Traditionally, the only training an investor receives as they begin to participate in the stock market is the ol’ buy and hold methodology. Buy and hold has been a piece of investing wisdom handed down from generation to generation. While this approach works well in a market that is consistently trending up, it fails to address the notion that at some point what goes up has the tendency to come down. While buy and hold makes sense if you are participating in the trend, so often the approach is more closely resembles “buy and forget” which results in complacency and in many cases regret.
The very nature of the buy and hold approach suggests that if securities are bought and held for a long period of time, over a 10-20 year period, prices will go up regardless of market fluctuation. Historical data (prior to 2000) does indeed support this claim, however this methodology assumes that in a capitalistic society profits will grow, prices will rise and dividends will increase as the economy expands. This assumption is correct…until it isn’t. Leaving the consequences of being wrong open ended. Now, of course we have to consider the open market operations of the global central banks in their effort to avoid an economic collapse. Under current central banking policy the mandate to the mandate is to (in laymen’s terms) make money cheap to stimulate spending and subsequently growth. We have to recognize that this cannot go on forever and while we want to benefit from the current environment, we also have to recognize that the global economy is on a form of “life support”.
One thing is for certain, with changes in technology and increased market access, there has never been a better time to take a more active role in managing personal wealth.
It is amazing how the pain of loss from the 2007/2008 market crash has been almost numbed by the 100% plus percent recovery witnessed since the lows in March 2009. Many investors who were reeling over a significant loss of wealth have been lulled into a false sense of security as the markets have surpassed (moderately) historical highs.
Although the intermediate trend appears to be up, it is important to remember that the markets do not move in a straight line. The caveat will be to make sure that investment capital is being protected and profits are locked in which will require a change in philosophy and a shift from the traditional stock market training that many long term investors have come to rely on.
It is important to clarify that active investing is not about being in and out of the market on a day to basis, it means paying attention to market conditions and taking action as needed. This might mean adding put options as protection or writing call option to help mitigate market volatility or simply offsetting a position entirely.
Understand of course, that this will require some time and effort. It is up to the individual to determine just how active they can realistically be. Many investors are on a mission to recover their losses; however the primary consideration should be to protect what they still have.
The first step is investing and trading education. Knowledge is power. Regardless of how much time one has to allocate to the pursuit of recapturing lost wealth, learning the dynamics of the market will put things into a greater perspective. Stock market training needs to focus on the recognition that one can profit when the market is going up or down. This will allow the investor to participate and ideally profit without bias.
There has been an evolution in services provided by many brokers. One initiative has been the development of educational programs such as the ones that we have been part of with the TMX/Montreal Exchange, T.D., iTRADE, Disnat and National Bank to name a few. These learning initiatives have been designed to provide insight and ideas to investors looking for answers. To use an old cliché, a house is not built (or rebuilt) without a solid foundation. An investor who is on the road to recovery from the last market decline must continue to evaluate goals, establish a time frame and select an approach that is going to help in attaining those goals.
Understanding the options market allows the investor to protect and preserve their capital, take decisive market positions with a limited and identifiable risk exposure and generate cash flow in a market that is trading sideways. All of these characteristics are extremely important considerations when building and maintaining a portfolio.
Active investing should be boring. If there is one guarantee, "thrill seekers" are separated from their capital fast.
There are some common characteristics shared by many active investors.
- An active investor has been trained to be constantly learning, looking for new ideas and opportunities in the pursuit meeting their objectives.
- An active investor is not concerned with which direction the market is going, just that it is moving, and that they are on the right side of it.
- An active investor is constantly evaluating risk and reward, putting capital preservation first on the list of priorities.
- An active investor leaves emotions at the door, consistently looking for signs of being wrong, regardless of how much time has been spent researching and rationalizing an opportunity.
- An active investor has an entry and exit strategy based on the time frame that they have allocated and they have the discipline to stick to it.
- An active investor has a confident understanding of how to read a price chart recognizing that company fundamentals are an important consideration but it is ultimately the price action that dictates profitability.
To be a successful active investor, one must realize that the price of a stock is only worth what someone is willing to pay for it, not necessarily what the company is “assumed” to be worth, be well aware of the psychology behind what drives the market and, once again, learn to control emotion.
There is no secret to being successful at navigating these markets actively. Relying too much on fundamental and technical analysis has its shortcomings. In the end, Your stock market training program should include a combination of personal discipline, a sound methodology and a sensible approach to money management…this will keep you on the path to prosperity.
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