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October
03
2023

Why I QUIT Investing
Greg Guenthner

I have a special note for you today.

But first, let’s take a look at the markets…

As I type this note, stocks are attempting to post a modest bounce following another rough trading week.

But the rally isn’t drumming up too much excitement. In fact, most stocks are sinking as the September struggle remains in full effect.

Friday’s action was especially telling. No buyers showed up late in the day despite oversold conditions. When the dust settled, the S&P finished the week down nearly 3%, marking its third consecutive week in the red.

The market weakness we’ve seen this month shouldn’t surprise anyone who’s paid close attention to the averages this year. Remember, stocks don’t move higher in a straight line. Pullbacks and corrections are not only normal, but necessary. If anything, you should feel uneasy if the averages don’t retreat at least 5 – 10% a couple times a year.

We can study seasonal trends to try to determine when the market will hit these rough patches. For instance, the S&P tends to flame out around the end of June during a typical pre-election year, and remain in a choppy range until a year-end push.

The averages are following this pre-election year script, with the minor exception of a strong summer rally that peaked at the end of July. August is generally a weaker performing month (check). Then, September and October get a little hairy (double check). If this pre-election year correlation continues, we can look forward to a final push higher into December.

But for now, all eyes are on the averages for a bounce.

Unfortunately, it might not be the bounce the bulls have been waiting for…

In fact, we might see a weak relief rally that leads to additional downside into October.

Regardless, the next market bounce will offer important information related to the market’s health – and how I’ll be looking to trade heading into the fourth quarter.

But I don’t care if the market rises or falls this week, next week, or next year.

This is simply information I can use to plan and execute my trading plan.

What is a Trader?

Trading was much easier during the first half of the year. Stocks were in rally mode and the gains piled up quickly.

Now that the market’s getting a little dicey, I figured it’s a good time to take a step back and re-introduce myself.

My name is Greg Guenthner, but everyone around here calls me Gunner. I’ve been swimming in the shark infested waters that we call the markets for nearly two decades.

I considered myself an “investor” in the early days of my career. But the Great Financial Crisis convinced me to master the true forces powering the markets, sparking a quest that led me to classical charting, technical analysis, and showing anyone who will listen how they can learn to think like a trader… and change their life.

But what is a trader?

You might think of a caffeine-addled maniac, frantically mashing his keyboard as he stares at a wall of computer monitors. But this couldn’t be further from the truth. I love markets because of the freedom it offers to anyone who desires to learn and trade. Sitting at a computer all day doesn’t sound like freedom to me…

Truth is, you don’t have to tie yourself to a glowing screen in a dark room to trade. The vast majority of successful traders in the long-term aren’t even daytraders. In fact, some of the most successful traders I know are only buying or selling a couple times a week – sometimes even less.

Trading isn’t about timeframes. It’s about mindset.

This doesn’t mean you have to bury your head in the sand and avoid any type of news or discussion about economics, the Fed, valuations, or any other market narratives floating around. Quite the opposite! I’m actively engaged with market news and events. And just like any other human, I have my own thoughts and opinions on these subjects.

But because I think like a trader, I’ve learned to compartmentalize this information and only trade what’s happening in front of my face.

Riding Waves 

I don’t care if the market is trending higher or lower. I’m not a bull or a bear. I’m simply taking advantage of opportunities when they present themselves – long or short.

Over at The Trading Desk, we surfed big rallies all summer. But when the market began to roll over in early September, we traded our longs for shorts. With the exception of a quick play on the uranium breakout, we’ve been loading up on puts all month.

Right now, we have open puts on two slumping tech stocks – and we just booked triple-digit gains on a bearish crypto miner bet. While most investors are anxiously watching their long-term holdings give back their summer gains, we’re trading the downside action and booking profits.

The market weakness we’re seeing right now might turn into a bigger correction. Or, the bulls might step in and save the day. We just don’t know. No one does!

Remember, there were plenty of good reasons to avoid stocks back in January, just as there were legitimate reasons for bulls to hang onto their stocks back in August.

But if you’re thinking like a trader, you’ve prepared for every scenario. You took some profits on your longer-term positions in July and August when the market was running hot. You honored your stop losses on the trades that didn’t work out. And you continue to let price dictate your decisions.

The result is a trading account that consistently grows – whether the market is trending up, down, or sideways.

We have been discussing 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.

I’ll write more about these ideas next week…

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

 

 

Greg Guenthner, CMT, is chief strategist at Forge Research Group. He has spent the better part of the past two decades developing long-term and short-term strategies with a single goal in mind: to help everyday investors generate outstanding returns and control their financial futures. Greg’s charts, analysis, and insights have appeared in Marketwatch, Forbes, Yahoo Finance, and many other financial publications.

 

 

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