Investing and trading financial markets look simple but realizing substantial profits is not easy, at all. Many things can go wrong when entering and exiting a position. In fact there is much more that can go wrong than most would think. In probabilistic terms the probability of hitting trades (investments) consistently right is very low. This goes beyond forecasting skills, much of it is softer in nature. In our premium services Trade Alerts (short term trades) and Momentum Investing (medium term investments) we write every weekend an educational piece, covering the educational part of trading and investing. In this article we pick out 10 timely insights which we shared in the last 9 months to our premium members.
Welcome in the wonderful world of success in financial markets which requires the least intuitive set of principles to be set up for success.
#1. The narrative is the biggest trap
More importantly, any time you think of a trend in a market because of a reason, the probability is extremely high that you are falling in the ‘narrative’ trap which is the 2nd most important source of failure.
#2. The illusion of choice
Many believe that it is great to have lots of choices to pick from. Lots of information, lots of stocks, lots of charts, lots of gurus … the more the better right? Wrong!
The opposite is true.
In our medium term portfolio (Momentum Investing) we limit the number of open positions to 2. Does this imply we don’t see any other opportunity out there? Of course not. But it is by restrictions that you will force yourself to make the best possible choice.
#3. Information overload
There is this intuitive belief that more information leads to better investing decisions. So in an age of information overload it automatically leads to the belief that one should be able to outsmart all other investors provided the investor acquires a high volume of information and data points.
Nothing is further from the truth.
And here is the big pitfall: relying on too much information when making an investing decision leads to a high level of confidence.
#4. Mechanically taking trades is the key to success, excitement is the key to disaster
If anything, traders need to have a solid proven method in place, and execute on it in a mechanical way. The word MECHANICAL is the important concept here, and it’s only a minority who understands the importance of it.
Way too often do we see traders choose for EXCITEMENT as opposed to MECHANICAL trades.
#5. Any methodology must consistently pick time frame, risk level and profit potential for each and every trade
Any solid trading or investing method is based on constraints in risk levels / time frame / profit potential. It is possible to adjust 2 of the 3 constraints, but not all 3 simultaneously.
#6. Consolidations are nerve wracking, and designed to give up right at the wrong moment in time
Consolidations make everyone nervous. Traders and investors start doubting what to do and how to trade, make traders deviate from their intended path …. right before the consolidation ends.
Any algorithm and methodology has to ensure that you have to be correctly positioned once the new trend starts. However many get frustrated, and will miss it.
#7. Consistent accumulation of profits delivers exceptional results
The simplicity of success in trading: accumulate 10% each and every month for many years. What happens if you do this consistently after the frist 12 months? Indeed, you triple your initial capital. It’s the compound effect that starts kicking in, and we called it “the 8th world wonder” in previous writings.
#8. The new (ab)normal: think as an investor, execute like a trader
For the first time as far as we can remember do they need each other. They go hand in hand, until we get back to ‘normal market conditions’, whatever that means and whenever that is. Our best guess is that it will be only in 2021.
Here is what happens with investors in 2020: either they get disappointed which is the first step to give up (majority), or they go in over-drive and research until they can pivot or refine their method (minority). We are, without any doubt, in the second camp. We are relentless, and will not give up until our results show that we are in the 1% outperformers among market participants.
Why didn’t we find this before? As there was no need for it. Last year, we booked big successes with positions in AG, BTC, SVI.V in a classic investing buy-and-hold-for-the-medium-term type of trades. This isn’t working in 2020 any longer.
So in a way the crash, the aftermath of it and ‘the new (ab)normal’ made us so much smarter. But only after doing the hard work, the really hard work, really really hard.
#8. Continuous learning and hard work combined with the right mindset
Trading is not only about getting the signals right, it is even more so about continuous learning. As humans we have some shortcomings when trading. The human mind, particularly our emotions, prevent us initially from being successful.
That’s why we spend time writing the weekend updates. It’s about continuuos learning. It’s about being humble. It’s about introspection. It’s about becoming aware how our emotions work, and how they need to be ‘trained’ to be aligned with the dynamics and inner workings of financial markets.
#10. There is always a bull market somewhere
We strongly believe that even if only a few stocks go up there is always some sub-sector or a few amazing stocks that will do well. That’s what we mean by ‘There is always a bull market somewhere‘ (not to be confused with Peter Schiff his book).
Enjoying our work? In our Trade Alerts premium service we go after small and larger profits on the very short term, trading the S&P 500 as well as from time to time emerging markets / precious metals prices. Our return is almost +100% year to date. In our Momentum Investing portfolio we go after positions in broad markets, with lots of focus on precious metals, on a medium term timeframe (from a weeks to a few months out). So far, this year, the portfolio is delivering close to 40%. Combined our 2 portfolios are delivering +60% year to date. We are well on track to double our capital in 2020, as per our Mission 2026.