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Tuesday, October 08, 2013

Uncommon Common Sense

If you are like me your email inbox gets a lot of those oh so enticing offers promising instant stock trading profits in just 15 minutes a day and endless stock promotions. I spend a lot of time visiting financial sits on the web kicking over rocks in search of ides so it is no surprise that I end up on many of these mailing lists. What is surprising to me is that many of these firms have been in business for some time so apparently people are spending money to become the next Stevie Cohen or George Soros between dinner and dessert.  Folks must be buying those stocks that will benefit from the looming crisis or loading up on those $.10 stocks with breakthrough technology that will change the world.

It must seem silly for me to say this since write for a subscription service but there is a huge difference between advice and hucksterism. The guys and gals on Real Money share their thoughts, ideas and the trades they make with their own money which is light years away from Five Stocks to Buy if the Government Shuts Down , or Six Stocks to Sell If The President Trips On The Way to the Podium.

We need to see a healthy dose of common sense applied when it comes to trading and investing our money. There is no magical system that will make you risk free millions in just minutes a day. When you open the account and decide you will make your living trading stocks or forex in your spare time you are stepping into someone else’s arena and odds are you are mere lunch money. I have done a lot of work on trader survival rates and returns of late and you have a better chance of beating Lebron James in a one on one basketball game than you do of being a consistently profitable trader in your spare time. When I talk to successful traders like Tim Collins, Bob Lang or Bob Bryne they are always working to define and refine their edge. You are up against the best minds armed with the best technology and you have a better chance of earning outsized profits betting a hard 8 every roll at the craps table.

The other area where I see any illusion of common sense thrown out the window is this idea that we can somehow predict where the market is going and book huge profits in the process. Predicting the market sis an absolute waste of time and the lucky ones who get a call right are then usually wrong for the next several dozen predictions. We make stars out of folks like Elaine Garzarelli and the Joe Granville for a lucky coin flip and spent a long time paying for that mistake. The economic, financial and psychological stews that are the financial markets are impossible for anyone to predict with any sustained accuracy.

Big money is made in the stock market by reacting to what the markets do, not in predicting their future movements. If you look at the most successful investors they made their biggest returns by buying when markets were ridiculously undervalued or hopele4ssly overpriced. Investors like Jon Paulson and Michael Burry didn’t sell subprime mortgages because of a chart pattern or trading system. They made billions because they correctly recognized that the securities traded at price will beyond their true value. The markets went against them for a while but they held on until the process inevitably corrected themselves.

Investors like Wilber Ross, Warren Buffett and Howard marks did not get rich by predicting the direction of the stock market. They did it by buying assets they were egregiously undervalued and held them until the market entered another euphoric stage and selling them to over excited traders and investors. They are far more active when the markets are crashing down around our ears and everyone else was panicking. They bought assets and earnings cheaply by acting as the buyer of last resort for scared sellers. They got rich by applying common sense to the markets and waiting for a chance to react rather than predict.

I have no idea what the market will do in a reaction to a government shutdown. I do know that the best way to lose some serious coin here is to try and predict the outcome and the market’s reaction. Common sense tells me that if the markets react negatively we could sell some bargains created. In the long term the shutdown has no real impact on the future of my small bank and cheap stock so I would be foolish to rush to sell.

As investors we need to apply common sense to the markets and quit chasing impossible pipe dreams. Charlie Munger once attributed his success to the fact that he acted rationally when other did not. We need to do the same.

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