Stock market old-timers will often tell newcomers that “The market wants to take your money,” which, on the face of it, just doesn’t sound right. After all, lots of people make lots of money on Wall Street, and you have as good a chance as anyone, right?
Well, not really. There’s something to the warning, and the quicker you learn about it, the quicker you can start printing your yearly results in black ink, rather than red.
But learning the market’s tricks and traps can be an expensive proposition if you approach it by trial and error. The stock market is happy to teach its lessons, but it charges for the service.
Some people treat the truism that the market wants to take your money as a scare tactic. They don’t believe that the market is actively, forcefully and intentionally trying to take their money away. They’re wrong, and here are three reasons why.
1. Institutions want to take your money away. Large institutional investors control a majority of the equity capitalization in U.S. and global markets, and they count on individuals to be both over-enthusiastic and over-discouraged.
The individuals who push stocks up the last 10% to their tops are setting the table for institutions to sell and begin the stock’s decline. And the last individuals who finally capitulate and sell a stock down to its low are tying a bow on the gift package for institutions, who will then quietly begin to buy up the discounted bargains. (I’m leaving out of this point the active market manipulation that institutional investors sometimes stoop to.
Sometimes one of the whales will put a big stock position on the selling block, driving the price down a little. Then, when momentum carries the price even lower, they will buy it back at a discount. And that’s not even illegal.)
2. The bandwagon wants to take your money away. It’s hard to commit to putting a chunk of cash into a stock. As a result, a lot of investors wait to invest … and then they wait some more, wanting to be sure that the stock they’re buying is really in an uptrend. As the stock rises, more and more people are reassured by its performance into finally hitting the BUY button.
But if you wait too long, the stock will be overextended and ready to correct. The last few people who jump on the bandwagon are doomed to go over the cliff with it. It’s the law.
3. Good stories want to take your money away. Lots of stocks have great stories. Compelling stories help entrepreneurs win funding for their startups and secure rising companies the capital to expand. The trouble is that a lot of stocks that are absolute mutts have stories that make them sound like the next Apple and Google and Microsoft all rolled into one.
The guy who starts telling you about his favorite stock at a party will probably give you 98 cents worth of story with two cent’s worth of information about the company’s revenues and earnings and the performance of its stock.
There are other ways the market wants to take your money, but you get the picture. So what can you do about it?
As any of our long-time readers know, Cabot recommends that you have a system. If you know your own investing personality and follow the rules for stock selection, asset allocation, buying and selling that are appropriate for your favored investing style, you’ll make money.
If you like the idea of buying stocks at a discount and then holding on patiently while they appreciate to fair value (the Warren Buffett way), then you are a value investor and you should follow that system. You’ll make money.
If you’re more comfortable with the idea of buying dividend-paying large-cap stocks that are closely tied to the progress of the U.S. or global economy, then you’re a blue-chip income investor, and that’s exactly what you should do. You’ll make money.
If you cherish the thrill of finding hot, young stocks that are climbing like rockets and riding them to huge gains—and you can tolerate, and minimize, the losses that inevitably accompany this strategy—then you’re a growth investor, and you should stick to your guns.
You’ll make money.
Whatever system you use, a strict sell discipline needs to be an integral part of it. If you ever forget that the stock market actively wants to take your money, the value of your portfolio will be glad to remind you.
As a growth investor who learned my investing chops from working at Cabot, I know that our rules for growth investors are sound. And subscribers to Cabot Emerging Markets Investor and Cabot Growth Investor get the benefit of many years of patient testing of different investment models. We only recommend what works.
And that’s true for all of Cabot’s investment advisories in every style: growth, value, income, small caps, options and balanced.
Learning from us is a heck of a lot cheaper than getting schooled by the market. We want to help you make money, but the stock market wants to take your money. And the market’s appetite is bottomless.
To learn more about Cabot Growth Investor, click here.
To learn more about Cabot Emerging Markets Investor, click here.
Here’s this week’s Fortune Cookie. Remember, you can always view all previous Fortune Cookies and Contrary Opinion buttons by clicking here.
“Success is nothing more than a few simple disciplines, practiced every day.”
Tim’s comment: For growth investors, that means keeping an eye on the charts, pruning losses so their pain is minimal, and always being alert to stories of young companies that have the potential to change the world. (It’s one of the most enjoyable parts of my job.)
Paul’s comment: When I came to Cabot, one big lesson I had to learn was that there is no single best way to invest. You can follow growth rules (which is where I found a home) and make money. Ditto for value investing, income investing, small-cap investing, options trading, etc. But you have to know the rules and follow them. So maybe the bigger requirement is that you find out what those “few simple disciplines” that work for you actually are! When you know that, the daily practice is relatively simple.