18. The 5 Market Myths Assets have inherent value Markets are efficient Markets are rational You canโt time the market so buy & hold Diversify your investments
35. Your New Mantras Donโt lose money Itโs all just numbers and symbols Markets donโt change The economy is not the market Donโt fight the market
Most market participants are victims of how markets actually workYou wouldnโt do brain surgery without understanding the brainThe market is not an intuitive system
Ask:Are great traders born or made?Effective rules and principals can be taught
Ask: how do we value assets?Ask: how do we value commodities?Ask: how do we value equities?Ask: how do we value bonds?
Markets are made of people and algorithms (programed by people)Market, just like people, operates on classic emotional cycles
Time to tear down everything youโve previously learned
What is a house worth?We just went through a massive housing bubble Who decides how we should value things?
Value of an asset is whatever you can sell it for todayValue is set by supply and demand for an assetWe have historical norms called multiples and valuation methods to help guide usP/E rationDCF analysis
Efficient market theory worst blunder in economics historyEconomists attempt to fit complex things into simple systemsIf markets were efficient, we wouldnโt have marketsDifferent participants have different levels and types of informationDifferent participants have different motives
Does this look like an efficient marketWhy did price change so rapidly here?โMarkets can deal with good news, deal with bad newsโฆ..โ
Markets are made of peoplePeople are inherently irrationalAny number of factors causes people to be irrational
Canโt assume markets will act in rational waysMarkets have phobias and biasesGo through example of earnings beat and stock drop
Buy and hold is a horrible promise sold to you by mutual fundsYou donโt have 100 years to grow your assets
Markets do not move in straight linesThere are draw downsGet caught in a draw down and it can take long time to break evenWhat happens if youโre about to retire like baby boomers in โ07
Did buy and hold work here?
Modern portfolio theory has been proven wrongCross asset correlation is higher than everThere is no free lunch from diversification
Markets are more volatile than ever increasing correlations
Based on evolution, your brain is wired to do certain thingsEffective market operation goes against many of these thingsWe need to rewire your brain to follow a different set of rules
Controlling fear is the most important skill to masterโfear and greedโ, no just FEARControl fear by having a system
Fear produces replicable patters in all markets on all timeframesUnderstanding where a market is in this cycle is important
How do we know where we are in the pattern?Use technical analysis to decode the market like a rosetta stoneTechnical analysis teaches us patternsPriceVolumeDerivatives of those twoThese patterns donโt change
Not trying to predict the futureUse technical analysis and pattern recognition to put odds in favorWe donโt care about being right or predicting the futureCare about understanding the system
DONโT LOSE MONEY!#1 job in the market, protect your assets
Itโs all just numbers and symbolsShouldnโt be buying assets for an ownership stakeGoal is to extract value from the marketMany different strategies to extract value
Markets donโt changeFear still guides all humansSame patterns in human emotionHigh frequency trading does not change thisHumans program computers and can unplug them
Economy is not the marketEconomy is just 1 factor in the marketStop worrying about the economy and focus price
You are not smarter than the marketEverything else lies besides price, it never liesTell story of early short sellers
What story do you see here?
best overpast 12 months have better chance of performing well over next 12
Momentum helps us to narrow down which assets to look atMomentum cuts both ways, long and short side
Buying begets buying, selling begets sellingBuy strength, sell weaknessMove with the market, not against it
Not looking to buy bottomsBuy the assets that everyone wants, not the ones they donโt
Institutions drive the marketInstitutions accumulate and distribute stock in predictable patternsThey look for earnings and revenue accelerations, is the company growing?Narrow down your list to only these stocks
Support and resistance is supply and demandWhen the trend ends, get off!There will always be another trend to catchDonโt need to catch the whole trend
Donโt touch broken chartsBroken charts give clues about broken companiesUnderdogs are good in Hollywood, not hereOwn the winners, short the losers
Cash is a positionMarket does not give equal opportunity at all timesPlay the odds when they are in your favor
Just like learning a sport or skillTakes time to rebuild neural connections just like building muscle memoryHave a set of rules and stick to themUnderstand your own emotions, be self aware