Investing and trading are hard. Not only do our brains work against us with the instinctive cycle of fear and greed, the entire infrastructure of the game is against us.
Wall Street exists to take money from investors large and small in the form of fees, commissions and trading profits. Those brokerages did not build those buildings in Manhattan because of their devotion to customer service and sage advice. They paid for the opulent digs by taking money from you and me and making it theirs.
Everyone in the business is lined up against you when you attempt to profit in the markets, from the broker who takes the order to the person who buys what you are selling or sells you the shares you buy.
Surviving and profiting require a different mindset and approach from what everyone else is using. Every trader I know seems to be trading the same stuff. They are applying their lines, graphs and statistical measures to the same group of stocks. All the trading chatter is about Apple (AAPL), Facebook (FB) or Google (GOOG). They all have trendlines and retracement levels on charts of the SPDR S&P 500 (SPY) and the iShares 20-Year-Plus Treasury ETF (TLT). Almost all of the individual traders I know are in the hot stocks and popular exchange-traded funds. They are competing against themselves, each other and Wall Street for a piece of the same pie.
If I were a trader, I would adopt a different approach. Instead of the new-high list, I would be trading the new-low list. In recent weeks I have been tracking a hedged portfolio of S&P 500 stocks that are hitting new lows, and the performance of the stocks has been simply spectacular. The buying pressure from short-term index traders is causing these fallen angels to revert to the mean very quickly. Those that are broken fundamentally plunge further and faster than one would ordinarily expect. There is action in the new-low list and lots of it. Best of all, there is a lot less competition for trades.
Also, every trading day I would have the list of stocks that show large open-market purchases by CEOs and CFOs. Testing and research have shown us that these stocks have a very high probability of rising over the next year, and I would be using my charts and stats to find a suitable entry point to ride the wave. Instead of trading what everyone else is trading, my list would include stocks such as Bristow Group (BRS) and Bruker (BRKR), where insider activity gives me a statistical edge to the upside.
Those of us who are investors also need to adjust our mindset. Owing the popular stocks may make for great chatter at the cocktail party and water cooler, but this is often a poor investment approach. Popular stocks usually carry a high valuation and are priced for perfection. If one earnings report falls short of expectations, a year's profit can vanish before you get out of your meeting to place your order. As growth and excitement about a company inevitably dissipate, the popular can quickly become the mundane, and performance reverts to the mean.
Also, as long-term investors, we need to trade a lot less than we do. Turning over your portfolio once or twice a year is not productive and usually just feeds the brokers and the tax man. The random buying and selling of stocks based on market movements is rarely a profitable venture for individual investors. Buying a stock and selling it for a 5-point gain will never produce enough profits to offset the inevitable losers.
A look at the Forbes 400 list is instructive for individual investors. Lots of Wall Street types make the list. Most of them are hedge fund managers and the heads of large investment firms. They did not make their money through their investments. For the most part, they got rich by charging fees to others. The traders on the list got there by having a huge edge derived from a unique skill set that you and I cannot replicate. The rich finance folks got that way by taking our money by either charging fees or taking the other side of our less-informed trading efforts.
A few got rich through their investment activities. Although they have slightly different methods, investors such as Warren Buffett, Wilbur Ross and Boone Pickens all practiced a variation of a theme. They bought into companies when they were out of favor and unloved, then held them for a very long period of time. These successful investors position themselves as the buyer of last resort. They buy assets and earnings from distressed sellers and hold them until the value is fully reflected in the market price. This is an approach that we as investors can and should replicate.
Be different from everyone else. Go where no else is. It is the secret to long-term success for traders and investors alike.