My Best Advice for Stock Market Traders

I consider myself an investor, not really a trader, but like a lot of people, I do think I pick a winning trade from time to time.  Unfortunately, since my funds are limited, like everyone, it leads me to sell stocks in order to buy new ones. 

This leads to my worst performance.  I always think that my current holding is not going to as good as my next one.  I sell what I have to chase something else.  Generally, this is usually a bad move.  The stock used to own does just as well or better than the new one I bought. 

Add to that fact that in the process I paid commissions to go in and out of the two positions.  That’s just dumb. 

Comparison to Baseball

I’m a baseball fan, and if there’s one thing I don’t like to see in baseball, it’s overmanaging, particularly when a manager changes relievers repeatedly, multiple times in an inning.  As if the next pitcher is guaranteed to get next guy out.  Like the next pitcher is going to be better than the one that is already in there. 

Sometimes he does the job, sometimes he doesn’t.  In baseball, there’s no way to know how the other guy would have done.  In stocks, we do know.  They continue to trade even if we don’t own them. 

So, a little advice:  STOP TRADING SO MUCH.  Review not only your past trades, but what happens to stocks after you sell them.  You will likely find that you would have been just as well off, or better even with commissions, as if you just held the first stock.

If you feel you have to trade just to do something, then you have another problem.  You aren’t trying to make money; you are trying to fill some other need.  If so, just expect to continue to underperform.  Nothing is going to help that. 

Where's the Stock Market Crash?

If you follow the stock market pundits, you know that many of them have been calling, or at least warning of a crash for some time now. So, you have to wonder, where is it?

I mean, it's been years now. Some of my favorites have been calling for a 50 percent fall for so long the market would have to fall 50 just to get back to the level where they first made the call.

Now, anything is possible, and I dont know the future, but neither does anyone else. Generally, the market doesnt make big moves. Only rarely is there more than a 5 percent move in a month's time.  You have a better chance of losing 5 percent by moving your money in and out than having the market take a tumble.

So, my advice is, every time you feel like making a trade, do something else. I won't suggest to you what, but anything. Get a candy bar. Watch a movie. Et cetera. If you still feel like making a move later, make a smaller one than you planned.

And if think Pundits have the answers, read Macke and Brown's book, Clash of the Financial Pundits.

Why is the Stock Market so High?

The stock market, as measured by the Dow Jones and SP 500, closed at another record high today.  That causes many people to ask:  Why is the market at all time highs?  Is it overvalued? Will it crash soon?

As to the first question, there is some debate as to whether the market is high.  Yes, it is, in dollar terms, higher than it ever has been.  But, if you take into account inflation, it isn’t as high in “inflation-adjusted” terms as it was a few times in the past. 

More importantly, there isn’t really a perfect measure of what “high” means.  It is only in terms of price, or a percentage of what companies earn (the P/E ratio).  Or you can look at the P/E over the last 10 years (CAPE ratio.)  You can find justification for just about any position you want.  

The Stock Market is High

If you accept that it is high based on the price, there are possible explanations.  I prefer the simple supply and demand explanation.  In basic economics, when there is more supply for a good, the price drops, and vice versa.  When demand for a product goes up, the price goes up. 

Right now, there is a bit of reduction in supply because companies are going private, fewer companies are going public, and public companies are buying back shares at an increased rate. 

I tend to think the big difference relates to increased demand for stocks because of low interest rates.  If an investor has money to put to work, his options are limited.  He can only get 2.6% on a ten year bond.  Other options, like real estate or gold, are less liquid.  That is, harder to get money out in a short time. 

Therefore, more money is pouring into stocks, many of which pay a dividend, and have recently gone up. 

So, why is the stock market high?  Because like Richard Gere in An Officer and a Gentleman, “(it’s) got no place else to go. “

As always, nothing here is meant to be a recommendation to buy or sell securities. 

Compound Interest, Die Hard and Hans Gruber

Die Hard is a spectacularly entertaining movie and can be used as a lesson in compound interest.

Spoilers follow.

The villain, Hans Gruber, played marvelously by Alan Rickman, attempts to steal $600 million dollars and plans his escape so that he can retire to an island and earn 20%.

Now, even in those days, earning 20% wasn't easy, and it seems less likely now.  But, taking him at his word, he was very smart financially.  His plans are something everybody can sensibly aspire to.

The movie was made in 1988.  If he had been able to accomplish the two things:

1. Steal $600 million
2. Earn 20%

and hadn't had to touch the money,

he would, through the magic of compound interest, now have a fortune worth

$57,237,729,986.44

That's $57 billion and change, which would make him 5th on Forbes' list of world's richest people

Not bad. .

A Fable on Stock Market Valuation

Why valuation is a lousy measure.

King Midas gave up the gold thing, and bought all the outstanding float of $KMID.  Midas owned 1,000,000 shares of the stock, and on the day he bought the last share, he paid $100.  Therefore, the closing price of the stock gave him a market cap of $100 million.  That’s one hundred million dollars.

Now Little Johnny tended the King’s gardens and prevailed upon him to sell him a share of $KMID.  Believing it was undervalued he offered the King $110 for that share.  The King was an evil man, so happily took the money at the bid.  He was amazed to find out his value in the company had risen to $10,999,890.  And he had 110 bucks cash to show for it. 

When Johnny’s mother found out that he had blown the family grocery money, he forced him to return to Midas to sell the stock back.  The evil Midas agreed, but at the price of $105.  With no alternative, Johnny took the price, poorer but wiser. 

King Midas had all his stock back, $5 in his pocket, and a new market valuation of $10,500,000.  The stock caught the attention of the Wall Street pundits and trend followers. But, of course nothing about the company or the stock really changed.  

Farfetched?   I suppose.  It would take a lot of dumb, evil people make something like this happen in the real stock market.

Oh, yeah.   Think about that the next time you invest in a stock simply because the price changes.  

Why the $QQQ and $IWM fell more than the $SPY and $DIA

I saw this stat for the following indexes just now, as of April 4. Thanks ro @stockcats for posting it.

: % off the all-time intraday highs as of Friday's close $IWM -5.0% $QQQ -5.4% $DIA -1.3% $SPY -1.7%

It looks like $IWM and $QQQ are down seriously.  Well, they are, from the recent highs.  

However, look at how far they are up from the 52 week low based on Friday's close. 

$IWM 28.4%

$QQQ 29.1%

$SPY 21.4%

$DIA 13.8%

So, it seems pretty reasonable for the small caps and Nazz to have the biggest decline, since they had the run-up to get there.  

Calling the Top of the Bull Market

I tried a few weeks ago to call the top of the bull market.  Silly me.

No one can call the market top.  If they do it's just luck.  Really, what happens is that someone repeatedly calls for a top and when they it finally happens, they claim victory.  Silly them.

The latest attempt to find an indicator that we are at the top relates to the fact that the NASDAQ and small caps ($IWM) have fallen a great deal in the last few days.  They are supposed to be leaders, and when fall, the market will follow them.

But they haven't been leaders in this market.  Tech hasn't performed nearly as well as the broad market, and although small caps have exceeded the S&P, they haven't done that much better, and were partially driven by the ridiculous jump in biotech stocks.  Which have hit a wall and dropped like a rock in the last few days.
So it the bull market over?  Nah, not in my opinion.  It may take a few days or weeks off, but as long as interest rates remain low (and they still are ridiculously low in historical terms) there is no reason to think that money will flee the stock market for a better opportunity.

Long and strong.

Nothing here is a recommendation to buy or sell stocks.