In a word – yes. But it’s not easy. Investors have been convinced by Wall Street and academia that they can’t beat the market.
Wall Street – because they ARE the market. They cannot outperform themselves. Wall Street realized long ago that the real money is in charging everyone 1% rather than in trying to make a few rich. So the name of the game is asset gathering. To make returns palatable, they invented a bunch of indices for every occasion. Now all they need to do is outperform the relevant index on a relative basis. That means “beating” the index by being down “only” 10% when the index is down 15%.
Academia – well, where do I start? To begin with, if an academic could make money trading, he or she would. But I am not aware of any academic who made money implementing their theories. Building up their own brilliance by justifying mediocrity is their preferred theme. Wall Street buys it because it helps convince investors to accept mediocrity. Investors – because that’s what they want to hear: no need to try.
The simple truth is: every year the market produces enough tenbaggers to make a few rich. That’s all the individual investor needs in order to beat the market. All they need to do is find them ahead of the crowd.
So the first step is to purge your mind of stupefying conventional wisdom like: you have to be fully invested at all times to achieve your long-term goals; asset allocation accounts for 80% of the return; professional money management.
The second step is to block out the investment noise from CNBC, the business sections of major newspapers, and most financial publications. All they do is confuse you by carrying a full gamut of opinions. Learn to separate fact from interpretation.
Next, you need a system.
There are several successful stock trading systems. None is perfect; none works 100% of the time. But a good system must combine these four key elements:
Stock selection
With roughly 10,000 stocks to choose from, how do you find the next big winner? It’s easy to point to the past winners – TASR, AAPL – because they are obvious to everyone by now. But if it is that easy to pick new winners, name the NEXT potential tenbaggers going forward.
Time element
Even after you select the right stocks, there is still the question of when to buy. You CAN lose money in a rising stock by buying and selling at the wrong time. In the end, it’s not the stock that makes you money, it’s what you do with it.
Stocks don’t go up forever or in a straight line. They move in a succession of spurts and consolidations. Beating the market means buying and selling the right stocks at the right time, i.e. riding the advances and waiting out the bases/consolidations.
There is also a time to trade and a time to stay on the sidelines. You can get ahead by simply making fewer mistakes or losing the least amount of money.
Risk management
Cash is the lifeblood of your system. We all want to get richer sooner rather than later. But any system that promises to make you rich fast can wipe you out as fast. A good system should incorporate risk/portfolio management so that no one move, no matter how dumb, can wipe you out. If a “proper” asset allocation did not prevent your portfolio from losing 50%, it’s obviously no good.
Emotion control
In trading, YOU are your worst enemy. Not the market, not your adviser, not Jim Cramer. You can’t control events on Wall Street but you can control your emotions. It’s not what happens to you, it’s how you respond to it that counts.
When people reach their pain threshold, reasoning and long term goals go out the window and they start acting irrationally. A good system must have a way of dealing with emotions through structure and discipline.
Above all, a good system must be simple and robust. The more ingredients go into the pot, the easier it is to spoil the dish.
Slav Fedorov is a full time stock trader and founder and managing member of TradingZoom, LLC. TradingZoom provides timely stock picks in small cap stocks to part-time traders who can’t watch the market throughout the day.
http://www.tradingzoom.com/
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