“All of the above brings us back to our conclusion that the investor has no sound basis for expecting more than an average overall return…” – Benjamin Graham[i]
This is what will happen when you first try your hand in the stock market:
Without any studying or formal training you will aim to “beat the market” because you are naturally smarter and luckier than most people. You will buy low and sell high, maybe even short, and in the end, because you are more special than all others you will amass a great fortune. Much like falling in love, no one wants to learn it; they just know that they will do it the best.
This is how it will end up:
If you try to pick winners and losers you’ll have some wins, and some losses, and then eventually all loses. If you take the other route and just buy ETF’s or ‘diversify’ with enough stocks, you will generally make a return above 0%, however that is only due to the central bank expansion of the balance sheet that pushes the stock market up and little to do with your stock picking expertise.
If you really want to get rich in the stock market you’ll need to learn skillsets that most people do not have, and then combine that with a tremendous amount of luck that you’ll have to rely upon and make for yourself. These ideas should help you start off in the right direction but in no way can realistically serve as a “how to get rich in the stock market” guide because no such thing exists.
True fundamental analysis relies on reviewing things like ratios, statistics and company financial information in order to find an “undervalued” stock. You can make money by investing in this undervalued stock because eventually the market will “correct” for this and the stock price will go up. I highly doubt that your average retail investor or money manager could simply analyze a stock in such a way that they could see something that millions of other people cannot. Fundamental analysis is good for banks and other money managers who need justification for their service.
The take away is that fundamental analysis should be used as a “what to buy.” You should do your own due diligence to understand what companies you should be investing in. You will not even scratch the surface as to the inner workings of a publicly traded company, but by reading the financial statements and other valuation metrics to compare companies or industries, you may be able to somewhat understand what it is you’re buying as opposed to picking blindly or basing decisions off of someone else’s, sometimes paid, recommendations.
This is practically considered voodoo and something that could get you thrown out of a major investment institution. Technical Analysis (TA) involves reading the historical price movements of charts in order to help make decisions on the future base. Someone who practices this is called a “technician,” and they will not say that it can predict the future, however, there is something to be said about chart movements that has an uncanny way of helping you decide “when to buy and sell” stocks. Under true TA, fundamentals do not matter because everything can be “charted” and therefore traded, but to the novice I would caution against quickly adopting that attitude as it requires countless hours of study, practice and patience. TA is not something you will become a master of overnight, but even a basic understanding may help you avoid errors such as trying to “catch a falling knife:”
From the chart above, do you see the numerous “sell signals?”
Do you see the “maybe” buy signals and the rounding bottom, the breakthrough in the MACD, FULL STO, Chandelier exit, 50 day Moving Average and “maybe” MACD? Coupled with the recent expansion of the Fed’s balance sheet, the “should be” bankrupt Deutsche Bank could be interesting again…
One more thing to consider: do you think your money manager and anyone working at a major bank has any clue as to what I just said or has ever read one book on Technical Analysis?
The Federal Reserve
In my article https://econcircus.com/money-supply-is-everything/ I discussed how money supply really is the underlying cause to all booms and busts. Basically, when the Fed expands its balance sheet it means that money is literally being created out of thin air and given to rich bankers to buy things such as stocks and bonds. When the Fed contracts its balance sheet the reverse is true. The $4 Trillion+ of money printing that has occurred since 2007 is the primary cause of the increase in the prices of stocks since then. If you recall, the Fed briefly contracted their balance sheet about a year ago and the market started to tank, while it has recently resumed expansion and the stock market has rebounded.
In simple terms, when the Fed expands, you buy stocks, when the Fed contracts you sell your stocks.
Throughout business school there were numerous professors who talked about how most money managers destroy value and that their returns were no better than the general public. When they lose your money it’s your loss, when they make money the gain is shared with them. On top of that they generally get a percentage of fees under their management. I’ve only met a few men who are capable of managing large sums of money and it’s unlikely that you’ll find one of them yourself. They are in the business of collecting assets, not managing them and they’ll never care more about your own money than you care for it. They’ll most likely know little of gold, stock trading or economics and are most likely not subscribers to Econ Circus; but they’ll have a nice suit on and a reputable firm behind them, if that makes you feel any better?
As kid watching the movie Wall Street I didn’t really understand what Gordon meant when he talked about wanting information. Now I understand that information is the best chance you have at picking a successful stock. I do not mean illegal insider information, but information that most people probably do not have access to or knowledge about. For example, it’s possible that some global elites may have known what stocks the publically traded central bank of Switzerland (Swiss National Bank) would buy before they printed over $90 billion to buy US stocks,[ii] just by virtue of being in the right circles. I’m not saying that you have to become a global elite, but if you make enough connections to those in the industry, management or boards of companies and have enough money, then you’ll most likely have access to better information than the general public and will probably see better returns for yourself.
To put all the ideas together, it’s probably best that you manage your own money as opposed to paying someone to lose it for you. If you do manage your own money then have a firm understanding of technical and fundamental analysis so at least you’ll have a basis on which stocks to buy and when, but then also understand the Fed and if possible Austrian economics. By understanding the boom and bust cycle that occurs through central bank inflation and related concepts, you may be better able to anticipate and prepare for the next market crash. Lastly, try to get in the know and obtain as much information as you can by making friends with insiders. This is easier said than done, but you can still try.
[i] Benjamin Graham, The Intelligent Investor, (New York, HarperCollins, 2006), 54.