In the previous post, we discussed how to enter the market using Moving Averages, using Apple (Ticker: AAPL) as an example. The stock went up more than 5% the next month, then went on to gain 100% that year. Not too shabby. This month, we explore the 5 facts we have more chances of making money than even the professionals in the City.
Who am I talking about when I say ‘Professionals’? I am talking about the traditional big Fund, Pension and Unit Trust Managers who traditionally invest our money for us.
Making money investing in the ways I have taught you over the last few months (PCA, VCA, Buffalo etc.) is simple. It shouldn’t take longer than 10-20 minutes a day. After all, how difficult can a strategy be that takes only 10-20 minutes a day? But that doesn’t mean it is easy. You have to learn what to do. Then you need to do what you have learned. Simple, but not easy.
What most people don’t realise is that, after you have learned a few simple strategies, all you need to do is to keep the momentum going long enough for you to get into the habit of practising 10-20 minutes a day trading and investing stocks. The rest will take care of itself. We suggest that if you can keep this up for just 4 weeks every Monday, Tuesday, Wednesday, Thursday and then some time over the weekend you will master this habit. After that the habit is set and you will get better and better at trading and investing. But you have to get past the first 4 weeks.
So what prevents us from doing this? Often it is as simple as not really believing it is possible in the first place. Often we find that the challenge starts with our own mindset around ‘the markets’. We say things to ourselves like “It is too risky”, or “I could lose everything”, or “the markets are manipulated”, “the professionals know best, I should invest with them”. Feel free to add your own words here. We will discuss the first two next month where I will prove that it does not need to be risky at all but here I would like to explain why the last one is total and utter BS.
There are four reasons why you have MORE chance of making money than the professionals. If I were to sum it up, it would be down to the Regulations the professionals fall under due to the fact that they are investing other people’s money. Four! Not one or two but four! If this doesn’t convince you then nothing will. So here goes:
1. Professionals are limited in what they can invest in. We are not.
Imagine a Fund called Pan European Growth Utilities Fund. Sounds good? You invest you savings and hope for the best. After all, they are the professionals.
After a few months it is clear that not much is happening in the utilities sector. But in an inter-departmental meeting, our fund manager hears from the technology fund manager that the technology sector is hot right now and roaring ahead, chalking up massive gains. The Technology Fund manager’s office is right next door to our Fund manager’s office. Can our fund manager knock on his colleague’s door, get some expert advice, and invest instead in the technology market?
Our utilities fund can only invest in Gas, Water, Electricity companies because it is a Utilities Fund not a Technology fund.
No matter, our savvy Fund manager can look to the East at the growth markets that are China and India to find some undiscovered utilities gem there, right?
We wish! Didn’t you read the brochure? It’s a Pan-European fund so only European utility companies are allowed.
We on the other hand can invest in anything and any company we want to. It is our money we are investing and so are not regulated in this way.
2. Funds HAVE to invest even when it is best to stay in cash. We can stay in cash
As a professional, there might be times when the market is not looking so bullish and it might be time to get out of the markets and stay in cash. Right?
As an Investment Fund, our Professional is mandated to invest when he receives our money, no matter what is happening in the market. Can you imagine the uproar if he decided not to invest our money, stay in cash and to his horror the market would go up? We think we are invested with him. He however stayed in cash and missed out of profits. We would be up in arms as soon as we found out.
Worst still, he would still be buying if we sent him our money when stocks are actually going down. If we questioned him he would point to the sign on the door: “Investment Fund”. That’s what we do. Invest your money for you. You send it, we invest it.
Which leads us to reason number 3
3. Traditional funds can’t make money when markets go down. We can Sell Short
We have just learned that our Professional can’t stay in cash. So what do they do when markets are going down?
Obviously they are hoping to cherry pick those companies whose shares price is going to buck the trend and go up instead. Easier said than done. For a start, market sentiment makes up approximately 65% of the movement. If the market starts moving down, people start to panic. Panic leads to selling. Selling leads to more panic.
Wouldn’t it make more sense and just Sell Short, as we described a few months ago? This is where we make money when markets go down by Selling Short at a high price and Buying Back at a lower price?
They would if they could. The majority of funds can only buy. That means they can only make money when a market goes up. Not when it goes sideways and they will actually lose you money when it goes down. Put another way, you have 1 in 3 chances of making money.
How do you like the odds of being able to make money in only 1 out of 3 scenarios (that’s less than 50-50 chance)? Now imagine putting the odds in your favour and being able to make money in ALL market directions. How do you like THOSE odds? We can do that. They can’t.
4. Funds are forced to make short term decisions to the detriment of longer term gains. We can view things more long term and therefore benefit more.
Fund managers are ranked according to their performance against each other. If a fund falls down the ranking, investors start to pull their money out. So a Fund’s job is essentially to do 2 things.
1. Take investors money in
2. Keep investors money in
In order to do that, they will sacrifice really big short term gains in order to make short term gains and keep their ranking. There have been stories of incredibly well respected investors, including Warren Buffett, who were criticised about not riding the Technology bubble up all the way in the late 90s. They were vindicated and later proved right when it crashed wiping out millions of profits, but by that time many had been fired.
We can get into a position and even if it is going the wrong way for a while, even months or years, it is ok because we are not comparing ourselves to anyone else. Jim Rogers, a maverick and contrarian investor, who ran the Quantum Fund with George Soros, will usually get in way too early but in the end he is proven right. They made their shareholders over 4,200% in 10 years. Not that’s what I am talking about!
Now if there was 1 or 2 reasons then they could be ignored. But how can we ignore 4 solid gold reasons.
Have you ever stared at one of those annoying posters where if you stare at it long enough you actually see the image that everyone can see but you can’t. You have to relax and sort of cross your eyes a bit and suddenly the picture jumps out at you. Amazingly it was there all along. Try this one here:
Can you see it?
Most people can’t do it immediately.
Try not looking right at it and relax and almost cross your eyes.
Can you see it yet?
If you can see it then every time you look at it now you see it right? How could you not see it the first time? If you can’t see it send me an email and I will send you the answer to Marcus@investment-mastery.com
This is what investing is like – it is there for you to see. You just need to practice a bit.
In these times it is a MUST for you to learn more about what trading and investing in stocks, commodities and precious metals has to offer. We are having a series of 1 day events where we go through the strategies so you can take control of your own finances.
But first, why not go ahead and download your FREE book:
Until next time,