Useless & Misleading Investing and Trading Cliche

As we expected, the very last leg up of stock market is happening now. I expect this should be the top for stock market in 2009. Take 100% of your profit and relax yourself.

Today i wanna talk about some useless and misleading cliche (saying/idea/expression) of investing and trading. I hear it all the time from investors and traders. We all think these cliches are true but it's absolutely garbage.

1. High Risk High Return.

This cliche is probably the most famous among amateur traders and investors. It is so widely used by everyone and everyone thinks it's the truth. It leads people to believe in order to achieve reasonable high return, you need to take unreasonable level of risk. Besides that, it also encourage people to take risk without understand risk and ability to manage risk. So many people will ignore the high risk of a financial asset thinking they will get higher profit by investing in high risk financial products.

Yes, I admit, it is easier to get higher profit by investing in high risk assets. However it does not mean we can't reduce the risk involved. By understanding and with ability to manage risk, we can significantly reduce risk of risky financial assets such as derivative, option or foreign currency exchange. In other word, although we are investing in risky assets, by managing it, we can make it into a medium risk investment but able to generate handsome profit with it. So now it will become, reasonable risk, high profit.

How to reduce and manage risk? I have wrote some article able predicting stock market movement and you can check it.

2. Buy Low, Sell High.

This is also a popular saying in investing. Everybody knows we need to buy low and sell at high price to get profit.

However not many people can tell what is low price and what is high price. Most amateur investors and traders use historical market price as a measurement of price level.

Example: Microsoft (MSFT) was traded at around 55 (peaked at 58.80 at 24 Dec 1999) during the dot-com bubble. After the bubble burst, MSFT dropped straight to around 40 level which is around 32% drop. Many amateur investors, using the cliche of buy low and sell high, think 40 is low based on previous market price. They bought it at 35-40 level and stuck with it ever since. Even at the peak of 2007, MSFT still did not make it back to that level.

So the correct cliche should be buy at some level, sell at higher level.

To determine what is the good entry exit level, never use historical or current market price as indicator. You should use the fundamental and technical analysis tools to help you.Check my previous blog article for it.

Another mistake that amateur investors and traders always make it only decide where to enter but rarely decide where to exit. They usually spend huge amount of time deciding the reasonable entry level but seldom put any effort in planning the exit strategy. They rarely think about the profit taking level, cut loss level, collecting level, all in level and so on. So they will easily panic when something unexpected happen and make silly mistake.

Remember this, exit level is much more important than entry level as exit level will determine either you make profit or loss. Even if you enter the market at perfect moment does not guarantee you a profit, rather exit the market at perfect moment usually guarantee handsome profit.

3. Buy The Rumors, Sell The News

This is another popular cliche that i disagree on. It encourage people to invest based on rumors without consider facts behind it. It mislead people to make silly investment without knowing much info behind it.

I admit sometime, in short term trading, you may get lucky by investing according to this cliche. However i consider that as gambling and not investing. Rumors mean something that is not confirm and has no definite answer.

In other word, invest or trade based on rumors is exactly like gambling. It has a 50% chance of being right and 50% chance of bust. So you are investing based on 50-50 chance of getting profit and there is no chance of managing risk involved. If that's not gambling, i don't know what is.

Another funny part of this cliche is why you need to sell at news? If we got a good news about something, why should we abandon it? We should buy more on it.

Example i own a HK listed company call Enviro Energy (8182, HK). Few months ago it announced that it found some new oil field in Mainland China. That's a positive news. Why should anybody sell the share of this company based on that good news?

4. Stock Always Goes Up.

This is one of the funniest cliche i think i will ever heard. Many people say stock always goes up. Is that true?

NO. Bullish market mainly based on rising inflation. Inflation will always lift the price of everything higher including financial assets. Besides stock, food and commodity price will goes up as well.

Inflation happen mainly based on money supply. Higher the rise in money supply, higher the rise in inflation. That mean more money in economy, higher the inflation will be.

So to sum it up, stock goes up because of rising money supply. Is money supply always rising?

NO. Some countries experience negative growth in money supply such as Japan. As a result, the Nikkei 225 index drop from 40,000 in 1990 to 10,000 now.

However, rising stock market does not necessary a good thing. Rapid rise in money supply may result in bubble and hyperinflation. Look at Zimbabwe. Zimbabwe stock market did rise more than 700% from 2003 to 2007, but their inflation rate rises by 13.2 billion percent a month. That mean Zimbabwe is experiencing 516 quintillion percent annual inflation (516, 000, 000, 000, 000, 000, 000, 000% a year)

So still think rising stock market caused by rising money supply is good? think again.

That's all for today. Next time I will introduce more silly investment cliche.