WHAT IS THE FOREX?
There are more than 48 million household traders in the United States and more than 11 million are online with one purpose—to make profits from their investments and to take control of their retirement funds.
What is the purpose of investing? To make money, right! I have always said that the single greatest source for wealth is the stock market. It always has been and always will be. Well, this has been obscured somewhat over the last couple of years.
I have spent a great deal of time traveling across this great country of ours teaching people (investors) how to take control of their financial lives. I have spoken to many individual investors who have come up to me and told me their trading nightmares—told me that their portfolios have lost upwards of 90 percent of their value.
That in itself is a real tragedy, but what makes it worse is that many of these individual investors are approaching retirement; they do not have the luxury or the time to start rebuilding their retirement nest eggs. They are faced with some very harsh decisions. Well, let me tell you: It is never too late—you have to take action. If you don’t, you will lose.
One of my favorite sayings is, “If you always do what you have always done, then you will always get what you have always gotten.” Let’s change this. I will teach you how you can start to make a difference just by increasing your awareness of and education about an alternative to the stock mar- ket, opening up opportunities that have long been available to Fortune 1000 companies, big banks, and institutions.
As a foundation to what I am going to be talking about, let’s look at the biggest mistakes investors make, regardless of what market or what instrument they are trading.
MISTAKE 1: TRADE AGAINST THE TREND
This is the number one mistake that investors make today. They trade against the trend of their positions. Remember, “The trend is your friend.”
Let’s look at a perfect example of this: Do you remember the company whose stock prices are depicted in Figure 1-1?
Yes, it’s Enron, and what has become known as the Enron debacle is a perfect example of investors trading against the trend. How about one of the biggest companies on Wall Street? Do you think that such a company would be a good investment for you portfolio? Probably so.
Look at Figure 1-1. Notice how the stock price is going down. The long-term trend on this is down—straight down. However, I want to point out a few things. First, there were a lot of Enron employees who loved the company. Most of the employees even took parts of their salaries as stocks and options.
Did you know that during the entire plunge of this stock, there was not one sell recommendation from a Wall Street analyst? Notice that as the stock went down from the $90 range, it had several retracements; that is, as the stock price was going down, it rallied and went back up a bit before going down again. As it was going down, what do you think investors were doing? They were buying. Why not—it was one of the biggest companies on Wall Street.
When the Enron stock price got to around the $65 mark, investors were somewhat relieved. They probably were saying, “Okay, it is now finally going back up.” Not so fast—the stock just retraced a little and started going back down again. Enron stock did this two more times, at $50 and $35, before falling off the map, so to speak. All the while, inventors were buying more.
MISTAKE 2: LISTING TO SO-CALLED EXPERTS
Look again at Figure 1-1. The entire way down, Enron stock had buy or hold recommendations from Wall Street analysts, never a sell. This is one reason why legislation was being discussed on Capitol Hill to solve this type of problem. The problem certainly was not limited to Enron. There was so much conflict of interest among analysts that most investors had a hard time keeping up with what was going on.
How many investors watch CNBC? Many, right? Well, where do you think the novice investors are getting their trading information? They get it from TV, newspapers, friends, and so on. The problem with this is that most of the information they are trading on is old, sometimes weeks old. You see this kind of thing happen all the time.
Let me give you an example. Let’s say that ABC Company just announced that it has the greatest new computer in the world and that it will revolutionize the industry. What do you think is going to happen to the stock? It will go up, sometimes very quickly. However, usually the stock will turn around and go back down just as quickly when the volume dies down.
You see, in the world of stocks, there are market makers. These indi- viduals have one objective in mind, and this is to make a fair and orderly market for a specific security. In the stock market, the reason a stock goes up is because there are more buyers than sellers, and the reason a stock goes down is because there are more sellers than buyers.
While the stock market is hard enough to trade with all the variables to keep in mind, the problem with the so-called experts is conflict of interest. The companies these experts work for are also market makers and own stocks. The opinions of these experts cannot be considered without considering their ulterior motives (see Figure 1-2).
Investor confidence is at an all-time low and has dropped dramatically as major investment firms are getting fined millions of dollars after recommending stocks to the public and yet at the same time sending internal memos and e-mails describing the lack of profit potential these same stocks actually had (see Figures 1-3 and 1-4).
I won’t mention the firm I am referring to, but the improprieties continue. However, here is some good news. As I commented earlier, there is a lot of legislation being introduced, if not passed, on Capitol Hill to help clear up some of these problems.
The New York Stock Exchange (NYSE), as a self-regulating body, has taken on the task of changing the way it operates and has also taken the lead in cleaning up these problems. All the proposed and forthcoming changes will make a difference and ultimately allow for a better trading environment.
Next, there is a common falsehood among traders that for every buyer, there is a seller. This is not true. That is what the market makers are for. If there is not enough buying in a stock, then the market maker will come in and lower the price until there is more interest. The same holds true for selling. If there is not enough selling, then the market maker will start raising the price until there is more selling interest. This cycle repeats many times and is the basis of what is known as support and resistance. I will talk more about these concepts later.
MISTAKE 3: UNWILLINGNESS TO SELL
You have to be willing to cut your losers. There is no reason to ride a loser all the way down. You have to let your winners outpace your losers. You will learn a lot more about this when I get into good money management. I have heard investors tell me that they can’t sell right now because they don’t want to take a loss. “It is only a loss on paper.” Okay, try spending it. It is a loss if you can’t spend it, such as the Enron example. It never came back.
You would have been better off having a stop loss on your trade and hav- ing gotten out with a 25 percent loss to trade another day. I will cover stop losses as a way to use money management in your trading later. On the other hand, I have had investors say such things to me as, “If I sell it, I will have to pay taxes.” Okay, if you have to pay taxes, why? Profit probably. As long as you have a plan for your taxes, don’t be afraid to take your gains as well.
MISTAKE 4: EMOTIONALLY INVOLVED
This is my favorite. Let’s look at Cisco Systems, a favorite story of mine to tell. I have personally experienced these changes in my portfolio, and my brother-in-law is a big salesman with the company.
The stock had split several times, and I bought some. It went back to $80, and I had dreams of retiring one day from trading this stock. A great many investors made millions on Cisco as it went to $80 and split several times, so surely I could do the same thing.
After hitting the $80 range in mid-2000, the trend reversed, and it was an excellent opportunity to short the stock if you had a crystal ball. How- ever, I, like many individual investors out there, loved the company.
As the stock went down, I said to my self, “Hey, Cisco at $60. Wow, now that’s a good buy.” So guess what? I bought more. As it continued to go down, I started saying, “Well, it’s got to go back up. It’s a good company.” It then dropped to $40. This is as low as it has been in a long time. The last time it was at $40, it went back to $80 several times (from the splits). This is the time to buy more.
Then Cisco went to $20. Now I again, like many other investors, said, “Wow! Well, I guess it is a good time to cost average down.” This is what the professionals were saying. It had to be right. Then low and behold, the stock kept going lower, all the way down to about $11. Now here I am saying, “Well, I guess it can’t go much lower.” So I bought some more. Ultimately, it lost 85 percent from its high, and most investors bought more as it went down—buy- ing into and adding to these positions. Why? Because of emotions.
Emotions and investing do not go hand and hand. Look at the Cisco chart for the time period I was referring to (Figure 1-5), and you will see how it had a few up trends (retracements). This is where all the investors were buying more.
Emotions—Here are a few things that I have said in the past while investing, and I am sure I was not alone:
“It will come back.”
“It’s a good company.”
“It can’t go any lower.”
“I can’t sell it now.”
“I have a feeling about this one.”
You might ask, then, “What can I do to invest wiser?” The answer is proper diversification. My grandmother told me so many times: “Don’t put all your eggs in one basket.” Guess what? I didn’t listen until it was too late.
There is no difference with investing; your portfolio is your basket, so why would you invest all your money in the stock market or, worse yet, all in one sector of the market.