2 Year Reflection on the Markets and Trading

[Soultrader 12]

Some thoughts on the current maket turmoil....

Roughly 5 years ago, I was still living the lifestyle of a poker player. A turning point in my life led me to enter the world of trading... in 2003 I did not even know what a stock or bond was. My first book I ever purchased on finance was "The Intelligent Investor" by Benjamin Graham. I am quite thankful that this was the first book I picked up because at that moment in time I was so fascinated by his work that by the end of 2003, I had finished over 130 books related on finance and trading. My Amazon bill was something like $7,000 or so...

 

I entered the trading arena without a freaking clue on what to do.... had no knowledge on various order types and traded NASDAQ stocks without even knowing there was a thing called the futures market. Sold just cause the RSI told me to.... bought cause stochastics crossed. I recall my first trade ever on my Ameritrade account and I made money. I thought I was a genious back then. Well... we all know what happened shortly after.

 

Anyways, I have read plenty of times in various trading books going back to the early 1900's about the public sentiment during booms and busts. The best news occurs at the tops... the worst news occurs at the bottom. I decided to dig deeper by studying past newspapers to understand the reaction and confidence level of the public during these times.

 

The past 2 years have been quite fascinating for me. It was my first time ever to really experience live what a bull market and a market crisis was. I mean to experience and read about it are entirely different things. I recall, the first market correction back in August 2007. Most traders and analysts were simply saying it was just a normal correction. Yes, the Dow did make new highs afterwards but what happened shortly after? Volume had diminished throughout the rally and we were seeing rising prices on decreasing volume.... wasnt this a clear warning sign?

 

I remember the general public being extremely bullish... alot of people around me had purchased their first home around the top of the uptrend in both Jun - July 2007 and September - October 2007. I recall amatuer investors around me buying mutual funds, ETF's, etc.... and a heavy promotion of these products by Japanese banks. In June of 2007, I had my grandparents liquidate there entire portfolio of Chinese and Vietnamese stocks. However, this week I found out that they had actually gone back to investing in the stock market due to their broker recommendations. Yesterday I receive a call asking me what they should do.

 

Is this how the public acts? When the public can no longer deal with the pain.... they will look for confirmation. I have a family member still holding a stock from 1990 at the Nikkei top. How many times have I talked him into selling the stock? Well they say Japanese people make the worst investors... I understand this clearly now. Loyalty may be a good thing... but not in the stock market. It seems like the only thing Japanese investors know what to do is to buy... and never sell.

 

I also recall Bush stating that the health of the US economy was good... this was a little while after the double top on the ES. Gradually as the markets started declining... his comments went from confident to somewhat worrisome to now a complete disaster. So perhaps we can use Bush as a contrarion indicator. Short > scale out > and finally cover.

 

Although current conditions are affecting alot of people globally from employment to foreclosures...and I know alot of people have it pretty bad right now. But personally I have found this experience to be one of the most exciting moments in my trading career. There was alot to learn in these past 2 years.

[Kiwi 16]

Nice story James.

 

I've been at it a bit longer. Mainly as an observer of manic behaviour in 1987 (where New Zealand had financially deregulated and thus received a much heavier fallout from the crash than the US or Australia while the mess was cleaned up and the public gradually forgot the pain --- women do get pregnant more than once). Most of the guys at work were investing in Judgecorp, Brierly's and Goldcorp, turning the Videotext terminals on each day to find out how much they'd gained by morning tea. I was busy paying off my first mortgage. My boss borrowed money from his mother and maxed out his bankcard to buy shares. NZ was STEAMING in August 87 ... steaming. Two out of three of those companies died after the crash - funny how the financial guys can really screw it up.

 

In 2000 I was telling everyone I knew about stop losses. Do you think anyone I used them? I had friends buy Cisco within a $ of the top and hold for a 90% decline. Some of the brightest people I knew. I met a smart MBA on a plane who had just invested millions of $$$ in high tech companies he'd just visited in California for NZ's wealthiest family. He didn't have stop losses either.

 

Its hard to be a trader in an up market when stupid people sometimes do better than you do. Its hard in the down market when everyone knows you're making money and they are not. And worse still - why didn't you tell your friends and family it was about to happen? Why?

 

Kiwi

[Soultrader 12]

Hi Kiwi,

 

Thank you for the response and your story. I think the problem is with amateur investors who will never listen to anything negative when long. I literally had to fight with some of my family members regarding their positions. What first alerted me was them investing without a slightest clue. The problem began when they actually made money in the bull market... this sort of led to them not listening to a word I said. Also the fact that I was just a young 20's kid trying to talk about the markets. Not much credibility there either....

 

Fortunately no one got hurt as bad as it could of been but it has been frustrating for me living in a society when young people are never taken seriously. In parts of Asia including Japan, Korea, Taiwan.... the respect for the elderly plays such as strong role in the culture that credibility can only be achieved through age.

 

How do you convince an amateur investor to sell when his position is still in the green? Its not so easy to do from my experience.

 

Going back to the failure rate of 95% of all market participants... I now feel like this number is off. Its sort of like counting bums as part of the unemployment rate. Most market participants will never care to learn about investing or trading. If you actually exclude the participants who are actually serious in succeeding in this game... I feel that the success rate should be alot higher.

[brownsfan019 17]

Going back to the failure rate of 95% of all market participants... I now feel like this number is off. Its sort of like counting bums as part of the unemployment rate. Most market participants will never care to learn about investing or trading. If you actually exclude the participants who are actually serious in succeeding in this game... I feel that the success rate should be alot higher.

 

That's what I've been saying for awhile James - this mysterious 95% could include anyone and everyone that has bought a stock, that tried trading the ES for a day, etc. etc. The professionals and business owners are lumped in w/ the guy that has $2500 and it going to bet it all on black in the ES....