The following is a Guest Post from Tony. A successful investor who has had years of experience with stocks, commodities, and currencies, Tony blogs at A Young Investor where he explains his investment ideas.
There are many misconceptions about investing and the markets. By dispelling these misconceptions, I hope you will become a more successful and realistic investor. Cheers!
The Insider Buying Lie
Believing that insiders know more about their stock than “outsiders” do, novices assume that:
- “The insiders are buying their own stock.”
- “The insiders know more about their company than I do.”
- “I should buy it too.”
Let me tell you what’s wrong with these assumptions.
1. Since an insider would never tell you “I’m buying on inside information”, how can you confirm the insider buying rumors that, in 95% of all cases, are absolutely false? You can’t. Hence, the conclusion can be made that insider buying rumours are used by two kinds of people to manipulate the stock’s price: high level executives or big traders. If the stock price is tanking, an insider might want to use these rumours to prop up the stock’s price, at the buyer’s expense. In similar fashion, another trader who wants to get rid of his long position will need a big market to swallow it for him, or else his own liquidating will work against him. As a result, the trader will find that the “insiders are buying” rumours can be quite useful for “creating a market” at the expense of fools in the market.
2. While it’s true that insiders know more about their own company than outsiders do, they’re not any better at TRADING their own stock than you or me. Besides earnings reports and management details, factors such as technicals, market sentiment, and the macro economy often play big roles in determining a stock’s price. Knowing the earnings report before it’s publicly available doesn’t mean the insider will able to trade successfully.
3. Never enter into a position just because someone else is doing it. Period.
There’s No Such Thing as Easy Money
Entering into this industry because they dreamt of vast sums of money, most new traders want to only work few hours a day. I find this to be absolutely ridiculous; if trading was that easy, we’d all be doing it, and if everyone were trading, no one would make money (hence, it’s called a zero sum game).
Because the market is a zero sum game, the dreamers mentioned above are playing against the professionals, who are working their asses off day in, day out; hence, a lack of commitment to trading won’t work. Big players swing centi-million dollar positions around, which means that for them to make money, A LOT of smaller guys have to lose money.
Sure, you might hit a lucky streak and make some money, but I can guarantee you that if you don’t really know what you’re doing, one day you will lose everything. And guess who’ll be taking the opposite end of that trade? The professionals.
Trading is Not Gambling
Beside novices who believe that “trading is easy money” are those who believe that trading is sheer gambling. This belief is common among people who witnessed a major market crash and saw how fast paper profits can vanish. “The market is random” they say. “It’s a 50-50 bet.”
No, it isn’t.
Believing that poker is gambling when it really isn’t, people also believe that trading is gambling when it really isn’t. To serious traders, it’s really just a mathematical game of calculating the odds and a psychological war of keeping your emotions in check. “What are the odds of the price going up, and what are the odds of the price going down?” After calculating the odds, they can bet when the odds are high or “fold” when the odds are against them.
Still don’t believe me? Then how do you explain all those successful traders who consistently beat the market?
Check out Tony’s great post on Ideas About Investing And The Markets.