Trend is a blog about global daily, weekly, monthly and yearly market trends in such financial markets as Forex, stocks and commodities as well as various day, swing and Forex trading strategies and ways to invest your money. In the blog I am going to share what happens in these markets on a daily basis. I hope you will enjoy my trend analysis. Welcome to my blog.
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Friday, September 14, 2012
Investing mistakes learned from crisis
A lot of
time has passed since the 2008 crisis and now we can look back to the period
and summarize what mistakes investors did and what lesson have to learn those
who want to invest in the nearest future. What have we learned and what
mistakes we should not want to repeat anymore?
If you read
books on investing written decades ago you will see that people of the past
made the very same mistakes that we do today. Markets do change somewhat, but
the mistakes that are made are always the same. And they are being made by both
private investors and corporate investment fund managers. We do give in to
crowd mentality, emotions, fail to assess risk and recklessly invest with
borrowed resources. Even the best trading strategy can fail us if we do not
learn to reverse the above mentioned things.
Some of the
best principles such as: “buy and hold” may not be working anymore. Especially
if one is ‘smart enough’ to buy at the top. Following this principle can
destroy all of your capital and leave you disappointed with investing.
So, let us
look at those fundamental things we have to know while investing our money in
People tend to forget history. There are things that will always repeat.
Stocks will go up and they will go down. They will be uptrends and downtrends.
Markets will experience booms and collapses. It is only natural that after a
long ride upwards you will surely have to experience a similar ride downwards.
Go back hundreds of years ago and you will see that the bigger the move upward
you have the bigger the correction or the move downwards. The bigger the
inertia, the more severe the reversal will be when it finally occurs.
I remember talking to one of my relatives just at the time the first
signs of 2008 crisis started to appear. As I studied market booms and collapses
for a long time I told him this one will be pretty dramatic and we are going to
see very serious troubles. He would not listen. He said there will be a minor
correction in economy and then it will continue growing, salaries rising and
prices growing. He sounded as if we will have a never ending boom. We know what
And it will happen. Bubbles will always be. So will crises! My relative
had a triple cut of his salary. Then he lost his job. With a loan on a house
and two new cars it was a pretty severe blow. His wife had to do double work.
Parents helped. After many months he got another job and managed to sail
through the troubles. His thinking changed though.
Remember, history will always repeat itself. It may do it in a bit
different way, but it will. So, if you see a boom you can be sure that you will
also see a collapse. People forget all crises. They forget that there are
cycles everywhere. And they continue being bullish for too long. They continue
being bearish for too long too. Be ready for repetitions!
Imagine the worst scenario
We often do
the other way round. We tend to imagine the best as the only possible way. We
tend to think only about how much profit we can make and how many opportunities
we can miss. This often leads to borrowing truckloads of money at unfavorable
interest rates and rash purchases of assets or securities that we believe
should rise soon and make us millions in profits. If we risk a lot we may find
ourselves in a situation when we lose everything and in some cases we may not
be able to repay what we owe (bank or somebody else) in a lifetime.
visited an acquaintance of mine who used to be a director in a construction
company. He would get there a good salary and have some smaller businesses of
his own. Somehow in the middle of the boom he started purchasing land. He got
into deep debt. When markets collapsed he lost his house, cars and he still
owes to the banks truckloads of money. His wife travels to work in London in
order for the family to survive. Had he thought not only about possible
opportunities, but losses he would have never had to live the way he lives
what happens if the market goes against you. How much are you willing and ready
to lose? This will help to balance your expectations. Do not be driven either
by greed, or by fear. Let your mind and analytical skills guide you in making
Emotions or a sound plan
that are emotionally grounded are bountiful. Investors constantly break the
soundest investing principles just because they are ruled by their emotions. Multitudes
of investors made psychological mistakes during the last crisis. They bought at
the top and sold at the bottom. They jumped from one investment fund to
another. They sold risky stocks at the bottom and bought conservative stocks. It
is clear that you cannot go far with this type of behavior.
give statistics showing that most investors were willing to sell their
securities at the time when market actually found its’ bottom. It also confirms
that those securities were bought when markets peaked, just year or half before
the collapse. What a smart way to trade!
offs started when “Lehman Brothers” bankruptcy was announced. It is ok, when a
speculator behaves in such a way. It is not good when a person who saves up for
his/her retirement does so. I have a few friends who bought houses and flats at
the time when markets peak. They did this with borrowed money, of course. Now
they tell me how lucky I am for not doing that. I would not say I was lucky. I
have been studying markets and various technical as well as psychological
patterns for years and my findings discouraged me from buying real estate at
such prices. Ya, I was lucky.
sometimes has to wait patiently through such periods, because market cannot
stay too long irrational. Sanity does come back. Many wake up to unpleasant reality.
Inertia can last for some time, so can irrationality, but sanity does come back
and stays in the markets. Wait for bottoming processes to start buying and
topping processes to start selling. Not vice versa!
Do not try to recoup losses
another mistake that 99 percent of traders make. When a trader loses ten or
twenty percent of his capital he naturally tries to recoup the experienced
losses. This, in 99 cases out of 100 leads to even bigger losses. When markets
start going down they would prefer to close their long term positions and start
searching for fast profits. They work hard to figure out how to win back what
they had lost. And they lose more and more till they stop this futile
expect to quickly recoup your losses. It will take some time to find good
securities and more time for those securities to start rising. Patience is a
remedy for this disease of ‘trying to recoup losses’.
I told you a
few times how a friend of mine and me split up from trading together. At some
point he decided to follow some bogus Forex signal service. I do not want to go
into details, but I would watch how he opened ten trades at the same time with
small stop losses and those would be hit the same day. This continued for a few
weeks or a month till all account was wiped out. Trying to recoup losses after
a bad day will inevitably end this way. Forget your losses. Continue analyzing
markets and after you have noticed some developing tendency trade with
confidence and with stop loss orders.
Make your own decisions
particularly important for those who enjoy hunting for tips. If you go to
investment unit in a bank or an investment fund they would likely give you
optimistic predictions for these or those securities. You see, they make money
selling their services and they have to behave like that. A lot of their
predictions never come true. Just have this in mind when you are tempted to ask
your broker what are upcoming golden securities to invest in. Yes, he will tell
you. I doubt if you are happy with the final result.
Learn to do
your own analysis and make your own decisions. Take this responsibility on your
shoulders. This will be a big step forward for you to maturity as an investor. If,
however, you decide to follow some investment advisor be sure to check if the
person who consults you invests himself. If he does not buy securities that he
offers you to buy why listen to him? It is useless. Better use your own head.
Invest into securities you
A lot of people invested into
derivatives during the boom that preceded the crisis. Most of them did not have
a clue where they invested. Most experts could not explain that either. If
majority people do what they do not understand they are sure on the road to
ruin. A lot of financial instruments are created for one single purpose – to make
more money. However, the general rule remains the same – only very small
percentage of people make money in these special instruments. Majority loses.
Why? Because they do not have the slightest idea what risks these instruments involve.
Remember the bigger potential to make money you have the bigger risks are
involved. You’d better understand what you are doing. You have to understand
securities you invest in. If you don’t, it is better not invest into those.
Find something you understand.
We know that too much analysis leads
to ‘paralysis’. However, a thorough analysis of conditions a given market is in
will help you to understand what time it is: buy, sell or stay away from the
market. We would make fewer mistakes if we spent more time for analysis. Having
done your own analysis of a company and seeing its’ share falling you should
not immediately run away from the market. You should see whether the fall is
justified. Maybe it’s just some profit taking or small players getting scared
of losing their profit and selling the shares. It is quite possible that after
the fall the stock will make even higher highs. You will hardly ever be able to
predict exact top in the market, so when you see a fall and a rise you have to
ask yourself whether something has changed about the conditions of a given
security you own. If not, stay where you are.
does not work well during bear markets
This crisis clearly shows us that
diversification during bear markets does not work well. If you studied charts
of various securities you would see that almost all markets collapsed. So, if
you simply moved your money from one industry to another you would still have
lost your money. Of course, if you know how and when to ‘sell short’ and be
participant of bear market (play from the short side) you will probably make
more money than in bull market. Unfortunately, very few people know how to do
it. So, in a downward market you either continue selling or you stay out and wait
for the market to bottom.
Look through your investment portfolio
Speculators watch markets on daily
basis trying to see any changes that might influence prices. Investors tend to
look at that less often. Some even buy stocks and hold them for life. Others,
let’s say George Soros made his famous pound breaking trade in one day and made
a profit of one billion dollars. In one day! Does not sound like investing! Markets
are becoming more volatile and you cannot just sit for a decade without looking
what happens in the securities you have bought. It may cost you a lot. So, be
sure to check from time to time whether market conditions have not changed and
it is still ok to own the securities you have in your portfolio.
Modern times have brought a lot of
various ways and places to invest in. A lot of instruments have been created
for an Average Joe to take advantage of. Unfortunately, most Joes lose their
money in the markets. Booms and crises come and go. The reasons for those can
be different, but the principles that are there always remain the same: greed
and fear, buying and selling at the wrong time and etc. One has to sit down and
start analyzing one’s mistakes and then go on to perfect one’s trading
patterns, style, methods and strategies. Next time a boom or a crisis comes one
will do much better.
Good luck trading.
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