The stock market is not casino gambling or flip of a coin. With smart insight and perspectives, you can make reasonable predictions about price movements.
The stock market never comes close to perfect competition due to the presence of a small number of big players conspiring together, millions of small players acting like a herd, and some medium ones in between. The medium players are in constant flux. Some of them merge to become big players. Some of them just lose out.
The stock market is a zero-sum game where one group profits at the expense of the others. Given the huge power imbalance between big and small players, who are most likely to profit at the expense of whom?
Power in the stock market comes from lots of cash to buy and lots of shares to sell. Coupled with insider information that goes with power, this constitutes a real lethal weapon. With this weapon, all other market factors become secondary.
Stocks must move, either up or down. Else nobody will make any money. Then who have the power to move the price?
Stock prices always move several months ahead of company performance. Can’t you figure out why after you have read the previous paragraphs?
You may think that the news drive the market. News can be manufactured, deliberately leaked, released to serve a purpose, and subjectively interpreted. The news do not drive the stock market. The business and economic fundamentals do. Some people purposely use the news to direct what will happen for the day. Most people conveniently or blindly use the news to explain what has already happened.
The stock market hates uncertainties. Prices always drop under a cloud. When the market nears its peak where all the good news become regular news, uncertainty begins to set in. Stock prices will fall. Conversely, when the end of a recession nears where all the bad news become regular news, the cloud begins to clear and people see the end of the tunnel. Stock prices will soar.
“Successful investing is anticipating the anticipations of others.” (John M. Keynes)
There are two bottoms for any company stock. The real bottom is zero when the company goes bust. The market bottom is your own illusion. It only happens when the big guys start to go in.
There is no real peak for any company stock. The market peak is wherever the big guys decide to cash out.
Long term or short term is just your own convenient definition. The truth is, “In the long run we are all dead.” (John M. Keynes)
2. Big Players
You don’t have to be a big player to understand their motives and actions. You just need to put yourself in their shoes.
The big players consist of an exclusive club of wealthy individuals who are born rich or self-made billionaires, major banks, investment banks, various investment funds, brokerage companies, venture capitalists, and all kinds of money launderers. Do you want to know who are the big players of a given stock? Ask the Board of Directors of the company. Whether they want to tell you is a separate matter.
Since there are thousands of public companies out there, the big players must focus their firepower in a short list of companies that they can manage. These are known as their own territories. When territories overlap, the big players consult and conspire together. Otherwise, they have more freedom of action. The overriding objective is to profit at the expense of the small guys, not any member of the exclusive club for fear of retaliation. The big players don’t want to step on each others’ toes, or negate each others’ schemes.
The banks and brokerage companies possess something that the other big guys don’t: They know all about your private trading accounts. They know how much money you have, how much you have borrowed on margin, how much short sales you have made, when will your options expire, and what price levels you want to buy or sell as specified in your limit orders. How can you win if your opponents know everything about you?
The banks and brokerage companies are forbidden by law to divulge private account information. But that does not prevent them from aggregating all the data regarding their account holders. Also, it does not prevent them from sharing or selling the aggregate data. If they share this data, they will know for example how much short sales have been made by all small players for a given stock and at what prices. They can easily make the short sellers lose by pushing up the price of that stock. They can do all kinds of other things, too.
To shield their identities, the big players do not buy or sell in their own names. They employ special companies or agents to trade for them on a daily basis. They may do share exchanges or other back room deals outside of the stock market.
The lead-time of stock price ahead of company performance by several months shows that the big players have access to insider information.
Do you think big players read the news or analyses before going out to buy or sell just like you? If they do, they are no big players. Big players make news and make analyses for you to read.
Big players practice the age-old game of buy low and sell high. In the stock market, the game involves more sophistication: Buy most shares at lowest possible price, buy panic sales by small guys, push up the price by continuous buying, seduce public participation by trumpeting the stock, short sell at higher prices, begin unloading near the peak, and depress the price by continuous selling. Then come back later to repeat the cycle again. Or switch to another company stock.
People work for the sources of their paychecks. When an analyst works in an investment firm owned or controlled by a big player, can’t you tell for whom the analyst is working?
When an investment firm controlled by a big player operates a mutual fund, can’t you tell for whose interest the fund is serving? Remember the stock market is a zero-sum game.
3. General Advice
Truths are usually learned through observation, reasoning, and experience, not by remembering what an expert or authority says.
We all suffer from B.A.D. syndrome (blind, amnesia, deaf). So many things can prevent us from learning a good lesson. Even after we have learned from seeing and hearing, we tend to forget. So be on guard all the time.
The butcher does not try to feed you by selling you meat. He only tries to feed himself. The same is true for any business dealing (Adam Smith).
The world is never fair. It may be fairer in some cases than others.
If you want more fairness, insist on more transparency. When people short-change you, they want to do it in the fog, behind closed doors, or in the fine prints.
If you want more transparency, insist on simplifying procedures, rules, red tapes, and technical details. People tend to get immersed in those complicated things and forget to ask what is good for them.
Laws are never sufficient and are broken all the time. Laws are usually written or influenced by the rich and powerful for their own benefit. Don’t assume that the laws provide you with automatic protection, especially in financial matters. You need to protect yourself with your own smarts.
Most contracts or agreements between a company and a consumer are less than fair. Take a look at insurance policies, loans, credit card rules, investment funds, leases, lawyer services, hospital care, and so on. Do you have the time to read all those fine prints in the contract? Even if you do, do you really understand what they mean for your benefit?
“A crisis is a terrible thing to waste” (Paul Romer, economist at Stanford).
You become a smarter person the moment you recognize that you are not that smart.
4. Some Don’ts
Don’t let anyone play with your money in the stock market. If you don’t know how to play, please learn!
Don’t indulge in “would have” or “should have” in the stock game. Only losers do that. Try to learn a lesson and move on. There are always new opportunities tomorrow.
Don’t buy or sell because your friend or an expert says so. You have to decide for yourself even though you may be wrong. So learn how to make smart decisions.
Don’t get immersed in technical details about the stock market. They are misleading at worst, and outdated at best.
Don’t waste your energy looking for insider information. It is beyond reach for small guys without tons of cash, shares, and power.
Don’t get emotional in the stock market. The big guys win because they are cold-blooded, conspiring, and well coordinated, in addition to having great resources.
Don’t buy when the price is falling because you cannot see the bottom. Many small guys commit this fatal mistake.
Don’t buy and hold as encouraged by the big guys except when the company is on a clear growth path. Buy and cash out when you can make a reasonable profit. You can always come back and buy some more after the price has fallen.
Don’t buy when the price of a stock rises for a few days leading to the release of the quarterly earnings report. Chances are it will fall on the release date. And vice versa.
When you buy options, you are limited by time due to the expiration date. Self-imposing a time limit in the stock game is never a wise idea. No wonder the big guys invented the options system for the small guys to play.
The big guys also invented the short-sell system for the small guys to play. Don’t fall into this trap unless you have acquired enough experience. Short selling is dangerous for three reasons. First, stocks have no real peaks. A stock can rise and rise, split and split. That will make short sellers lose everything if they stay in there. Second, short selling is expensive because you must short sell at a high price and pay an interest for borrowing the stock from your brokerage company. Third, the big players know the aggregate short sale volumes and prices through the brokerage companies. They know your anxiety. They will make you lose by pushing up the price.
Don’t buy penny stocks because you have better things to do. Betting on a dead or dying company is not a viable proposition. In the penny market, you can catch a price to buy, but you can hardly catch a good price to sell. If you have limited capital, why not buy a big company whose stock has been beaten down? Although the company is on life support, should it survive, the turnaround will multiply your bet many times.
5. Some Do’s
Stock price moves like the Waltz or Tango. During good times, it advances three steps and backs one, punctuated by a few pauses. During bad times, it backs three steps and advances one, again punctuated by some pauses. The point is not whether it goes up or down in a given day, it is whether you are able to see the trend.
It works to your advantage by going against public sentiments because they are usually proved wrong. So when everybody says buy, you sell. When everybody says sell, you buy.
You can never predict the highest or the lowest price for any stock even though you may strike luck sometimes. So play carefully and cash out when you can with a reasonable profit.
Small guys only win by following closely what the big guys do. So you must figure out big guys’ behaviors first.
How can you tell when the big guys act? You just can’t! But you know their motive: profit maximization at the expense of small guys. This means they have to seduce the small guys to buy something they have already bought in huge quantities.
Small guys as a group has inertia. It takes time for them to be gradually seduced, usually in several months. Can you figure out the rest? Conclusion: Your window of opportunity normally lasts for several months. Beyond that, you put yourself in unsafe territory.
When you buy a stock, ask yourself when the last highest and lowest prices occurred. Make an intelligent guess as to the next ones. Without this most basic historical perspective, you are nowhere.
Act short term with a view to build long term.
When you buy real estate, the key is location, location, location. When you buy stocks, I’d say trend, trend, trend.
All parties must end. Come to the party early, and leave well before it ends.