Becoming a successful investor requires a lot of courage, as investing is typically a trial-and-error driven activity. There are some fundamental misconceptions about investing success factors. In this article we specifically debunk the 3 most important myths about stock market investing.
Make no mistake, it may take many years in order to thoroughly understand the “do’s and don’ts” of stock market investing. Based on our experience we conclude that many of the most successful investors and traders are the ones that suffered serious losses in the past. It takes courage to continue investing after having made mistakes. But the misery of losses can create a strong willingness to outperform peer investors.
Myth #1: News is driving markets and should also drive your investments
This is, by far, the most important myth for stock market investors. It is no coincidence that the saying goes “buy the rumor, sell the news.” We would say that news support market movements and trends, not the other way around.
Now that is a serious paradigm shift for investors. Most investors, when reading the above paragraph, will thoroughly disagree. Before you stop reading, try to reflect on that statement. There is lots of truth in there which you will probably recognize if you look at it with an open mind.
Case in point, let’s look at the price of gold this year. Remember the Brexit days, when gold shot higher? Everyone was convinced that gold was off to the races. You can google the Brexit headlines, only to discover an extreme bullishness and conviction that gold had entered a new bull market.
As it always goes, the mainstream investor got trapped, as he entered the gold market near a top. Since then, prices went south. We wrote a piece in August, saying that we could not believe that gold would go higher. Some readers ridiculed our article, saying we did not pay attention to the news, and described our analysis as “attention seeking” (see the comment section in the gold article linked in myth #2). Traders are using live chat rooms to maximize their profits as well as help others. Click here to know more on this.
Our point of view is very simple: news is noise.
A second somehow similar case is the stock market bearishness that we saw in January of 2016. During those dark days, everyone was predicting a stock market crash. Listening to the news would have been extremely disbeneficial for your portfolio, as stock markets rallied strongly since then, almost non-stop.
Investors should develop their own methodology, or follow a methodology that has proven to be accurate and has passed the test of time. That is the number one success factor.
Myth #2: Charts are of secondary importance for stock market investing
Many investors quickly scan a chart only to archive it for a future reference. They consider charts of secondary importance, and, unsurprisingly, consider news to be of the highest importance.
Our point of view is different: charts are, by far, the most important source of information for investors, while at least 98% of news items are worthless.
The challenge is to understand how exactly to read charts. On the one hand, investors should look for patterns and trends on a chart. On the other hand, it is key to understand that less than 20% of price points on a chart are of any importance (the other 80% of price points are worthless). So it does not make any sense to continuously follow price movements; it makes a lot of sense to follow prices in function of patterns and trends. That is another paradigm shift to most investors.
Let’s continue with the gold price in 2016 as an interesting case. When everyone was convinced that a new bull market had started in gold, we came out with our bearish gold price forecast for 2017. Our viewpoint was based on basic chart analysis. We do not use any technical indicator (apart from one long term moving average which is of secondary importance) nor do we use complex charts. Our only focus is to discover basic chart patterns and structures.
In doing so, we discovered a long term bearish trendline on gold’s chart. Visibly, gold was not able to overcome this trendline, leading us to conclude in August that the long term bear market was still intact. Indeed, that was a spot-on call, which we made on our own, without involving expensive consultants, analysts, or large financial instutions (they all got it horribly wrong).
By the way, the Brexit event which was deemed so important to many is indicated with the red arrow on the chart. Again, this is our chart which was created in August.
Myth #3: Gurus must know better than me
You really do not need to be a guru to be a successful investor, nor do you need advice from expensive analysts. You should create your own methodology that passes the test of time.
Most investors believe that gurus must know better … because they built a fortune in the past. While that could be true, it does not guarantee success in the future. Moreover, if a guru reveals he took a position in company or market x, y, z, you cannot know his *real* motives. There can be plenty of reasons behind that position. It can be to promote a company, or for tax loss selling, or purely for speculative reasons.
The point is that stock market investing is like running a business. You need to build your proper processes, analysis, decision criteria, and, above all, way to organize things with lots of discipline. Investing is exactly like that. Above all, like every healthy business, it takes time and a winner’s mentality to proceed during hard time.