The 2 Biggest Lies in the Stock Market

1. "This time it's different".

Anytime you hear this,you can be sure that this time it's exactly the same as every other time. Who remembers the "New Economy" of the dot com years?

2. "XYZ is going to (price P)",

where P is some number far far away from the current level. Generally issued when XYZ has been on some extended trend. Not only is XYZ not going to P, but when you hear this it usually means the trend is over.

Remember Goldman's prediction that oil was going to $200 back in the spring of 2008? A few months later oil topped at $145. By the end of the year, it had collapsed to $30.

Remember when the Dow broke below 7000 last winter? We started hearing calls for "Dow 5000", "Dow 2000", even "Dow 1000". A month later, the Dow hit 6500 and then took off to eventually top 11,000.

And when someone tells you that XYZ is going to some crazy number because "this time it's different", then you know for sure they're wrong.

It seems to me there's a third Big Lie in there somewhere, but I can't quite think of it at the moment.

Psychoanalyzing the Markets

My dad was a psychiatrist. He was also a very talented investor. I used to ask him how he was able to do so well and he told me that it was just a matter of "psychoanalyzing the market". He thought of the stock market as just another crazy patient badly in need of therapy. At the time I thought he was the crazy one.

Crazy like a fox, as it turns out. It's hardly a novel observation that the stock market runs on two things: fear and greed. Understand those, and you understand the market. I know, easier said than done. That's one reason I liked Dr. Brett Steenbarger's blog so much - he talked a lot about psychology there. "The market" after all, is just a reflection of the people who make it up. As a technician, I've recently come to believe that perhaps I should pay more attention to the psychology and the psychoses of the players.

Anyway, there's no shortage of proof on how this works. Consider the airlines. My dad deemed the airline industry to be "completely psychotic". He claimed that only a psychotic would get into such a business. And if you look at the lunacy going around the airlines these days, what with fares that change every five minutes and fees for all kinds of nonsense from pillows to carry-on bags, it's hard to disagree. I personally would not touch an airline stock with a 10 foot jetway.

On Goals

It's important to have goals when trading so you can tell how well you're doing.

When I first started trading, my goal was simply "to make lots of money". In retrospect, that was a silly goal. It was both unreasonable and too vague. After losing money for a few years, I revised my goal to "Make at least $50 every day". At least this wasn't vague. But it was also unreasonable. It's just not possible to have every single day be a winner. I still lost money.

So then in disgust I finally set up a new goal: "To not lose money". This sounds like a pretty weak goal, sort of like saying your life's ambition is to not be a crackhead. Oddly enough though, once I set that as my goal, I did in fact stop losing money.

Once I wasn't losing money, I picked a new goal. This time I decided that I should be able to achieve at least a 7% annualized return. If I couldn't do that, then I might as well just buy high yield bonds and spend all day watching TV instead of the markets. So far so good. Last year I achieved a 40% return. Of course last year was quite extraordinary. But so far this year, I'm just about at the same level.

Now it's easy to perform well when the market is up. The question then becomes, am I good or just lucky? So I also have one final goal: to outperform the Dow. It doesn't matter if the Dow is up or down, as long as my gains are greater and my losses are smaller. So far, that's working out too. I'm outperforming the Dow by around 2 to 1 this year so far.