Why I QUIT Investing, Part 2

Last week, we discussed how you can change your life by thinking like a trader.

This idea has nothing to do with quitting your job to stare at a row of glowing monitors every second of the day.

That doesn’t sound like freedom to me.

I “quit” investing to trade because I enjoy keeping my own schedule, spending time with my family, and (mostly) ignoring the market pundits who are only blathering about stocks to sell ad space for prescription drugs and car insurance.

It’s just easier to trade when you tune it all out.

Thinking like a trader will not only dramatically improve your returns, it will also free you from the neverending spin-cycle of the financial media, bogus Wall Street analysis, and foggy economic prognostications that never seem to come true.

More importantly, you can apply the principles of trading no matter how you invest – short-term, long-term, and everything in between. You don’t have to change your timeframe to succeed with trading. You simply have to change your mindset.

Today, I’m going to dig a little deeper.

Let’s get started…

Fundamental Mistakes 

What is an investor’s most important task?

If I polled a random group of people, I’d expect “research” would be the most popular answer to this question.

After all, if you’re going to invest in a company, you want to know what it does, who its customers are, how much money it makes, various valuation metrics, plans for future growth, etc.

These are all supposed to be important pieces of information. And information is what most investors crave. Many diligent market watchers – especially newer investors – love to dig into news articles, analyst ratings, and earnings statements. They want to feel informed. After all, the more you know, the better chance you have at picking a winner.

Except this isn’t entirely true.

Over the long haul, a company will live or die based on its ability to make money and grow. I’m not disputing these facts.

But you probably won’t profit from these long-term success stories based on widely-available fundamental research or economic trends.

Let me explain…

Electric car pioneer Tesla Inc (TSLA) currently trades for 54x forward earnings estimates. Legacy automaker Ford Motor Co. (F) trades a little more than 6x forward earnings estimates.

Does this mean Ford shares are a better “deal” than Tesla right now? Will Ford outperform Tesla over the next three years because Tesla stock is too richly valued? Or, is Ford stock cheap because it simply can’t compete with Tesla?

Perhaps Tesla is on the cusp of a major breakthrough in its autonomous driving technology that will cement it as the most important transportation and technology company in the world. Or, maybe the opposite is true – Tesla’s biggest growth days are behind it and the company struggles to meet its aggressive goals over the next several years.

No matter how much research we do (you can replace forward earnings with your metric of choice and repeat this process ad nauseam), we cannot confidently answer any of these questions. Sure, we can come up with some very serious stories about how the economic, political, and company-specific fundamentals will perfectly align…

But it’s highly unlikely any of our well-researched ideas will come true. The markets – and the world – are way too complicated for this to consistently happen.

You Have No Edge 

Not only do we live in a complicated, chaotic world – we also have to deal with highly sophisticated professional investors who can exploit limitless resources to deliver returns to their clients.

In other words, it’s virtually impossible to discover information about a company that Goldman Sachs doesn’t already know.

The connections analysts can exploit and the sheer amount of information they can obtain that a Main Street investor could never sniff is obvious. Plus, the major Wall Street institutions have access to billions of dollars (of course!), armies of quantitative analysts, mathematicians, and virtually unlimited computing power.

So why should we attempt to play their game?

Stop pretending you can beat these monsters after spending a couple hours Googling stocks. You and I don’t have an edge over these firms. There’s no information we could legally obtain that would tell us something about a specific company someone in a major financial institution’s research department doesn’t already have on file.

I spent way too much time at the beginning of my career trying to figure out the fundamental research that would give me some sort of a repeatable edge in the markets. Looking back, I don’t even think this endeavor is possible – even for investors much smarter than me. Even the handful of lionized investing legends who have made billions in the market concede that many other factors played into their success, such as when they started investing. But that’s a story for another time…

There is a way you can leave all this fundamental confusion behind. It starts with the concepts we’ve discussed so far.

First, we acknowledge fundamental and economic analysis is important in the long-term – but it’s useless for attempting to determine when to buy or sell stocks.

Next, we admit that we have no edge in the markets – and possess no magical information that can give us an advantage over the professionals.

That leaves us with the big question…

If fundamentals are flawed, what strategy can I use to beat the market?

We’ll dig into this answer – and more! – next week…

In the meantime, hit me up with your most pressing trading questions by emailing me here.