I've been active in stocks for about 6 years, and I've tried to corral the things I wish someone had told me when I first started out. There's information about how stocks work and why they work, but in terms of philosophy, I feel like there's a general lack.
Someone once explained market movements to me as “stochastic” (re: random), and I think that description sets up every potential new investor/trader for failure. No, the market is not a random lottery and it is not unpredictable. There are always, always bellwethers to be mindful of, and most of them never show up on finance sites, subs, etc. That said, you do not need to be a Moneyball-esque guru to get things right either. Just be aware of the world around you. Absorb as much as you can.
Figuring out a good strategy means acknowledging that (the value of general awareness) and knowing the difference between investing and trading – the philosophical difference.
Investing in a company is like the ultimate upvote button. You're literally committing money as a loan to a company that you want to continue to exist. Yes, you can invest in things that you feel will have a good ROI years down the road, but if that's what your main goal is, just index. Buying index funds is like betting the market won't explode in 10-20-30 years. I almost wouldn't call index funds investing. Generally, folks who index just asked “what's a safe bet?” and some finance person said “index funds” (in other words, it's just trading). Investing is more emotional in my opinion. If the stock goes down, you're willing to eat that as a premium for supporting a company you believe in – or just really like.
Trading (and I know I'll catch some flack here) has nothing to do with understanding the actual value of a company or how you personally feel about it. You just have to know two things:
- where pervading sentiment is wrong
- when the market will likely figure out there's a blind spot
Knowing one is not enough – you need both in order to be successful.
Every fundamentals-focused trade I ever made blew up in my face. The only way to win on fundamentals is to a) be an insider, or b) have a time machine. It's a false game for new traders to play because fundamentals are almost always already priced in.
What is not priced in is sociology. Read the room. When is the general tenor of discussion moving ass-backwards from reality? Squeeze plays like we've seen with GME and BBBY come from the acknowledgment of one simple idea – these companies are not going out of business. The market was pricing them as if they were, and you know the rest.
Now, some folks on the GME side would say fundamentals were the catalyst, but that's less-than-half of the story. It was really Ryan Cohen. It was an almost unanimous social acceptance that his name brought legitimacy to the company's potential rebound. Nothing on a spreadsheet could have predicted the impact he would have – before he even did anything! And the same is happening for BBBY. Ryan Cohen is the common denominator.
Find moments like this where your gut tells you the market isn't seeing reality clearly, then time your position with when you think sentiments will change. In other words, yes, YOU CAN TIME THE MARKET (god I hate that adage). Timing the market is a must if you're going to trade actively. It's literally why options exist.
Anyways, that's my two cents to myself 6 years ago. Interested to see what y'all think.
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