Wall Street Craps – 2012 Global Ebook Finance Award-Winner

AVOID BEAR MARKET & BULL MARKET TALK: In the game of Las Vegas craps, the dice are often described as being either “hot,” “cold,” or “choppy.” In the stock market, expect any of these to appear, but think of them more as “streaks” and not “trends.” As savvy players will attest, most of the time the tables are in varying degrees of “choppiness.” (Note: The word “choppy” means short, irregular, or abruptly shifting runs of luck.)

Don’t make the common mistake of falling in love with long-term investment scenarios that prevent you from taking necessary actions in your short-term trading account. Save your long-term bull market and bear market discussions for when you’re sitting on the sidelines, out of the market, and have nothing to lose by taking a stand for the sake of intellectual entertainment.

Otherwise, your long-term investing views will naturally cause you to make critical errors in short-term trading decisions. On the other hand, the funds that you’ve portioned off as “security assets” are designed for long-term holding. It’s only in regards to your “security assets” that you should entertain any thoughts and discussions about bull and bear markets. (Note: Bull markets are long-term upward price movements in the general stock market. Conversely, bear markets are long-term downward movements in prices.)

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Comment: While the discussion of long-term stock trends makes for interesting conversation, it also has the unwanted side-effect of messing up your shorter-term decision-making. It is important to note that the stock market operates on three cycles at the same time –– short, intermediate, and long. So it’s often the case where the present stock market may be in a short-term rally within an intermediate and long-term downtrend. In my opinion, the best way to estimate the size of a rally is to determine the amount of time that was spent in the preceding downtrend. There seems to be symmetry in terms of time when it comes to rallies and declines.

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“Wall Street has a uniquely hysterical way of thinking the world will end tomorrow but be fully recovered in the long run, then a few years later believing the immediate future is rosy, but the long term stinks.”

Kenneth L. Fisher ~ Author of Wall Street Waltz

GET RICH IN THE DARK: Savvy players don’t share their opinions while playing the game. They quietly go about their business – playing correctly, making good money, and avoiding attention.

The temptation for amateur players is to share their opinions and early successes with almost anyone who will listen. But this type of naïve behavior has a way of locking an investor into their stated opinions. And as far as trading the stock market goes, a wise player must be able to turn on a dime and take decisive actions when underlying indicators point to a change in direction. In order to play the game correctly, investors must be willing to go against any previously stated positions without any regard for what other people may think about them.

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Comment: This advice comes from the gambling world. It is closely related to avoid the jinx. When things are going well for you, it’s the proper time to lie low and be humble. This is probably the exact opposite of what most amateurs are inclined to do….but precisely what the pros do. So when good fortunes come your way have the class and composure to handle it smoothly and quietly.

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“Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one.”

Charles Mackay ~ Author of Extraordinary Popular Delusions and The Madness of Crowds (1852)

IGNORE OTHER PLAYERS & THE DEALERS: Don’t get distracted by what other people say or do concerning the stock market. Combining different strategies will only cloud your thinking and prevent you from taking correct decisive actions. Remember that there will always be a well-qualified expert with convincing advice to take almost any position on the future course of the stock market.

The obvious truth is that no one really knows that outcome. As wise investors, we must not be fooled by the convictions or credentials of any expert and their opinions. What matters in the area of stock market advice is only the accuracy of the thinking and wisdom of the philosophy behind it.

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Comment: In terms of market analysis, you want to get to the point where you have enough experience working with the key internal indicators that you can trust your own decisions. Understand that when you are in an emotional state of uncertainty, you will be inclined to be swayed by what other people think and do. However, the one place where other people’s opinions matter is when you see a consistent pattern to cause you to look at them as “contrary indicators.”

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“It’s not the bulls and bears you need to avoid — it’s the bum steers.”

Chuck Hillis ` Portfolio Manager at Hillis Partnership