One of the most common mistakes in investing and trading the financial markets is falling in love with your own opinion. Or bucking the trend.
The standard investor has a medium to long-term strategy of buying good companies and holding them. This approach has finally begun to ‘pay dividends’ as some major Australian stocks have awoken from the slumber of the first half of 2012 and made positive gains.
So, is this the beginning of new bull market? Well, “yes and no” is the safest answer, as you can be right regardless of what happens. A better question might be: “do you want to be right or profitable?” You would think this is an easy question to answer but when you combine money with emotion, it’s not as clear-cut as it seems.
US and European markets have outperformed Australian markets over the last 12-months and my short-term advice is to run with the bulls while they are in town. The trends are up and we are making fresh highs on the ASX 200 and trading above 4,500. My only caveat is to ensure you have a plan to quit the stock if it under performs.
The simplest way to make money is to trade the prevailing trend and this has been up since June, as you can see from Chart 1. Over the past 12-months, much of the economic and fundamental data has been pretty bleak - at least the data that gets media ‘air time’. Despite this, many markets (including the US and Europe) have found a way to climb while markets like Australia and China have stagnated. Which is strange as the “fundamentals” would seem to indicate that these are “better performing” economies.
Many investors are worried about jumping back into the markets and ‘getting it wrong’. I frequently get it wrong in my own trading but what really matters is how you manage the losses. You need to accept that getting it wrong sometimes is part of investing. You have to be prepared to leave that stock and move on.
Volumes are thin at the moment in many equity markets and this can be a sign that things are about to change to the downside. The thing is though; volumes have been thin since June. So the markets have risen on low volume and may continue to do so for some time. If you trade what you see (a rising market) and ignore trading what you feel (emotion), you can get ahead.
This is why I am happy being a contrarian. The main theme of online discussions is market doom and gloom, with investors sweating on picking the next GFC top. Every week a commentator or blogger has nominated this ‘top’ and every week they have been wrong. The real question is whether they have been profitable and while some may have been, there is no money to be made on the sidelines or by just having an opinion.
I understand many investors are still reeling from the GFC. For some, it will take many years to step back into the market with confidence. But they don’t ring a bell to let you know when it’s best to get back in and much can be missed while you’re ‘falling in love’ with the next major crash.
Chart 2 illustrates how the US S&P 500 has climbed back to near its 2007 (pre-GFC) highs and it is obvious there have been good opportunities along the way.
I see great profit potential in the months ahead, for both buying and selling. The upside trend in the market is currently strong and this will mean a bias to towards buying. Eventually this will change and you will then have to decide what to do. This is when having business-like capital management and risk management rules to follow will hold you in good stead.
When the trend changes I will happily trade the market to the downside. In the next few weeks I will identify some key markets and areas to watch for potential movement.