The Insiders: Experience Teaches You How to Recognize a Mistake
When You've Made it Again
Experience Teaches You to Recognize a Mistake When You've Made
It ...Again
Most stock traders, hereinafter referenced as the "Trivial
Many", the "Herd", the "80" of 80/20 fame and others, tend to
make two fundamental mistakes when trading stocks and options.
They buy heavily at the top of the market, right before it turns
over. And...they sell at the bottoms of markets, right before
they turn up.
Hum...not a good way to make money in the markets.
But, there's a bright side. The "experts" blew it too. You see,
most stock traders tend to listen to the analysts, their
brokers, and their friends for stock tips.
Of course, their brokers are listening to the analysts, their
friends and other brokers (who are listening to the same
analysts, etc.)... So, as the Titanic is rolling over, we're all
still raising our glasses.
The problem is recurrent. Nobody (stock traders) really checks
to see what the track records of these analysts really are.
Studies going back as far as 50 years have shown that only a
small fraction of what is recommended by the analysts makes
money.
The bright side is that IF you decide to use the analysts as
Insiders and others do, you will use their advice as a
contrarian signal. After all, they're WRONG most of the time! I
don't mean any single one. I mean the chorus of all of them will
be slanted ...So, you can learn to use that as a contrarian
indicator.
Let me illustrate. Back in 2002, the Insiders were selling small
and mid-sized companies at record rates. Now, if you were a
stock trader then, you were probably tempted to get in on the
action. But, you probably were tempted to BUY more stock in
these companies. After all, who is going to be selling stocks
when they are still going up?
Insiders that's who.
But, stock traders, a.k.a. "the herd", "the trivial many", "the
majority of stock traders", were buying heavily. Unlike drinking
heavily, such stock traders do NOT recover easily from their
exuberance the next morning.
Granted the Dow was struggling even though these stocks were
reaching new highs. And, the analysts were ecstatic. One stock
analyst after another was paraded across the screen each with
his or her own version of the refrain, "Buy."
But, the Insiders weren't buying. The Insiders were selling.
Within just a few short months (three months to be exact), those
stock traders had lost upwards of 50% of their investment.
But, the Insiders had not lost due to their stock selling. They
were out long before the market turned over, having kept their
profits intact.
So, time and again, there is market exuberance close to the top
of the markets. The chorus of analyst "experts" are all singing
the refrain "buy!" The "herd" kicks into gear and revs up the
buying spree. And the market turns over... and hurdles downward,
leaving a trail of shirts along the way.
But, the Insiders didn't lose their shirts.
So... who are these Insiders? And who is this Insiders expert
George Muzea?
We're coming to that.
...Again...
So... The new TV analysts are paraded before an adoring public.
They present an impressive display on the Tube. Just ask them.
They set before us stock tips which will "do wonders for your
portfolio." Just ask them.
And, in stock after stock, as they speed their way to the top,
greed and irrational exuberance empties more wallets as stock
traders and investors buy what they're told to buy.
And predictably...in stock after stock, the market turns
over...again.
What is it about stock traders which makes us learn from our
experience at least a dozen or so times before it dawns on us,
"This ain't workin'?" I know what it is. We don't know what
we're doing...
But, instead of admitting it, we say things like: