Vid. 002: The Urban Legends of Stock Trading

Many people who are novice stock traders seem to believe certain urban legends – like that they can simply watch CNBC or listen to what Warren Buffet says, and make their stock trading money that way. But they soon realize that they can’t make BIG money that way. I explain why.

In this video, you will hear about:

  • Dispelling the three “Holy Grails”, the urban legends of investing
  • Why talking heads from the TV don’t actually know much about investing trading
  • Why day trading is a waste of your time
  • How Warren Buffet is not telling you the whole story
  • A funny story about my interview with Maria Bartiromo

Items mentioned in this video:

In the next episode, I will talk about the specifics of how I learned about the trend following trading.

In the meantime, subscribe to my podcast (over 1 million downloads!) and join the 12,000 Trend Following newsletter subscribers.

[toggle Title=”View full transcript”]In my last video, I talked about Black Swans and the Zero Interest Rate Policy. I made a point that you don’t know when it’s going to happen – the next event that causes the stock markets to melt down 50%. We just know that it’s coming, but we don’t know when the Black Swan will land.

I also made a point in my last video about the Zero Interest Rate Policy – how my grandparents have done the right thing to save money, so that they would have interest income. But when you save money today, there is no interest income. The central planners simply want you to put all your money into the stock market. That’s where it stands today.

Today I want to talk about the Holy Grails – the legendary ways that you supposedly can make money. These are the things that people who don’t have any expertise in the markets generally think about.

They think about watching CNBC. Because if you watch the CNBC, some supposedly very smart talking head will come on TV, tell you some actionable piece of information, like “buy XYZ stock”. They won’t tell you when to sell, only when to buy. So that’s the first thing.

Number two, the great Warren Buffet. I’m a fan of Warren Buffet’s self-made capitalism. But I’m going to talk about knocking down the legend today.

Number three, day trading. High frequency trading – this is the land of the novice. You think that if you can watch the screen all day, and make decisions by watching the market tick by tick, you’ll be successful. There’s very little evidence that you’ll be successful doing that. But it doesn’t stop people from believing in that urban legend.

But lets jump back to CNBC, one of my favorites. Look, I think the people that are there are just people that have a job, they read the teleprompter. I don’t have a teleprompter right now – maybe if they gave me one, I’d be more proficient and professional. I have a guy here, Mike, who is filming me, but I have no teleprompter. So the CNBC people use the teleprompter, and they just read scripts – they tell you what you want to hear. They tell you what the Central Planning script is.

A fun story about the CNBC’s most well-known talking head, Maria Bartiromo – everyone either recognizes the name of the face, she’s extremely well-known. A few years back, I was doing a documentary film, and we invited her to come and speak. I was going to interview her on camera. And last minute, she cancelled and left me this voice mail: “Hi Michael, this is Maria Bartiromo calling, sorry I missed your call. How are you? I do appologize for having to cancel today. It’s just that when I read through the details of the shoot, it just occurred to me that this is something different. I thought it was just generic investing advice, when in fact it’s about financial analysts. And I have to have that kind of stuff screened through my company. I probably should not have said yes without having this stuff go through my PR people. I’m sorry about that. You know what’s going on, and all the criticism of all the analysts, and the dot com boom and bust. I can’t – I don’t really want to do this open-ended without really knowing more details.”

Mind you, that was a few years ago – but who cares. Why would she have been worried seven or eight years later, as someone who just reads the teleprompter, about what happened during the dot com bubble? What’s so cool about that is that it gives you some insight into how little these people on the TV know, and how little their information can help you.

First point: Turn off the TV, turn off the distractions. The great traders do not watch TV, and they do not use the information on TV to try and make their decisions – period. They don’t do it, and you shouldn’t do it either.

Number two: Big daddy Warren Buffet, one of the richest men in the world. And the legend has it that Warren has bought and held big popular companies like Gillette and Coca Cola, and has in turn made billions of dollars. And every year, a whole bunch of people go to Omaha, Nebraska, and they bow down to him because he has made all this money, for himself and for them. But he didn’t make it as a buy & hold investor.

Warren Buffet is known for saying that derivatives are weapons of mass destruction. Go Google right now Warren Buffet and derivatives, and see how much he uses derivatives. So on one breath he’s saying they’re weapons of mass destruction, and on the next breath, that’s how he’s making his money. But I don’t have a problem with that. I have a problem with him getting people to believe that he made his money not doing that. Because he uses derivatives, and that’s how he makes his money. There is nothing wrong with using derivatives, I just think Buffet doesn’t tell you the whole story.

Number three: Day trading. So one of my favorite traders, my favorite mentors, is a guy named Ed Seykota. He is one of the best trend following traders out there. Trend Following is my world, it’s what I teach and educate people on. I’ve written five books on trend following, I’ve made a film on trend following. Ed Seykota, who deserves a lot of respect – one of the early adopters of technical trend following systems, and actually coding these with punch cards when he was at MIT. Ed simply says that day trading is a distraction. It’s a way for people to self-medicate. Why does he say that? Because he realizes that if you follow the screen all day, and you follow all the little ticks moving around, and all your focus is these little five minute bars, or what happens every ten minutes – that’s random noise. That’s not how the big money is made. The big money is made on the big moves, like the move that goes for a year. Some of the best traders use one data point per week. That means they only look at the closing price of S&P one time a week. Now, if you day trade, or if you look at the market multiple times during the week, think about that for a second. One time per week – I challenge you! Step back.

In my next video, I’m going to go into some of the specifics of how I learned about the trend following trading. But I’m going to leave you with some takeaways today. Get yourself educated. Get some more insight into how things really work. Two books: Tom Asacker’s The Business of Belief, and Michael Mauboussin’s More Than You Know. Read those books.

Lastly, listen to my podcast. Some of the brightest trading minds are on my podcast. One million plus listens since inception. As high as number two on iTunes investing channel. There must be a reason people are listening. They must think that the crazy white dude in the blue suit somewhere in South East Asia has something useful to say. [/toggle]

Have a question about the urban legends of stock investing mentioned in this video? Ask below!