So you’ve been buying stocks since July 27 thinking you were getting a bargain. How is that working out so far? Maybe you think now they are cheap to buy. How do you know?
Back in 2000, all of us trend followers heard that we had to buy the pullback from the March highs. It was a great buying opportunity in the summer of 2000. How could we pass? Easy. The trend was down. In March 2003 the market began to rally but everyone suffered a two year bear market and there was no way stocks could move up now. How can trend followers be buying here? Easy. The trend was up.
When I was a contributor at Realmoney back in 2007 my inbox was flooded with hate email because I was “foolish” to see the bargains that were presented by stocks like GOOG, RIMM, and BIDU off their highs in late 2007. How did that turn out for them? In March 2009 the market began to rally with leading stocks leading the way higher. Everyone was for sure that this was a fakeout move. How could trend followers be buying? Easy. The trend was higher.
This year, stocks made progress throughout 2011 but internally the chart patterns of individual stocks in the banking, semiconductor, and commodity sectors were selling off while the market was moving higher. This is a classic sign of a market ready to make a move from an uptrend to a downtrend. However, when the crack happened on July 27th, bulls refused to listen to the clear message of the tape. Instead of going with the trend, they decided to fight it. Today I continue to see the same thing besides having charts with technical damage exactly on par with 2008.
The question isn’t about how to buy stocks here. The question is why are you buying stocks here? What historical precedence and investing methodology with a long-term proven track record provides the returns that warrants doing something so dangerous? I have read books on the greatest traders. I myself inspire to be one of them later on in my life. Everyones methodology is different yet it is similar. The one thing you don’t find is them fighting the trend.
Trend following makes sense. Why argue with facts. The greatest traders of our lifetime are trend followers. Oh, but, Warren Buffet isn’t. OK. How many other Warren Buffets are there out there? Do you know who Jesse Livermore is? William O’Neil? Nicolas Darvas? Richard Wyckoff? Jack Dreyfus? Richard Dennis? William Eckhardt? Ed Seykota? If none of these names are familiar, then there is a lot of work to be done.
All of the traders above have turned small stakes of cash into millions and millions of dollars. The reason why is simple. When the market is trending higher, they are buying stocks. When the market is trending lower, they are selling/shorting stocks. When the market is sideways/choppy, they are sitting on their hands waiting for the next trend. It’s common sense investing yet so uncommon in a world where we are taught “cheap” is good. Where else in life is cheap good? Fast food? Automobiles? Jewelry? No. You get what you pay for in life and in the market.
Cheap stocks get cheaper and cheaper in a bear market. Not being able to recognize the difference between buying stocks in an uptrend and buying stocks in a downtrend is the difference between becoming a great trader and becoming the normal 95%-99% of most traders that try to get the stock market to make them rich.
If you want to get rich, you got to learn how to invest from the best. To learn from the best means you are going to have to spend money and pay your dues. Investing blindly without any real hardcore research will turn out horrible, in this economy, where downtrends will be more prevalent than uptrends. The trend is down. Trend followers are already short and profiting. Meanwhile, the bulls, continue to buy and lose money.
When the market actually turns and begins a new rally, trend followers will have made money in the bear market that bulls in the bear market lost. When that happens, all those bulls will be broke and will be unable to particpate in the rally. If they are still solvent the capital they have remaining will have limited impact on repairing the damages done by buying stocks and not taking a small loss. The trend follower, on the other hand, will have profited handsomely on the downtrend and will be able to use that ample capital to put to work in the uptrend. Learning to play the game right is how you make a killing in the stock market. Buying a stock because you believe it is cheap is not a game plan. Trend following, money management, a sound methodology, and cutting losses when you are wrong is.
[Editors Note: Do we have to whip out the tack hammer again?]
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