My name is Anders Bøgebeck. My mission is to help you become a better investor and trader. Why is this important? We are not only helping ourselves by becoming financially free. Along the way we help society by either allocating capital the right places or creating better products and services. That's why I want to help you achieve the life you desire!
So the idea that you should invest your money in the stock market is, that in the long run, your portfolio will be okay and you will get great returns. In this post, I will walk through some of the fallacies about this concept and why things quickly can get out of control. The post will show you why it is better to trade the stock market rather than invest in it.
"You should buy this stock now because it is cheap!" or "this is a good short opportunity, because it is expensive". The problem with these statements is that the market can stay irrational longer, than you can stay solvent. So if you buy a stock that's on a downtrend but has some great fundamentals behind it, the fundamentals don't really matter.
Because when you click that button to buy, you are actually trading against the trend. This typically leads to large drawdowns for that position. Cheap can always get cheaper and buying low can always mean, that it could be bought even lower. No one truly knows. Not even the so called experts, because no one can predict the future.
The same argument goes for a great short opportunity. Expensive can always get more expensive. Check out picture 1 below. Even though these stocks had crazy P/E ratios, the market would expect explosive earnings results from all these companies (as seen by the forward looking P/E ratio). At the time of writing this post, all of these symbols were on a steep uptrend. That's the madness of the crowd!
The short example can be seen on the chart in picture 2. Even though this company has consistently delivered bad earnings results, you would suppose that investors would be pessimistic about it. However, as the broader market was on a rally, so was this company's share price. Fundamentals did not matter at the time of your entry!
If the stock market experiences a steep crash, so will your long positions. If you are a true fundamentalist, you hold on to your positions, because "in the long run" it will be okay.
But when does the pain become too severe that you decide to sell for a great loss? Is this going to be a quick recovery or a multi-decade slowly recovery?
Yes, it is possible that the whole market will be down for decades. Just take a look at the Japanese stock market index "NKY" in picture 3. The problem with liquid investments is that they are liquid.
Let's be honest about what we can control. When you hand your hard earned money to the stock market, you do not control them anymore. Your financial future is in the hands of everyone - driven by greed and fear.
An investment is like a relationship in the sense that you want to commit long-term capital to projects, which will enrich yourself and the rest of us.
When you go out and buy a machine or an employee, you expect either to produce products, that you will eventually sell.
When you buy a stock, you hope that someone else will buy it from you in the future for a higher price. I don't want to hope, I wan't to be in control.
That's why you need controlled entry and exit points for the trade and sound risk management.
It is a very bad idea to just push the buy button without trying to buy low. The same logic applies if you never sell.
You will not enjoy compounding your winners, because the same capital is still committed to the investment. Compounding can greatly increase your yearly returns.
Take picture 4 as an example. If you bought Boeing shares at the worst time in 2007, and you sold your shares at the worst time in 2020. Guess what: 13 years without a single dollar in profit.
Obvoiusly, it makes sense to buy into fear and sell into greed. But the problem is still, where is the bottom? Where is the top? No one knows and that's why you will never catch the exact top and bottom.
By the way, Tradingview.com is a nice tool for these charts I post: https://www.tradingview.com/
My proposal is that you invest in something that is real and tangible. This could be an education for yourself, a small business venture, a cash-flowing rental property or a private business.
In these undertakings, fundamentals DO matter! Because ultimately you commit long-term capital to real projects. If you want a stake in a larger private company, you often need to be an accredited investor (meaning rich already).
However, the good news is, that no one can prevent you from negotiating a stake in a pub, a pizza restaurant or a movie theater. You only need a private company broker.
If you are the entrepreneur type of person, you could go for your own business undertakings and if you prefer analyzing fundamentals, you could buy a stake in another man's business.
With all being said about the stock market, I still believe that there is money to be made when you trade the stock market - done correctly. Personally, I prefer swing trading stocks. Buying and selling at great technical levels on the price chart. There is still a risk, that the setup will not work, but as long as the setup works most of the time, it will make money in the long run.
Great technical levels work, especially on very liquid stocks, because other people watch these levels too! And the decisions of humans move the market.
Check out picture 5 to see an example of a swing trade. If you want to dig into my trading posts, here is the category: http://yourbestinvestor.com/category?category=trading
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