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And how many times I explain to people that it’s not.
Wizard investors like Warren Buffett, Carl Icahn, Peter Lynch, and even the infamous Michael Burry prove market timing is possible.
However, broadly speaking, the average investor can’t time the markets.
Most investors fall into one of two camps:
- They invest through their 401(k) or other retirement vehicles and never select individual equities.
- They consume disparate pieces of information like an out-of-control vacuum and haphazardly apply them to stock picking.
Anyone who invests in an individual stock is trying to time the market.
Think about it. If that wasn’t true, it would mean that investing in Radioshack in 1990 would be no different from investing in it in 2005.
So what is it that allows certain investors and traders to effectively time the market?
- Do your homework
- Build an effective strategy for YOU
- Practice emotional discipline
Do Your HomeworkWall Street would have you believe that it takes hours of burning the midnight oil to beat the markets.
Nothing could be further from the truth.
Today’s technology lets traders and investors filter out the noise and zero in on the trade and investment ideas they want.
For example, TradeSmith Finance built and customized screeners for stocks and options to help traders find investments that suit their individual tastes.
Users can use these tools to explore and evaluate different trades based on risk, return on investment, volatility, and much more.
Here’s a quick snapshot from our Pure Quant investment screener.
This screener pulls out the top investment ideas based on our proprietary quantitative ranking system. And that’s just one of the built-in options.
However, homework is more than just performing technical analysis and applying filters. It requires looking into the qualitative factors as well.
Right now, oil and gas companies are all over the news because of the shortages plaguing global supply chains.
Wouldn’t it make sense to marry this thesis with a screener?
You see, it’s not about plowing through reams of sell-side analyst reports and hours of earnings calls.
It’s about taking a trading or investment strategy and combining it with timely, common-sense analysis.
That means looking at what’s moving and why.
Naturally, the next question is how you build an effective strategy.
Building an Effective Strategy for YOUSome people like to day trade. Some people love options (I’m one of them). Some people prefer dividend stocks.
No one of these strategies is better than the other, because the best strategy is the one that fits you as an individual.
Being able to time the market means building a strategy that creates a risk-adjusted statistical edge over time.
It can be as simple as selling covered calls against dividend stocks when implied volatility is high, or picking up momentum stocks after an entry signal.
Any approach can work for you. That’s why our platform offers so many different ways to analyze stocks. We want you to explore and build the strategy that works best for you.
So how do you do that?
Let me offer a few tips:
- Align your strategy with your risk tolerance. Don’t try investing in stocks with high volatility if it keeps you up at night. Similarly, don’t just invest in dividend stocks when you’re just starting out investing in your 20s. Find an investment style and method that keeps you involved without being overbearing.
- Work with a concept you understand and can execute. People who work a nine-to-five job won’t make good day traders. Some folks can only do their research on weekends. That’s fine. Pick a strategy that makes sense to you and works within your time constraints.
- Use backtests. The past doesn’t always predict the future. But backtests can help you craft a data-driven strategy based on historical results.
Practice emotional DisciplineIf I had to pick one skill that separates successful traders and investors from the rest, it would be emotional discipline.
Human beings are more naturally averse to loss than they are attracted to gains.
That predisposes us to risk aversion instead of risk taking, which is the very trait you need to be a successful investor.
What you might not realize is how emotional discipline changes over time.
Younger investors with longer time horizons and less money invested can handle large percentage drawdowns.
Folks at or near retirement see a market collapse and worry they won’t have enough money to live off of.
It’s one thing for a pundit to walk on television and tell people to stay calm. It’s another thing to actually stay calm when your retirement account looks like a leaky boat.
I saved this section for last for a reason.
We can’t divorce ourselves from our emotions and feelings. It doesn’t work like that.
Instead, we have to acknowledge their existence and work to lessen their influence.
By creating disciplined trading plans and strategies that we have confidence in because we did our homework.
It’s incredibly easy to get caught up in the panic of down swells and the exuberance of buying frenzies.
Yet those are the times when we need emotional discipline the most.
The more you can plan ahead, the less you need to do ‘in the moment.
One great way to do this is to set up a watchlist.
It’s a simple yet effective way to notify yourself when a stock you want to own hits your buy price.
However, as part of your homework, you should constantly be updating and refining your watchlists. It doesn’t take long, but it requires regular maintenance.
The bottom line is that timing the markets comes down to making smart decisions at key moments by spending the rest of the time preparing for them.
Avoid harmful decisions and sprinkle in a few good ones. It will go a long way.
Now think back over the last few years. Was there a time when you came to one of these key moments? What was it and how did you handle it? What could you have done differently only knowing what you knew at the time?
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While I can’t answer your emails individually, I promise to read every one.