The Secrets of Successful Investing Revealed - Words from the Wise

Published on March 22, 2019 @ 8:06am

TGIF all. A fierce reversal back to the upside yesterday put both the S&P 500 and the NASDAQ at new highs for the year yet again - all while the DOW and the Russell 2000 still haven't been able to get it done. However, if the markets can manage to post another few days of that type of strength, not only will the Russell and the DOW likely make new highs for the year, it is possible the NASDAQ and/or the S&P 500 could be on the verge of testing their all-time highs for the first time since last October.

That's a big if though considering yesterday's sharp move to the upside did have all of the makings of a potential blow off top. Meaning, if the markets were to reverse most or all of that strength as soon as today or Monday at the latest, the volatility could be the trigger patient bears have been waiting for.

Provided here are daily charts of the NASDAQ Composite and the S&P 500 showing you what's taken place an hour into the markets' open this morning. As you can see, we're already seeing some solid weakness on the day, but again, one hour or one or two days does not make a trend, so we'll simply have to keep another close eye on what happens into the close today, and more importantly what happens into the close on Monday.

Now, I want to completely shift everyone's attention away from the short-term minutia of the markets for one day and share some advice and opinions on what we believe to be the most important facts about the markets and investors/traders in general.

I'll start with the fact yesterday's broad based rally was led primarily by tech - specifically the semiconductor space, which clearly depicts just how much current fundamentals and economic data don't matter when it comes to the short-term landscape for equities as a whole.

While the chip space had continued to warn of an oversupply glut and softening demand, the entire sector has been among the best performing sectors since the beginning of the year. It just goes to show how important the power of momentum and human emotion is when it comes to how the markets behave from day-to-day, week-to-week and even year-to-year.

This is also why we tend to fixate on charts far more than we do the data, because at the end of the day the markets are far smarter than any economist would ever give it credit for. That's why the financial media tends to get it wrong more often than not. However, in defense of the media (something I never do), people like stories and drama far more than they like charts. Charts, for many, is like watching paint dry, but be rest assured the charts are far more important to trading or investing than literally anything else out there - especially when you can assess them and understand them without any emotion whatsoever.

Think about it. Every time the markets break down, the doom and gloom analysts and economists surface to tell us why the markets are done going higher. Then, when the markets start proving all of them wrong, the interviews turn to those perpetual market bulls who come up with every story and piece of data to support the idea of stocks going higher.

However, it's important to remember a few things. First, the equity markets are driven primarily by human emotion. Secondly, the equity markets are also a tremendous balancing mechanism. Meaning, when investors get way too fearful, the markets come roaring back, and when investors get way too jubilant, they serve up a reversal few were expecting.

This in large part is why we continue to believe these markets will eventually make astronomical new highs, because it's also important to remember this historical bull market has actually been one of the most hated bull markets in history by the mainstream retail investment community.

Why? Because much of the retail investment community still hasn't and continues not to participate - waiting and waiting for the next big shoe to drop. That in and of itself is a huge reason why stocks can simply continue to go higher and higher on a long-term basis.

Further, it's typically not until a point in time every young and eager investor out there is bragging around the water cooler about how much they're making in stocks before the markets finally decided things have gotten way too frothy - hence the oddly efficient balancing mechanism the equity markets have and will continue to be since their inception.

Remember the whole bitcoin craze and mania a few years ago? I literally remember my sons friends bragging about how much they were making in bitcoin and various alt coins out there. That was giant clue number one that the bitcoin meltdown was coming, and look at what has happened since. It's been dead money now for two straight years.

Have you ever wondered why a stock can continue to go higher and higher when the fundamental landscape for the idea in question is completely out to lunch? Ever wondered why an extremely undervalued stock continues to get no love despite its current valuation metrics and forward growth projections?

Ever been invested in a great company, but its stock continues to go nowhere, only to sell it and finally end up watching the stock go crazy? We've all been there. However, it's all of the above that should answer all of those questions, because at the end of the day it's all about momentum and human emotion. Don't get me wrong, fundamentals and good companies always win in the end over the course of several years, but taking stock in your own emotional landscape is often the single most important aspect of being successful in the markets.

Case in point, I've met investors who are so certain of their decision making, and lack of emotion when doing so, that they literally only ever buy a stock - never ever selling it. Then there's those completely opposite of that strategy - buying and selling all of the time, regardless of the current market landscape.

The bottom line is I can tell you from years and years of experience... in order to be successful in the stock market, the single most important thing you can do is be completely objective about everything - with literally no emotion involved whatsoever.

Are you hanging on to a stock with no significant context for owning it? In other words, are you holding it just because you think it's going to come back someday, or just because someone told you it was a good stock to own? Do you hang on to losers and cut your winners too soon because your fear of loss is far more powerful than your desire for success?

I'll sum it up like this... be opportunistic when you sense an overly dramatic amount fear circling out there, and be cautious when everyone is bragging about their gains and success in the markets. That should provide you with some semblance of how these markets actually work. Of course that only works at extremes, so keep it in the context of what's actually happening out there on a short and long-term basis.

Lastly, we ask folks all the time... are you more of a long-term investor or more of a short-term trader? The answers are all over the map - when in fact everyone should know precisely who they are as an investor or trader, and equally important should have a very clear idea of why they're in the markets in the first place.

Do you have so much discretionary income that stocks are just something to give you the action you're looking for? Are you looking to use the stock market to generate short-term income, or looking to stocks to build a portfolio of wealth you can retire on someday?

If you don't have the time to trade, there's absolutely nothing wrong with passively participating in good quality companies. Collect them like baseball cards when you were a kid, and then let those quality companies work for you over the next five, ten, twenty or maybe even thirty to forty years.

For those aggressively looking to trade on a short-term basis, I can tell you from personal experience you should NEVER let your emotions play a part. I did on a few occasions over the last 20 years or so and it was very costly. But now, I keep and preach the idea of keeping emotions and the mere idea of hope completely out of the picture.

Although hope is a word we should all use on a day-to-day basis, the actual real idea of hope is never a good enough reason to own a stock. In other words, if you can assemble a purely non-emotional solid context collective for the idea in question - fundamentally and/or technically - to either keep it or sell it, you're likely going to have a lot more success in general.

Further, you should clearly determine a strategy for your desired timeframes and stick with it. If you're thinking is very long-term, then be full willing to be patient. If it's short-term, then keep a short leash on your ideas, because once you start to mix the concept of trading with the concept of long-term investing, that's where you're probably going to run into trouble.

I thought today was a good day to cover all of this since so many investors are unsure about the short and long-term landscape for equities right now. However, right or wrong, we are fully convinced these markets will make new all-time highs on a long-term basis - despite any significant volatility along the way.

Have a wonderful weekend. We'll see you on the other side.

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