Overcoming a Market’s Mindset

I hope you’ve had a chance to read the recent essays I’ve shared with you here in MoneyWire by my friend Keith Kaplan.

Keith uses a revolutionary tool to get in front of major market moves – and the tool has been spot-on about this recent market… as well as every major bear market AND bull market going back over the last two decades.

I can’t wait to talk more about it with Keith in an exclusive event we’re holding tomorrow afternoon. I’ll interview him about his system that has signaled every major market move over the last 20 years and, frankly, his amazing story.

Today, I want to share another of Keith’s essays so you can get a glimpse into how much research he did to come up with his system. As you know if you’re a regular MoneyWire reader, I’m a research fanatic.

Enjoy Keith’s insights, and then please plan to join us tomorrow, June 23, at 4 p.m. ET, where we will show you how thousands of ordinary folks use his revolutionary tool with great success. It’s free to attend, and I encourage you to join us.

Best regards,

Matt McCall
Editor, MoneyWire

Overcoming a Market’s Mindset

We talked last time about how your mindset is critical to successful investing. No matter who we are, we’re all susceptible to flawed perceptions and cognitive biases.

It is something that we can identify, though. When we start becoming more aware of our mindset, we can start to overcome it. And with the use of technology, it becomes even easier.

What happens when we have to overcome everyone else’s mindset, though?

You and I aren’t the only ones investing in the markets.

As just an Average Joe on the street, I wanted to better understand how a collective mindset could move the markets. That made me do a little research.

What I found was a giant study of market factors going back more than 200 years.

The study looked at six factors that drive modern-day investing:

  • Momentum (the tendency of winning stocks to keep winning)
  • Trend (the tendency of strong trends to persist)
  • Value (the long-term outperformance of cheaply priced stocks)
  • Carry (the tendency of high-income securities to be favored)
  • Seasonality (buying at a historically favorable time of year)
  • BAB (‘Betting Against Beta,’ favoring low-volatility vs high)

The researchers applied each of these factors to stocks, bonds, commodities, and currencies — 24 data points across all sorts of market conditions, including bull, bear, booms, busts, and world wars.

The results were astounding: 19 of the 24 data points stayed intact for more than 200 years.

That left me scratching my head, wondering:

  • Why haven’t factors weakened after all this time?
  • Why do trend-following and momentum and value still work?
  • Why is market seasonality as viable an input as ever?

If markets were truly rational, these factors wouldn’t exist.

But the markets aren’t rational.

The markets aren’t run by machines exclusively. There are people placing trades. There are brokers telling clients what to buy and sell. There are market makers on the trading floor. If an algorithm tells someone what to buy, we can choose to ignore the results if we don’t like what the algorithm spits out.

These six factors to modern-day investing have lasted 200 years. They certainly can last another 200.

So, how do we overcome an entire market’s mindset?

Well, we can’t change how every single investor thinks, but we can account for it in our trading plan via position sizing and other risk management techniques — many of which are used by some of the best hedge funds in the world.

I can’t change how everyone thinks, but I can factor the group mindset into my trading plan. All stocks have their own inherent risk — based on how the company is run and how the stock is traded.

I factor that risk in whenever I go to buy a new stock. The number of shares I buy is based on the stock’s risk, which in part is influenced by the mindset of the masses.

Position sizing for risk — or risk parity — can have a major impact on our portfolios.

I’ve seen research that shows simply adjusting a portfolio’s position sizes — without changing the actual positions held — increased one test portfolio’s performance by more than 275%! It took a $36,000 loss and turned it into a $64,000 gain.

By simply position sizing for risk — investing less money in more risky stocks and more money in less risky stocks — that portfolio’s performance would have improved dramatically.

Risk management via position sizing (and other techniques like trailing stops and portfolio diversification) allows me to practically eliminate other investor’s mindsets and focus on just my own. It gives me the peace of mind to make my own decisions based on the risk that I’m comfortable with.

Over the past few days, I’ve shared my story with you.

I’ve told you how I cashed out of the market in February, got back in at the bottom of the bear market, and how understanding the biases that can influence my mindset has helped me.

Today we’ve covered how to handle competing mindsets in the market, overcome them, and succeed.

Whether you’re a novice investor or a seasoned pro, I want you to know that you can do this. You can be a successful investor on your own. If your friends are calling you crazy, too — do your best to ignore it. If emotions are getting in the way, take a step back and calm your mind.

With a clear mind and technology on your side, you can overcome your greatest obstacle to investing and build a successful portfolio for the years to come.

To your investing success,

Keith Kaplan

Matt McCall’s MoneyLine Podcast

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