The Secret to Making Market-Beating Returns
Wednesday, November 4, 2009 | Teeka TiwariRating:
As a trader or investor, you know that keeping a cool head whether the markets are on fire or flaming out is key to your success. Yet, when havoc is wreaked on your portfolio, it's altogether too easy to forget not only that you've probably endured worse, but also how you might have failed or even managed to prevail in similar conditions.
Whether you're experiencing market deja vu or you're encountering an unfamiliar situation for the first time (or, the first time you're going to triumph in a particular market condition), it's important to strike the right balance between consistency and flexibility.
Examine, Re-examine Your Stance on Your Stocks
Unlike in politics and religion, dogmatic opinions about the stock market rarely result in success.
As investors, we cannot afford the luxury of a fixed point of view. In the same vein, we must avoid extremist viewpoints, whether too bullish or bearish.
The greatest investors are usually great realists. They have the ability to strip away emotion, dogma and their own personal prejudice when evaluating global events and their impact on financial markets
Perfect timing is a myth. Having a strong handle on the overall trend is a far-more-important skill. If the longer-term trend is intact, then short-term losses are just that: short term.
That’s why I don’t panic if a stock doesn’t go my way right away -- so long as the company's management and business are still sound (if I'm bullish) or crumbling to pieces (if I'm bearish).
With stocks that I am long, I know that if I’m right on the larger macro view, and the company is a key player in the space -- barring corporate malfeasance or natural disaster -- THE STOCK MUST TRADE HIGHER .. regardless of, and maybe even in spite of, the rest of the market.
(At) Home on the Range
The market despises extremes; it’s most comfortable when it’s "middling."
Sixty-eight percent of the time, the market trades within one standard deviation of the mean on the bell curve. Knowing this gives us fantastic perspective when we see the market overly stretched in one direction or the other.
Like water always seeking the lowest point, the market is always seeking the “mean” and it will always revert back to the middle of its trading range.
Remember, too, that today’s dog group is tomorrow’s star group -- ALWAYS! That is why a strong understanding of sector rotation is so important.
Just like women’s fashions, stocks rotate in and out of favor. It can be somewhat comical how predictable these rotations can be. Whatever we're seeing now, will be coming around again ... so remember what works and what doesn't, because these observations will come in handy later!
There is almost a spiritual flow to the way that the broader markets move. As there should be, because it is the mood, the hopes and the dreams of the market participants that guides stock prices -- especially when we begin trading at the margin of either the upper or lower limits of the market.
Markets Eternally in Search of Equilibrium
Like nature, the market constantly seeks balance.
This is where a strong understanding of human behavior can help you, the investor, immensely in your trading decisions.
Mental flexibility, the gift of being able to imagine the world being different from what it is today, is a skill worth developing.
Having a vivid imagination married with a firm understanding of the business cycle can yield bountiful rewards.
I urge you to stretch your mental muscles and start on this path.
A Way to Flex Your Mental, Financial Muscles
One of the things I do is keep a trader’s diary where I write my interpretations of global events and how it will affect the markets. The more you do this, the better you will become at interpreting the impact of global events on the world's markets.
As you start to be right with more regularity, this will fill you with more and more confidence.
Even more importantly, you will have a firm record of where you got it wrong. Knowing where and how you went wrong is the first step to getting it “right.”
Always write down the reason why you bought or sold a stock, print a chart and staple it into your journal. Over time, you will have an invaluable record of what winning and losing trades look like.
You can’t get this kind of knowledge out of a book. If you are a self-directed investor, then you are the one who has to do this work. It’s worth it; it will take your trading -- and, more importantly, your returns -- to another level.
Unlock Your Success Secrets
There is a beauty and a rhythm to market movements that transcends balance sheets and analyst reports.
When I am at my very best, it’s almost as if I’m plugged into an external source. It’s difficult to describe the feeling but athletes call it being in the “flow.”
Those of you that have experienced it know exactly what I am talking about. My trader’s diary has been a big part of plugging me in to that “flow,” and I am sure your own trader's diary can do the same for you.
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Teeka Tiwari
Chief Investment Officer
ETF Master Trader
