19 Jan Stock Market Timing
The stock market is only about 130 years old in its current form however there are people that say things as if they are gospel, when others have evidence that they are not. The myth that you cannot time the stock market is one of them. Stock market timing is not that hard however it is not simple either.
Stock market timing is where you know/guess if the market is going to go up or down and if you can do this, isnt this the whole reason that people invest so that your investment can go up in value and if you can tell when something is going to go up or down wouldnt that make you a lot of money? Why yes it would. So why is there this myth around timing the stock market, why are people so adamant about telling you that you cant do that. Well in short its because the person giving you that answer cant do it, therefore they think it cannot be done. But if you think about it that is the wrong approach, humans can do anything and if you give us enough time and enough resources we really can do anything. So the fact that your financial advisor is telling you that you cannot time the markets doesnt mean he is right, it just means that he hasnt been taught how.
Stock market timing will go against your feelings, you will feel strongly one way and yet the market will go the other way, you can learn how to identify this. You can learn how to see when something has massive selling even if its going straight up. You can tell if a stock is bottoming even if its dropping like a stone. All of these are counter-intuitive but thats kind of how the stock market works, its counter-intuitive.
The stock market is run by large, very large groups of money that are called Institutions. When these institutions buy and sell the market moves, its simple supply and demand. Do you think that if a large dinosaur were to run though your neighborhood you could tell where it went? Well you can, by the footprints it leaves in your yard, or street probably. Then you can follow that, well what if you were looking at your street and there was an invisible dinosaur and you saw depressions in the ground start to form and you wanted to follow the dinosaur, you could just walk behind it. We are trying to do this when we market time. So think about if you were a large institution with $5 Billion to manage, what would you do? Well yes you would look for stocks however you wanted to invest, but then you had to put that money to work, how would you do that? Well if you buy too much the markets will swing wildly making your investment less valuable and just because you bought. If you started buying a stock at $50 and you bought so much that people started asking more and more for their shares you would have to pay that. Well you do because you have $5 Billion to invest. So you pay $50.50, $51 and so on. You buy ALOT of stock so on a stock chart you see the volume begin to rise, then you add up what you’ve bought and realize that your responsible for 60% of the volume for that day! Thats pretty cool, and crazy. Now take yourself out of that situation and go back to being you. You are watching a stock at $50, it goes to $50.50, $51 and the volume is 60% above average, wow that looks like institutional accumulation to me! Im going to buy it and try and follow that Institutional buying because that guy is going to buy a lot of shares and you want to be in it when it rises.
Thats all the market is, Institutional buying and selling and its our jobs to follow it.
Now if you are a value investor this sounds nuts to you, your looking for valuable companies that you can buy and hold and see the value appreciate. Thats all fine and dandy, however picking and chosing winners and losers in that way is very difficult. Not to mention and Institutions are also looking for such investments so you are trying to outwit people with unlimited resources, and when we as individuals trade we are trying to outwit people with unlimited resources. Most people would this this as a fools game, however its not, because if you follow the footprints of the Institutions you can ride the wave that they themselves are creating.
This brings us to another point, if its this easy why isnt everyone doing it and why arent more people successful in this, well actually a lot of people are doing this successfully. The difference between the people that do this well and the ones that do not is how they quantify what they have learned. We all go to school and we are all taught the same things, why do we have different grades? Well we are all different, we think differently we are wired differently. You and I will look at a stock chart and possibly come to completely different conclusions. Some traders are permanent bulls or perma-bulls, there are also perma-bears, we all hear different news and are effected by it differently. If we just read 10 articles why the stock market is going to fall 10% this year then we’ll probably look for signs to prove or disprove this, missing an upcoming rally. We can perceive things differently and that is the real challenge, perception. In reality though perception is fake, its false it doesnt exist. Perception is how we interpret what is actually in front of us. So dont interpret, just look.
They key to the stock market is to get rid of all the noise, dont read the news dont watch the TV, just look at the charts. Look at different timeframes of charts as well, charts can show you many different timeframes, 5 min, 15 min, 30 min, hourly, daily, weekly and monthly charts. All have a story to tell and if you are able to read them them you can get a great sense of where the stock market is going, when its changing its temperment and when its time to put money to work and in what direction and more importantly when to sell everything and go cash.