first perspective is that of a market loser; the latter a winner. Don’t be in a hurry to choose your approach until you know what the choice entails. And look, don’t be shy about it. You have to want the money. You have to want to get ahead and be rich – the critics’ condemnation, the player hating, the rank jealousy be damned. Speculation is not only honorable – it is life. Profit-seeking speculation is the absolute driving force of markets and without it there is only disintegration.30
Investor versus Trader
Wide swaths of the population think as investors in search of a bargain. However, if you were to learn the most consistent market winners call themselves traders, you would want to know why. Simply put, they don’t invest – they trade.
Investors put their money, or capital, into a market, such as stocks or real estate, with the assumption that value will always increase over time: “I am long and never wrong!” As value increases, their investment and psychological reinforcement also increase. But investors have no plan when their value drops. They hold on to their investment, hoping the value will go back up. Investors succeed in bull markets and lose in bear markets – like clockwork.
This is because investors have zero plan to respond when losses mount. They always choose to hang tight and continue to lose. And if mainstream press continually positions investing as good or safe and trading as bad or risky, average investors will be reluctant to align themselves with trading. Better to trust the mutual fund, and government systems, and fall asleep.
A trader, on the other hand, has a defined plan or strategy to put capital to work to achieve profit. Traders don’t care what they buy or what they sell as long as they end up with more money than their starting capital. They are not investing in anything. They are trading. It is a critical distinction.
Trader Tom Basso believes a person is a trader whether or not he or she is trading. Some mistakenly think they must be in and out of the markets every day to call themselves traders. What makes someone a trader has more to do with their perspective on life more than making a given trade. For example, a great trader’s perspective must include extreme patience. Like the African lion waiting days for the right moment to strike its unsuspecting prey, great trading strategy can wait weeks or months for the right trade with the right odds, and only then pull the trigger.
Additionally, and ideally, traders will go short as often as they go long, enabling them to make money in both up and down markets. However, many traders won’t or can’t go short. They struggle with the counterintuitive concept of making money on market declines. I would hope the confusion associated with making money in down markets will dissipate, but it won’t. Human nature believes in only up.
Fundamental versus Technical
There are two basic trading theories. The first is fundamental analysis. It is the study of external factors that affect the supply and demand. Fundamental analysis uses factors such as Federal Reserve meetings, 24/7 news, weather reports, regulatory knowledge, price-earnings ratios, and balance sheet projections to make buy and sell decisions. By monitoring all fundamentals, one can supposedly predict a change in direction before that change has been reflected in the price of the market, with the belief you can then make money from that knowledge. That means you can sit around, ponder the viability of Uber’s autonomous car fleet, make your bets on whatever markets, and the easy bling money rolls in.
The vast majority of Wall Street is fundamental analysis alone. They are the bankers, academics, brokers, and analysts who always have an opinion or prediction, rain or shine. Many of these Wall Street players have serenaded millions with fundamental stories for decades. Gullible and naïve investors buy into rosy fundamental projections riding bubbles straight up with no clue how to exit. Consider an exchange with President George W. Bush before the Great Recession:
Question:
“I’m a financial advisor here in Virginia, and I wanted to ask you what your thoughts are on the market going forward for 2008 and if any of your policies would make any difference?”
President Bush:
“No (laughter), I’m not going to answer your question. If I were an investor, I would be looking at the basic fundamentals of the economy. Early on in my Presidency, somebody asked me about the stock market, and I thought I was a financial genius, and it was a mistake (laughter). The fundamentals of this nation are strong. One of the interesting developments has been the role of exports in overall GDP growth. When you open up markets for goods and services, and we’re treated fairly, we can compete just about with anybody, anywhere. And exports have been an integral part, at least of the 3rd quarter growth. But far be it for me – I apologize – for not being in the position to answer your question. But I don’t think you want your President opining on whether the Dow Jones is going to – (laughter) – be going up or down.”
The President’s view is a cardboard cutout of the type of fundamental view shared by the vast majority of market participants. An excerpt from Yahoo! Finance outlining a typical market day is instantly familiar: “It started off decent, but ended up the fourth straight down day for stocks. Early on, the indices were in the green, mostly as a continuation from the bounce Monday afternoon, but as the day wore on and the markets failed to show any upward momentum, the breakdown finally occurred. The impetus this time was attributed to the weakness in the dollar, even though the dollar was down early in the day while stocks were up. Also, oil prices popped higher on wishful thinking statements from a Venezuelan official about OPEC cutting production. Whether or not these factors were simply excuses for selling, or truly perceived as fundamental factors hardly matters.”
Millions consume news or fake news drivel such as this every minute, hour, day, year, and decade. Thousands have watched the likes of CNBC’s Jim Cramer’s Mad Money show promote similar projections for what seems like decades (actually back to 2005). But predictions based off fundamental analysis are a crapshoot guessing game, as you will never know all fundamentals in what has become an ever-expanding fact and fact-less society.
But instead of helping people to understand news is not at all critical to their moneymaking decision making, politicians across the globe are gearing up to stamp out the supposed scourge of fake news. For example, State of California Assembly member Jimmy Gomez introduced Assembly Bill (AB) 155 in 2017 “to ensure that upcoming generations of online readers possess the analytical skills needed to spot fake news. The bill would direct the Instructional Quality Commission to develop and adopt curriculum standards and frameworks that incorporate civic online reasoning, for English Language Arts, Mathematics, History, Social Science, and Science.”
[Insert your own Orwellian reference.]
Trader Ed Seykota notes across the board cognitive dissonance in play with a simple story: “One evening, while having dinner with a fundamentalist, I accidentally knocked a sharp knife off the edge of the table. He watched the knife twirl through the air, as it came to rest with the pointed end sticking into his shoe. ‘Why didn’t you move your foot?’ I exclaimed. ‘I was waiting for it to come back up,’ he replied.”31
Everyone knows an investor waiting for their market to come back, and it often never does. The financial website Motley Fool has a back-story, a narrative behind its start that reinforces the folly of fundamental analysis: “It all started with chocolate pudding. When they were young, brothers David and Tom Gardner learned about stocks and the business world from their father at the supermarket. Dad, a lawyer and economist, would tell them, ‘See that pudding? We own the company that makes it! Every time someone buys that pudding, it’s good for our company. So go get
von Mises,
Jack Schwager,
