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How to Find Investing Success in Today's Market

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I think you will agree with me when I say that an investor’s success should be measured in years and months, instead of hours and days.

Think about going to a casino. You can pull the lever on the slot machine and win in the short term. You can even win big and be profitable for weeks.

Eventually, if you sit in the casino long enough and continue to pull that lever, chances are your luck will eventually run out, and reality will come knockin’. That is the mathematical reality.

You see, the entire casino business is built on one simple fact: the odds are ever so slightly in the house’s favor – but in their favor, nonetheless. This is done purposefully to keep the gamblers rolling in. The larger the data-set, the more money the casino rakes in (even if they must pay out the occasional six-figure winnings).

Longevity is Critical to Success

I’d venture to say that legendary investors like Warren Buffett achieve massive financial success because they invest like the casino operator, not like the degenerate gambler in the casino example.

For example, “the Oracle of Omaha” consistently invests in a basket of top-tier companies such as Coca-Cola and Apple at reasonable valuations, with attractive risk-to-reward profiles.

Has he ever been wrong? Of course! In fact, he took a massive hit on airline stocks a few years ago – to give you one example. Despite those losses, his wealth grew because the odds and simple mathematics took hold. (Recall my casino example.)

In other words, he is concerned with how a series of trades play out over time, not a small sample size.

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The Market is the Master Manipulator

If you have watched the market over the years as I have, you may have noticed that it tends to march to the rhythm of its own beat.

In fact, I find it funny when friends of mine put too much credence in the opinions of a particular economist or market forecaster. When I observe this common pitfall, I like to hit them with the old joke: “Why did God create economists? To make weather forecasters look good!”

After all, the market has provided us with countless examples of why it is often best to expect the unexpected.

For instance, very few market participants anticipated that the COVID-19 pandemic would lead to such a rapid correction and subsequent rebound in 2020. This is also the case in anticipating that internet stocks would soar to the heights they did in 1999 (sometimes with P/E ratios in excess of 300x earnings), and that Gamestop shares would multi bag by a factor of 100 in just a few years during the meme stock craze.

Looking back, it all seems so obvious. But hindsight is 20/20 – especially when you are Monday Morning quarterbacking with no money on the line.

Markets are Human Psychology on Display

As we discussed earlier, markets are very unpredictable – particularly in the short term. Unforeseen events can impact markets and cause volatility.

But this is one of many components investors must contend with. The madness of crowds can drive markets into some pretty crazy places. Remember the internet bubble example?

Investors became so exuberant about internet stocks that they would simply buy shares in any company with a dot com in its name – regardless of fundamentals. In fact, it was almost becoming a weekly occurrence that stocks would double or even triple in 1999 on the same day they became public.

And you better believe that the internet bubble is not the only time such madness has plagued markets. The emotional attributes of hope, fear, and greed have been inherent in humans since the beginning of time. Ever heard of Tulip Mania?

In the 1600s, the Tulip craze took center stage. Dutch traders and florists paid exorbitant amounts of money for the newly introduced plant. Did the plant have any intrinsic value or use? Absolutely not!

Money Amplifies Emotions

Don’t believe me? Pay attention the next time you see an ugly divorce or a bad business break-up.

Investing in markets is no different. Think about paper trading versus real trading. The money itself is what turns the dial on your emotions!

If there’s one lesson I can communicate to you, it is to always keep your emotions in check. If you have one winning trade and feel like you just won or lost the Super Bowl, you’re likely trading too large and are too emotionally invested. The best traders and investors that I know are even keel.

Remember, making money in the stock market is not a linear event. You can be down 20 or even 30% in a brutal bear market and make it back if you focus.

But How Do I Remove Human Nature?

Regardless of how hard you try, you will never be able to fully remove human emotions and change human nature. However, you can put yourself above most other market participants by practicing discipline, risk management, and consistency.

Imagine a person that is trying to lose weight and is unsuccessful in doing so. More often than not, the reason they do not lose the weight is because they try to crash diet. Then, they proceed to overwork themselves in the gym from the get-go.

Instead of starting their fitness journey with a 45-minute workout, they may try to start with a two-hour workout. And rather than eliminating liquid calories, they jump right into a 48-hour fast.

Instead of doing the 48-hour fast, it’s better to simply make minor tweaks to your process, like skipping dessert and vowing to work out three times a week versus committing to seven right off the bat.

In the end, the issue always comes back to sustainability. I recommend that you look at your trading journey as a business and a series of trades, as opposed to trying to find one massive winner for short-term gain.

Trust the Process 

Investors like you and me need to have a process in place to eliminate bias and quell our inner “humanness”. In order to develop a sound process, we should base our trading and research off data, history and precedent - not random opinions.

In lieu of making bold predictions about the market, we should do our best to interpret the data in front of us and make the soundest, most unbiased decisions possible.

In other words, we need to eliminate the randomness associated with most traders who throw darts rather than make educated and well-thought-out investments.

By sizing up the data, as demonstrated in the company’s Zacks Rank, Industry Rank, and change in consensus estimates in the last 60 days, we can begin to make minor changes to our process that will ultimately lead to big strides forward and improvement in the long run.

Don’t forget the saying, “You don’t have to be great to start, but you have to start to be great!”

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Thanks and good trading,

Andrew Rocco

Andrew invites you to download Zacks' Ultimate Four Special Report before this weekend's deadline. Andrew Rocco serves as a Stock Strategist and writer for Zacks Investment Research. His passion is education, where he aims to provide valuable insights from both a fundamental and technical perspective.

¹ The results listed above are not (or may not be) representative of the performance of all selections made by Zacks Investment Research's newsletter editors and may represent the partial close of a position.


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