Investors Are Always Wrong At The Market Turns

This article was originally published for RC Peck’s Fearless Wealth Newsletter in the 4th Quarter, 2004.
In my daily conversations with clients I talk about trends in the market, for good reason. You have to know which way the trend is going in order to make your money grow consistently over time.

If you know the direction of the trend you know whether you should be long, short or out of the markets all together. If you don’t know the trend direction you could be stepping in front of a freight train, and you might get squashed (which is also called “losing money”).

If the market is trending down you have two choices:

  1. Stay out of the market
  2. Short the market

If the market is trending up, you have one choice:

  1. Go long in the market

Learn the choices quickly.

Unfortunately, most investors let Wall Street manage their money, which means having money in the market during both ups and downs. It is a costly strategy (for you) because you are not growing your money in the down-trending markets.

Your stockbroker may say, “Well, you lost money this year, but you lost less than everyone else.”  You don’t have to be like everyone else!

Most of Wall Street talk is not about a trend, it’s about P/E ratios, interest rates, earnings, orders, expansion, margins, and other metrics that are not always correlated with the price of the stock.

The problem is that these so-called metrics are often based on nothing more than rumors, and do not reflect trends. The trend of a single stock, or a composite of stocks, is determined by the actual stock price, or prices.

The price of a stock never lies—it is what it is—whether you want it to be that way or not. Remember, Wall Street’s sole game is to keep your money so that your money generates fees for those who “manage” it.  Whether or not your money actually grows under their management is secondary to them.

Please remember Wall Street works for their salaries and their shareholders and NOT for their customers. Meaning, their attention will go to what suits their shareholders best. And guess what? That means ‘buy and hold’ for you so they can collect their management fees.

Ask yourself, “In what direction is the trend moving?” The trend is either up, down or sideways. It’s very simple: if we have an indicator to show us the trend, then we have a tool to use for making investing decisions. I have created just such an indicator.

I use three timeframes to determine market trends: monthly trends (long term), weekly trends (intermediate) and daily trends (short-term). Each trend is either up or down. When I add the three trends together I can clearly see the direction of the market AND I can determine if I should go long, neutral or short.

No one knows when the stock market is going to change direction. The key is learning as fast as you can after the market had turned. How long does it take you to learn that the market has turned?

If it takes you days or weeks you can move quickly and capitalize on the change in direction. If it takes you months or years you will certainly lose money. And if you simply ignore the trend then you are chained to a life of making 5% (or less) annually.

The average mutual fund investors averaged a 5% annual gain from 1982 to 2000. What is so remarkable is that the market during the same period grew at a 17.5% annual gain. The public grows their money three times slower than the market.

Remember to keep your eyes on the prize. The prize is always knowing which way the market is trending.

Here’s to understanding that there are long periods of time when the stock market trends down. These are the times you want to seriously consider not being in the market at all.

With regards,
RC’s Signature