Most investors confront the stock market like minnows confront the ocean. If they are lucky, they swim around and enjoy a few snacks before they end up as a tasty meal for someone else. Individual investors have a tendency to relinquish control of their financial fate. They invest their money in what they think are good stocks or mutual funds and then do nothing other than hope and pray that the investment seas will treat them kindly. When they do act, they do so out of emotion and without any sort of plan or strategy.
Typically investors have little appreciation of the substantial risks they take with their hard-earned capital by being passive. They buy stocks that are considered “safe” or “blue chip” and then abandon control over the situation and wonder why they earn mediocre returns. They rely on hope and luck rather than skill or strategy and are gamblers rather than risk-averse speculators.
My personal experience in the stock market has proven that it is possible for investors not only to protect their capital and control their destinies but to flourish much like a shark in the ocean. The essence of my Shark Investing approach is to embrace the benefits of being a smaller investor by being more active and aggressive. The logic of moving quickly to protect your capital in a volatile situation is obvious. However, the vast majority of investors not only choose to remain passive and inactive in this always risky and uncontrollable market environment, but also have been brainwashed into thinking this is the best approach.
This naive thinking about the market is primarily a function of misleading traditional beliefs that most of us never question. In addition, the powerful forces that dominate Wall Street tend to have interests that are counter to our own. Wall Street professionals and the financial media have convinced investors that there is no way to successfully invest other than to follow the traditional methods. Not so coincidentally, these methods are very lucrative for big institutions and those dispensing the advice. (See Chapter 5, “Why Conventional Investment Advice Ensures Mediocre Results.”)
Investors have had it pounded into them by Wall Street professionals that it is best to be inactive and forgiving when it comes to investments because, in the long run, things will likely turn out okay. Unfortunately, this conventional investment wisdom not only results in mediocre returns, but also carries an above-average risk of loss. Holding on to good stocks for the long term sounds great in theory. But when an investor holds on to the wrong stocks for the long term, the damage to his or her financial well-being compounds quickly. Compounding is a powerful financial tool that is the road to real wealth, but it cuts both ways and must be harnessed and controlled.
In most cases the traditional methods of Wall Street never even put investors into the best stocks to begin with. After the fact, we hear how profitable we would have been had we bought Microsoft, Intel, or whatever the big winner of the past might have been. Racking up big gains is always easy in retrospect, but financial advisors fail to tell us how difficult it is to pick a stock right now that has substantial potential and is worthy of being held for the long term. We earn lackluster returns while we seek out the big winners that we can hold for the long run. We also take the chance that our savings will erode if we pick the wrong stock and sit with it for years while we wait for it to produce.
Investors are lulled into passivity by pithy Wall Street sayings such as “Buy low, sell high,” “Find good stocks and hold them for the long run,” and “Don’t try to time the market, or you will surely miss the big move.” (See Chapter 6, “The Myths of Wall Street.”) Brokers and financial advisors constantly reassure troubled investors that, if they remain patient and passive, the highly researched stocks, selected by their expert analysts, are sure to bounce back and go ever higher.
Investors are told not to worry when their portfolio is bleeding red ink. They are actively encouraged to just hold on because the market is sure to turn and it would be a big mistake to sell and lock in a loss. The message from financial advisors is that “real” investors rely on the courage of their convictions and stick with certain “quality” stocks through thick and thin. Wall Street makes individual investors feel that changing their minds and acting aggressively to limit losses will damn them to financial hell.
In the world of traditional Wall Street, lower prices are never a cause for concern. Investors never lose money. They only experience endless “buying opportunities.” This is an excellent approach to the market as long as you have a never-ending stream of cash and an infinite time frame in which to wait for the payoff. But for those who live in the real world and who must deal with a steady diet of financial demands, the frustration of passively holding stocks that aren’t doing well is tremendous.
Those catchy little investment aphorisms that are so blithely tossed around by financial professionals and the media do contain some elements of truth. It really is common sense to “hold on to good stocks.” So we happily incorporate these trite and convenient ideas into how we approach the stock market and then incorrectly believe that we are doing the best we possibly can.
What else is the average investor to do? How can the lone investor beat the big, powerful Whales of Wall Street, who have superior information, huge amounts of capital, and the ability to manipulate what happens in the markets? The answer is that he or she must learn to exploit the very qualities that make the Whales so dominant. Individual investors must use the Whales’ strengths and inherent characteristics against them and create their own advantage.
A small, savvy group of investors has learned how to do just that. They understand how and why Wall Street operates the way it does and have found ways to use their small size and quickness to benefit from it. They are solitary hunters who move quickly and decisively when the time is right. These investors are the Sharks, and this book teaches you their secrets.
Technology Empowers the Little Guy
Shark Investors have been around as long as there has been a stock market, but for many years they were an exceedingly small group that had close ties to Wall Street. Generally they were wealthy, well-connected individuals and not just the average guy off the street.
That all changed as investing tools and methods became available through the Internet. Technology now makes it possible for anyone who is willing to put forth the effort to be a Shark Investor. In the past, the average investor had no choice but to rely on brokers, financial advisors, and the media for insight into and advice about the investing process. That is no longer the case.
Over the last decade the explosion of computers, satellite and cable TV, high-speed Internet, specialized financial media, and websites has greatly changed the tools that are available to the average investor. It is now possible to live virtually anywhere in the world and have the same investing tools that only professionals on Wall Street had in the past.
Even with all this new and fantastic technology and information, most people continue to invest their hard-earned money in much the same way they did decades ago. Investors now have accounts with online brokers, access to an overwhelming amount of investment advice on the Internet, and 24-hour financial television. But they are still advised that the best way to approach the market is the same way their grandfathers did.
Why don’t investors better use the modern tools that are available to them to improve their investment results?
There are two key reasons. First, many investors simply don’t know how to use investment tools and information effectively. Many software applications, websites, and information sources are designed to help with investing tasks, but they are so overwhelming, complex, and inconsistent that people often feel even more confused and uncertain about how to proceed. Buried in this flood of information are the tools that make it possible for anyone to be a Shark Investor.
A good example of an extremely valuable tool that many individual investors are unfamiliar with are stock charts (discussed in Chapter 9, “Charts: Navigating the Market Seas”). Stock charts are very helpful in implementing a winning investment strategy. They provide insight and structure, but there is a tendency to overcomplicate their use and to consider them useful for only hyperactive traders.
Many on Wall Street go so far as to actively discourage investors from using charts. They are often dismissed as nothing more than useless voodoo. This brings us to the second reason that technology tools are not adequately used to improve individual investing. Wall Street has convinced investors that it is downright dangerous to ignore traditional advice.
Wall Street wants investors to stick with conventional investing methods that produce commissions and fees. They want the individual investor to leave funds in their hands and be dependent on them for advice. The Whales of Wall Street don’t want aggressive, self-sufficient Investing Sharks to make waves in the investment sea. They want passive minnows who are totally dependent on them for costly and questionable advice.