PT.1: The noise and the power of choice.

Last time that I wrote I outlined the case for taking an active role in your financial future, today I want to start expanding on that thought and provide you with a how. First, let me say that this will be a multi-post thought process, and will do little justice to the subject, but I want to provide a very simple, easy to understand primer. Let’s be honest most people will be initially daunted by the process of learning how to do this and sifting through all of the multitude of investing systems out there. There are more investment systems out in the ether than there are leaves on a tree, it seems like everybody and their brother has a system to get rich quickly with no effort. I often retort to this claim, “How often in your life have you found an opportunity to get money handed to you without doing anything and not suspect it just a bit?” Amazing how few people have a good answer to that one and if they parrot a line straight from the promo material I have one more question for them, “If that is true, why are they telling you? Even better where are all of the people screaming the praises of *fill in the blank* system on the corners? Why did you have to stumble across an advertisement on the internet that you weren’t looking for?” Usually after that last round of questioning there is no answer. Here’s a secret for you, the vast majority of professional investor type individuals, if they find a system with no risk that allows them to time the market and make a killing, WILL NOT SHARE IT WITH YOU!

What is the upside for them sharing it with untold numbers of people if they are really making enough money to be among the upper 1%? Here’s a piece of knowledge for you, the market does not move up an down based off of earnings reports, news events, scandals, talking heads on the business morning show, etc. Surprising? It would certainly be a surprise to many people in the general public who have been told these things by the very people reporting on or talking about those “events”. Here is the truth, the market moves off of the buying and selling of shares. It’s that simple. When buyers are stronger than sellers the price moves up, when the buyers get tired of buying and slow down we see the market go sideways for a bit during a period of consolidation while the market figures out where to go. If the buyers are completely out of gas and there are now a number of people who want to sell then the price starts going down. Remember the buyers had lost momentum at the price at the top of the peak, so the people who want to sell have to take less money than the peak to find someone willing to buy and the process starts downhill. Simple right?

Now the news, events, talking heads and earnings reports have an impact for sure, because while the actual movement is based on buying or selling, the choice to buy or sell is often psychological and based off of the things we see or hear. Don’t discount those things, but if you believe those things are what drive price not the process then it becomes a self-fulfilling prophecy. If everyone watched an earnings report for a company and the report was that earnings fell 50% from the previous quarter and no one saw or heard it ever or better yet every single person with money in the market decided to do nothing, the price would not move a cent. Wow, that’s a pretty powerful feeling if you think about it.

So think about this, over 85% of the money in the stock market is money from you and me. Let that sink in, your money and my money and your upstairs neighbors money and the owner of the corner deli and the teacher of your kids school and the person delivering your pizza is the VAST majority of the market. If that’s the case then why do we seem to get nowhere and corrupt corporations get away with all this garbage? Because we entrust our investments to fund advisors who invest it into mutual funds which own part of 100s of companies. We don’t vote our own dollars, there’s someone we pay to vote it for us with little ability to affect where it is directed. This person works for a company with thousands of other people just like them who pool your money under control of their directors. So you have no control over the buying and selling of a single share.

That should be a little scary. If you look at the companies that make up the S&P 500, Nasdaq, the growth fund your manager has your money in you will find some companies you might not like. Right now one of the safest growth companies in the market (who I will not name for legal reasons) produces nicotine products. Maybe that means nothing to you since they pay a dividend and are nearly recession proof, or maybe you don’t believe in the use of the products or their reported health effects. Both of these types of people if they look hard at the funds their managers have them invested in are likely to see this company and one or two others there.

Your fund manager is working on a quarterly basis. Quick primer, every business divides the year into four quarters of three months each. The start and end month of those “fiscal years” occur depending on how the company sets them up, often October to September but not all do it that way. The important part is that your investment advisor at one of the big investing companies is evaluated on the success of the stocks or funds they picked for the previous quarter, and their bonuses, promotions and even continued employment are based on the performance of their fund over that period. So ask yourself this, how likely are they to take a chance by not including companies in your portfolio that are growth machines with a moral question? Remember I said in the last post that no one will care about your finances like you will. Well, this is the second part, no one will vote for your values but you. The advisor you have may not like what they have to do, but they also like to eat, live in a house and provide for their family. It is a cut throat game on Wall Street, but if you manage your own money the only person you answer to is staring you in the mirror. Maybe it’s time to vote your values and take control of who moves the market. The market would change forever if everyone who invested with these large companies took out there money and voted it themselves.

Let’s circle back to the earlier subject of the systems out there that promise wealth with no work. Pay me $500, $1000, $1500, $5000 a year and I will send you text updates that you simply follow in and out of trades and you will make 400% returns consistently with over 99% win rate. Any of this sounding familiar? Again ask yourself, if this is true then why are you sending it out to me and thousands of other people to blindly follow. There are two schools of thought I have run into regarding this phenomenon, and don’t believe for a second that this is new, it’s been going on for at least 40 years that I am aware of. It used to be tapes and paper newsletters, now it is streaming videos and text messages. Neither of the two thoughts are comforting to me as an investor.

The first thought and astoundingly less cynical is that their success rate is substantially lower and the returns are not nearly as good as advertised and they need the money as a paycheck to keep them living their accustomed lifestyle because their system is not as fool proof as they make it sounds. Now you may say, if that’s the less cynical do I even want to know what the more cynical thought is? My guess would be no, but I feel you should hear it anyway and this will tie back in to what really makes stocks move in a way that should leave you thinking.

The second thought (and this was shared with me by an advisor I trust) is that they are using you. How? They identify a position (read stock) with a decent but not easily identifiable to everyone volume of trade. Now volume of trading is always critical when looking at a stock, because the more volume of trading there is, the easier to get into and out of it. The last thin you want is to be ready to sell your stock at a given price and there is no one there to buy it. I digress, the trader sees a potential stock that may have had some small good news or large event known to the public and buy in at the lowest price they can find. They send out a text to their several hundred or thousand followers, “Put $XXXXX into Company XYZ now! They just showed *this event happening* and are on the way up, up, up. Hurry!” Well if people really buy into this program, they will dutifully put money into the stock as instructed driving the price higher and higher. Now remember their “guru” will have bought much lower and will be watching their profits rise. Who else is seeing this move? Everyone in the market, you might be surprised that one of the most watched instruments of the market every day is a very simple and incredibly non-technical marker. Ready for it? Biggest gainers and losers. TA-DA! So the people watching this see Company XYZ making a move and want to bandwagon on, so they buy in and the price rises higher due to this artificial inflation that has nothing to do with the underlying value of the company or the event occurring necessarily. One guy with a newsletter can change a market. Then when the move hits a point the “guru” has determined to be where they want to cash out, they do so and then have all the time in the world for the position momentum to stall or die as people realize there is no big truth behind this move either and sell out. The “guru” when ready sends a message to their followers to get out and the stock drops which if this guru is savvy, will have shorted after selling out and they ride the price down making a second killing as their people make small profits or even lose money.

I don’t like to think that people actually do this, but my life has made me sometimes very cyncial as to what people will do when money is on the line through personal experience. There is nothing you will ever get for nothing, maybe you will suceed with one of these systems and if you do my personal thought is “I” would always end a trade before told to after making modest profits because compounding interest will take much better care of you in the long run, than timing the market. Also, I wish you nothing but the best in your journey if it’s working for you, I just don’t buy into it, there’s always a price.

Next post I will go into my personal philosophy and the people who started it and share why I believe in it, and I will tell you now, it takes work, but it is not impossible to do. A little of my background is that I studied history in college and took one basic math class, probabilities if I remember correctly. So I am not from a financial background, nobody in my family invested money and some of them are still hurting today because they didn’t. I am not close friends with any professional financial types, acquaintances yes, close people no. I still have a financial advisor who I do like, but am in the process of taking my money away from as I become more skilled. Currently he is only now working with 1/6th of investments and next year I plan for to take away a minimum of half of that, if not the entirety. He has done well for us, but he is hamstrung by the rules the brokerage puts in place on him. It doesn’t let him provide the same level of returns I can by investing in a small number of truly great companies. We will talk more about that next time though.

I hope this has been helpful for those who are following and I am happy to discuss further at either the sites Facebook page, or by email or in the comments. I am providing this information for the sole reason of seeing the suffering of people within my family and group of acquaintances who are either working into the late age because of not having the knowledge to invest or believing it was something they are not capable of. I truly want to spread the wealth of knowledge and will be the first to say I have made mistakes in the beginning, but through effort and learning make fewer every day. I want you to be able to do the same. I love people and my life has been centered around taking care of people, so this is for me a continuation of that mission even though I am no longer in the line of work where I was able to do so directly. I hope you enjoy this and until next time I’ll be tearing apart an herbivore.

-Daddicus Rex

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