I've coached sports much of my life and there are two key elements to succeeding in athletics: practice and confidence. Raw talent and athleticism don't hurt either, of course. I don't care how good you might think you are, to excel in sports, or anything in life for that matter, it takes practice. The more you practice, the better you get, and the more confidence you have. One feeds upon the other and around and around it goes. The stock market honestly is no different. The first step is confidence. Without it, you're lost. Pesky market makers prey on greed and fear among individual traders. They rely on traders making the exact same mistakes over and over again. So, as a trader, you need to "practice" trading to refine your skills and to increase your chances for success. Success will breed confidence. But you must take lumps along the way and learn from them so you're better prepared in the future. That's step 1.
Step 2 is to acquire knowledge. Every time we go through step 1, we hopefully learn something. That's the start of step 2. If you keep repeating step 1 without learning from it, then you're likely blaming others for your own mistakes. It becomes "Wall Street's fault" and "the market is rigged". You know what? You'd be absolutely correct. It is rigged to some degree, which is why step 2 is so important. If you don't follow this step, then it will always be Wall Street's fault.
Step 3 is to make changes and revise your plan. History repeats itself frequently in the stock market. Intense fear leads to major bottoms. Learn to see the opportunities created by fear, rather than being swallowed up in it. Warren Buffett said it best, "I try to be greedy when others are fearful and fearful when others are greedy". If you follow this line, and especially the first half of it, you will be ahead of 99% of the rest of the market.
I've realized through my life that I have a passion for education and providing education. It doesn't matter what I've done and learned in life, I've always wanted to teach it to others. I became a very accomplished golfer in my high school years and have always enjoyed giving lessons to others. After passing the CPA exam in the 1980s, I practiced public accounting and loved analyzing businesses. Meetings with management teams to help identify areas to improve their businesses, margins, and efficiency always ranked high on my list. And as my passion for the stock market grew throughout the 1980s and 1990s, I studied and studied and studied the market, learning many strategies from one of the best technicians of our time, John Murphy. John's had a profound impact on my career and he has clearly inspired me to continually study intermarket relationships to breed the kind of confidence needed to succeed in the stock market. Two decades ago, I had very little idea how much sentiment directed equity prices. I've learned that lesson the hard way, for sure.
It was after the dot-com bubble imploded that I realized it was time to change careers and begin educating. It was painful watching investors drive the prices of companies that had no earnings, and little hopes of ever generating profits, into the stratosphere because of stock splits and hype. Companies with no real solid business model were paying inordinate amounts of money for naming rights on stadiums, while investors funded it and cheered more stock splits. I'll never forget that period in my life. It was also the moment I realized that my weakness was trading options. I stopped trading options in 2000 and don't even have a margin account. Becoming a better trader or investor also requires an honest look inside yourself. Recognize your strengths and weaknesses and play to your strengths. My strength, or at least one of them, is my ability to analyze and adjust with changing market conditions. My weakness is growing overly confident and using leverage.
I ended my two decade career in public accounting in 2003 and co-founded EarningsBeats.com (formerly Invested Central) in 2004 with my partner John Hopkins, one of the contributors here at StockCharts.com. John writes articles for ChartWatchers as do I. As an aside, every StockCharts.com visitor/member should subscribe to ChartWatchers. First of all, it's FREE. Second, it's step 2 above - acquiring knowledge. Learn from seasoned technicians, who've experienced just about everything there is to experience in terms of stock market performance and behavior.
The March 23rd bottom was THE BOTTOM. John Hopkins wrote a great article in ChartWatchers on April 3rd titled, "Get Ready To Be Shocked - To The Upside". It wasn't fashionable to write bull market thoughts in early April, but as I discussed above, we've learned from past lessons. Major market bottoms are set by extreme bearish sentiment and I could argue that bearish sentiment in mid-March was worse than at any other point in my lifetime. At time of John's article, the S&P 500 stood at 2488.65. Yesterday it closed at 2953.91. That's closing in on 20% in six weeks. While it went against the grain of what nearly everyone else was thinking, it was SPOT ON. "Be greedy when others are fearful." Allow that line to sink in.
But we weren't done at EarningsBeats.com with an article. We were holding webinars at the time, educating our EarningsBeats.com members as to the changes that were taking place based on accumulation/distribution signals. Here was a recording from April 2nd before the stock market really began to power forward. It's one thing to call "bull market" using the Monday morning quarterbacking approach. But I stuck to my guns in the heat of battle, which you can listen to in real-time:
Later today, this journey back to the upside continues at EarningsBeats.com. I'll be announcing the 10 equal-weighted stocks being added to each of our portfolios for the next three months. They will be leading stocks from leading industry groups, hopefully adding to our incredible results. Our Model Portfolio, for example, is now up by 67% over the past 18 months, while the S&P 500 has risen less than 10%. Our Aggressive Portfolio is up 22% in its first year, while the S&P 500 is literally flat. This latter portfolio's most amazing stat is that it's comprised nearly entirely by small and mid cap stocks, which have been crushed by the S&P 500. Yet our "leading" small and mid cap stocks have crushed the S&P 500. New leaders will be announced later today for our members.
If you'd like to join my "Top 10 Stocks" webinar at 4:30pm EST today, and further strengthen your knowledge of current market action, hop on board with a fully-refundable $7 30-day trial. CLICK HERE for more details. I hope to see you at today's webinar!
Happy trading!
Tom
