Gamblers, Amateurs or Professionals?

The market fell by 4 straight days. In total, the index loss about a hundred points without any sign of rebounding. More than 80% of the share prices were below yesterday closing. Of the small amount of gainers, most are up by merely a bid and closed with huge ask queue. Investors and traders were mostly panic. Then a savior appeared. He boasted in the social media on his 1-day-5-digits trading gain despite the bad market. With the public scrambling in search for a solution which this trader seems to have, he immediately got everyone’s attention. Drowned by an overnight popularity, he proudly shared his “profound” analysis. Amateurs who are eager to make some quick bucks in the dampening market were quick to apply the new methods learned – only to lose more money.”

What went wrong?

While this is a hypothetical scenario, it is fairly common, especially in tough times like what we are experiencing here in Malaysia right now. Anyone who is skillful – or rather, lucky – enough to make money from long position in stocks during this time will immediately be bestowed the title “sifu”. The public seems to be blinded by their eagerness of making winning trades that most fall into conjunction fallacy (believing that a specific condition is more probable than a general condition). They fail to understand that in a market where the odds are highly against us (with less than 20% chance of picking a winning stock), the path of least resistance is going south. Therefore, luck plays a larger role when it comes to gaining from a long position in a down-trending market. And expecting lady luck to stay on any subsequent long positions is what a gambler – not a trader – does.

Learning any so-called analysis from the lucky trader will of course bring you to financial hell because most of such analyses are plain bullshits.  An analysis is good only if it covers all area that could substantially influence a share price movement and can be applied consistently and indiscriminately on stocks with the same characteristics and the outcome is fairly predictable. The so-called analyses are legitimate only if the outcome is the same when applied to all other stocks with the same characteristics during the same period of time (or at least, produce the same outcome in MOST cases). Clearly, long positions made in a down-trending market shows that market factors are blatantly ignored, rendering the analysis to be incomprehensive. That is unacceptable since market forces explain about 40-50% of the volatility of a stock and more than 60% of the DOWNSIDE movement of a stock in Malaysia (industrial forces explain about 30-40% while company-specific forces explain about 20-30%). With a high percentage of stock movements explained by market factor, it is mostly by luck that the average trader could make money taking long position in a downward market.

Then again, they are indeed some really good traders who can make money taking long position in a down market, but you will never see them talking about their gains in the social media. Think about it, did you ever see any good fund managers tweeting about their gains for the day? People who kept boasting about their profits usually have miserable annual return on investment. To look good, they always hide their losses and only show their gains. The real professionals understand that any trading gains or losses for the day will not stay long and the only thing that matters is their annual performance. They let their annual return do the talking. They don’t bother about looking good and thus share more about their losses because they understand the value of learning from the mistakes of others. And the fact that they can make money going against the tide means that they have, over many years, obtained the right skill, knowledge and experience. Lacking such expertise, the amateurs who try to imitate the professionals’ trade are bound to fail as they could not see the subtle differences in finding the winning stocks.

What then should an average trader do in the current market? Just stay at the sideline. That’s the most efficient thing to do right now, not to mention the simplest. It is emotionally difficult only if you are greedy and desperate. Being away from the market for a considerable time does not mean underperformance. I understand this because my annual performance is still way better than a lot of the professionals despite being active in only half of the trading period (about 6-7 months in a year). They tend to get overconfident when the times are good and they continue to trade even when the market start to turn south, believing that they are smart enough to beat the market. Most forget that half of trading is about finding the winning stocks and riding it while THE OTHER HALF is about getting or staying out of the market. It is the latter that differentiate the true pros and the amateurs. The business of trading is never about making money every day, every month; it is about making the most when the market is generous and staying back when the market is mean.

easy way hard way

While it is true that most filthy rich traders spend a lot of their time in front of the computers, trying hard to find the next best trades every single day, the average trader don’t need to do that to be financially free. In fact, the high level of stress and risk involved in trading the small trends are not worth taking given the likelihood of subpar return when one glues himself to the monitor 24/7 due partly to the tendency of overtrading. Regardless of the field we are in, the result should commensurate with the effort, if not better. My suggestion is to opt instead for efficient trades – trades that have high reward relative to risk and require only minimal effort. Put it simply, buy strong stocks in a strong industry when the market is bullish and stay aside when the market is bearish (the market moved up and down in a fairly predictable fashion every year). Not only that you are able to free up half of your time to do things that you like (or read to upgrade yourself in prepare for the next bull market), you have less stress in your trading because you are following the path of least resistance, not to mention the beautiful gains that you will make from doing things the right way.

Good traders have a lot of money. The best traders have money, time AND a peace of mind.

**Do not regret trading the market only after making huge losses. Always know that you MIGHT regret if you bet against the odd and refrain yourself from participating in the market in such situation. That way you will only miss several opportunities but you will never lose your hard earn money. And with the capital that you manage to preserve, you can always strike again when the market is poised to reverse**