by James Brumley | September 16, 2013 10:23 am
Being more than 200 years old, the stock market has had time to foster a staggering number of axioms, tips, disciplines and lessons. Indeed, one thing there’s never a shortage of on Wall Street is advice.
Unlike stock trading itself, though, all that advice and all those commonly accepted truisms are neither regulated nor tested. Anyone can write and publish an investing book, and it’s even easier to post trading tips and lessons online. No premise actually needs to be verified to be made public, and even when a premise is supported by facts, those facts are rarely verified.
The end result? There are a bunch of short-sighted — and downright bad — investing adages floating around in the proverbial ether. Some are more misleading and destructive than others, but five of them are particularly problematic for investors who have a tendency to believe, and act on, everything they hear.
This might have been solid advice a couple of decades ago when a stock’s price was a reflection of a company’s operation, slightly adjusted higher or lower depending on the organization’s plausible outlook.
But that’s not how stocks are priced in the modern era.
For better or worse, the stock market in the 21st century is something of a chess match, where you’re trading largely based on how you feel the rest of the market is going to feel about a stock anywhere from five days to 12 months down the road. That shell game doesn’t leave much room for an actual value-based assessment of a company’s operation.
Most mainstream investing books still don’t acknowledge this reality, but veteran traders know it’s how the game is played these days.
The market may be tricky, inconsistent, exhausting, unduly-influenced, erratic and unpredictable, but it’s not rigged.
That’s going to be a tough pill to swallow for a few traders who are convinced they’re on the wrong end of too many losing trades because someone is conspiring against them. But the sooner they can come to grips with the truth, the sooner they can come to grips with the real reason they’re struggling to stay afloat in the world of stock-picking.
In reality, most traders (and new traders in particular) lose because they actually believe this business is as simple as it appears when looking in from the outside. It’s not unlike the joyous, easy-winning picture the casinos paint when encouraging consumers to take a quick trip to Las Vegas.
Aside from sticking with safe and stable names simply as a way to maintain your sanity, the industry often encourages a focus on value stocks by noting they actually yield better bottom results over the long haul. Problem: It’s only true sometimes. Other times, it’s completely untrue.
It’s been especially untrue the last few years. Since this point in the year back in 2003, the iShares Russell 1000 Growth Fund (IWF) has advanced 81%, while the iShares Russell 1000 Value Fund (IWD) has only advanced 67%.
In another 10-year segment, value might lead growth again, or it might not. That’s just it — the landscape of what works and what doesn’t is forever changing.
Odds are that you’ll never successfully step into a stock right in front of an acquisition for any reason other than luck. Suitors make a point of keeping the lid on M&A plans specifically to avoid front-running a buyout and driving up a price. And, in the rare case where news of an impending buyout is leaked, there’s always someone with closer ties that can act on the information sooner than you can (assuming you’re not in those particular board meetings).
And just for the record, theme-based buyout speculation doesn’t improve your chances of picking an acquisition target. Back in 2012 after Bristol-Myers Squibb (BMY) bought Amylin for control of its diabetes pipeline following the purchase of Neighborhood Diabetes by Insulet (PODD), pundits were sure it would spark a wave of other diabetes-driven acquisitions. Those other M&A candidates began getting bid up, but as it turns out, no more meaningful buyouts materialized in the diabetes space.
Ditto for the gene-mapping mania that was sparked by the Roche (RHHBY) acquisition of Illumina and the GlaxoSmithKline (GSK) purchase of Human Genome Sciences. By the time the gene-mapping M&A trend became obviously hot, the trend was over.
There’s actually a little bit of truth to this axiom that Jim Cramer turned into an outright cliche. There’s an important footnote missing from the idea, however.
While there might always be a bull market somewhere, there’s not always a bull market in the arenas where the average investor can actually invest. In 2008, for instance, stocks, gold, oil, real estate and even bonds lost value over the course of most of 2008.
Yes, all of those areas eventually recovered, but they all fell — a lot — in tandem for a long, miserable time.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
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