Media Planet interviewed me for an article—I thought I would reprint my answers to their questions with a bit of expansion on my first answer for the good readership of this blog. Hope you find it interesting.
Speaking of interviews—don’t forget that I am on BNN Market Call’s 12:00 noon (EST) this Wednesday Nov 6th.
If you have questions about the technical analysis of stock trends for individual stocks, be sure to phone in with your questions during the show.
Call Toll-Free 1-855-326-6266
Or email your questions ahead of time (specify they are for Keith) to firstname.lastname@example.org.
BTW – Below is a shot while I was joking around taken by my photographer for a BNN media file – we felt it was too silly to send to BNN but I’m posting it today for fun.
How is knowledge about the stock market integral to building the skills and confidence necessary to successfully navigate any market condition?
I’ve been investing and trading professionally for some 30 years, and was investing privately for a bit less than 10 years prior to then (I can thank my dad for instilling that habit in me!). So I believe I have a good perspective on the changes that have taken place over the past 4 decades – and the challenges that investor face today. To me, the biggest change for the average retail investor has been the popularization of the internet. While developments such as computerized program trading, etc have created intra-day volatility, these systems actually cause little grief to most retail investors – beyond getting lousy fills on their orders.
The retail investor is more affected by the widespread availability of information through the internet – and the more rapid trend-changing responses by the many players to this information. In the 1980’s into the early 1990’s, retail investors were often ill informed of a news item as it happened– relying only on an evening television program (I used to religiously tune into “Louis Rukeyser’s Wall Street Week!”). Or they would read the next day’s morning newspaper. Many investors were far less sophisticated and informed than today’s investors – relying on a stockbroker or Investment Advisor to advise them.
Information flow via the internet did not become mainstream until the late 1990’s and into the early 2000’s.
The VIX illustrates this new development, and the increased volatility that came with it. Remember, the VIX represents anticipated volatility by options traders. Options become more costly – i.e., volatility premiums increase – when it is assumed that markets are becoming less predictable. You can see on the long termed VIX chart below that heightened volatility has occurred since 1990. Peak VIX levels in 1990 were about 35. By the late 1990’s/ early 2000’s, as the internet became prevalent amongst households, peak VIX scores were about a third higher at 45. Since 2008, the VIX has reached 90 (2008) and has taken numerous swings into the high 40’s and low 50’s.
The mid 1990’s brought with it an abrupt move out of individual stocks by retail investors – and a shift into mutual funds. Bank sold funds were less popular, and retail investors were sold independent funds with steep redemption penalties (“DSC back end loads”). They were taught to buy and hold no matter what the news – and encouraged to do so because of the penalties. Despite my negative view of that sales strategy, one cannot deny that it did offer the upside of a less reactive investor. As investors became more informed through the internet, they began to migrate out of the expensive and passive mutual fund products – and moved into individual stocks.
It was only a matter of time before do it yourself investing began. This, led by the popularization of discount brokerages in the late 1990’s, created an era of “ADD” investing (attention deficit disorder). Now, using the internet and online trading tools often provided by their discount brokers, an investor could view news developments as quickly as the pro’s, and execute trades quickly- sometimes not wisely. Pro traders were able to take advantage of the more emotional trading employed by less disciplined retail investors. In fact, I personally created trading systems to identify the movements of pro’s vs. retail investors – pitting “smart money” against “dumb money” to take advantage of the emotional trading habits of retail investors. The age of volatility had begun. the VIX chart above illustrates this perfectly.
Given the above, it’s vital to have an understanding how to invest within the new era of enlightenment, rapid information flow, and accessible technical / fundamental analysis tools. Knowledge will help us migrate through the overwhelming overabundance of information – and help us invest by paying attention to what really matters – while ignoring the noise.
What would you list as the top 2 or 3 investing trends and strategies currently popular in the industry?
The new trends seem to be short termed swing trading, mid termed momentum trading, and (on the other side of the coin) deep value investing.
What’s the one piece of investment advice you always give to your clients?
The most important thing is to understand what your personal attitudes are to risk, volatility and how that ties into your goals. In other words: know thyself!
For example, you may be an aggressive investor – if so, high volatility but disciplined momentum trading strategies will work with your mentality. If you are truly a long termed investor, then buy and hold can work- market madness shouldn’t bother you. You should learn to understand fundamental analysis. In this way, you’ll identify quality stocks you can hold long term.
On the other hand, some investors really don’t sleep well within a volatile environment. So they need to have some type of risk control put into place that will take them out when a major trend ends – then re-enter when it starts up again. Technical Analysis can help here.
Finally, you may be an investor who cannot stand any type of fluctuations! Everyone is a long termed investor – until the proverbial poop hits the fan. The real long termed investors don’t worry when things go south. Perhaps you do –despite what you have been told about long termed buy and hold. That’s OK – if you don’t like volatility, you should buy GIC’s – there is nothing wrong with that. Bottom line: Know thyself!