have to be right a staggering 91% of the time.

But that doesn’t stop people from trying and, I might add, with predictable results. It’s no coincidence that DALBAR data shows that the average investor who tried to time the markets achieved an annualized return of just 2.53% for the 20 years from 1993 to 2013, in contrast with the average annual return of 9.02% that the markets generated over the same time frame.

The bottom line?

People tend to overestimate their ability to predict where the market will be heading, so they make knee-jerk decisions based on how they feel about things instead of using cold, hard logic to guide their behavior.

Get emotion out of the equation, quit trying to time things, and you’ll be miles ahead of the herd.

Total Wealth Principle No. 4: Understand Volatility – and “Black Swan” Events That Shape It

Very few investors understand that volatility has a “shape,” and an extremely specific one at that.

Prior to the financial crisis, volatility was modelled around an equal set of expectations using standard distribution models taught in every high school statistics class.

Most commonly used for options, the price models are commonly depicted as a “volatility smile” that shows you the relationship between volatility and price.

While a complete discussion is beyond what we can do here in a single column, what you need to know is that as volatility rises, options prices rise along with it. In the old days it was a relatively evenly distributed relationship, as you see above.

However, since October 19, 1987 – a day traders refer to as Black Monday – when stock markets around the world crashed and the Dow lost nearly 22% in a single day, there’s been a change.

That’s because the markets are now viewed as having very small but permanent odds of a catastrophic failure. This is known as “skew,” and makes buying protection more expensive than it theoretically should be, and makes buying upside cheaper than it appears.

Imagine the “volatility” smile turned a bit, and you’ll get what I am talking about.

Figure 1: Safehaven.com

This is important even if you don’t trade options.

That’s because the skew is indicating that prices can get out of control on any downward move faster, and the move itself can be more violent, compared to similar downside moves before 1987.

So, you’ve always got to have a risk management plan in place ahead of time.

To me that means some combination of 1) only picking the best stocks following unstoppable trends, 2) having trailing stops in place at all times and 3) keeping risk to razor-thin levels. The stuff we walk about all the time here at Total Wealth.

There are a number of reasons why this is the case, but much of it has to do with the increasing computerization and indexing most of the major trading houses engage in today, not to mention the interconnected nature of our financial markets.

Incidentally, that brings me to…

Total Wealth Principle No. 5: Trade with Wall Street’s Big Boys – Not Against Them

The machines are here. The percentage of trades in the U.S. that were made by algorithmic programs rose from 25% in 2004 to more than 50% by late 2009, according to Aite Group. Some estimates suggest as much as 70% of total stock market volume is now machine-driven, with the heaviest concentrations in the U.S. financial system.

Most investors believe this to be a disadvantage, but I disagree for the simple reason that you have advantages as an individual investor that big traders don’t.

For instance, you can move in and out of the markets, adjusting your positions at will in accordance with your specific profit objectives and risk tolerances. Big traders have no choice but to keep their money moving. So they’ve got to play games even if they don’t want to, and even if the markets are working against them.

If that’s hard to believe, think about it this way. You can buy or sell a few thousand shares of Microsoft and the markets won’t even notice. But an instructional trader can’t just waltz in and buy a few million shares without other traders noticing and beginning to trade against him.

This is why, for example, a JP Morgan trader named Bruno Iksil got sideways and cost the company at least $6.2 billion in 2012. Once competing traders heard he was in trouble, they began to bet against him and profited even as he lost.

That’s why I recommend using limit orders, trailing stops, and even options. It’s not that I want you to do anything crazy.

Just the opposite, actually.

I want you to understand the big picture, along with all the tools at your disposal, so you can protect yourself from Wall Street’s manipulation and beat them at their own game by exploiting trading conditions to your benefit… not theirs.

The way I see it, investing is a thinking game, and the more strategically you approach it the more successful you will be, especially if you keep these five Total Wealth principles in mind.

To that end, I’ll be back with a look at several of the most commonly used order types you can put to work immediately.

Until next time,

Keith Fitz-Gerald

Source :http://totalwealthresearch.com/2015/04/five-total-wealth-principles-use-today-every-day-now/

Money Morning/The Money Map Report

©2015 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

© 2005-2016 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

Catching a Falling Financial Knife