When we look at nutrition from a sport perspective, we usually start by controlling the macros. I suggest the same procedure when looking at investments in financial instruments. Rather than picking stocks from news headlines, we'll look at three major factors that will determine the outcome of our stock picking.
Yes, I said it. All information regarding a stock is already factored into the price. So unless you have factor #2 (inside information), your guess is as good as an apes and as bad as Warren Buffet's. And the other way around.
Some people confuse luck with hard work. But it's always worth remembering that the hardest working people are not the highest paid ones. Will you have an edge if you browse Bloomberg an extra hour? Will reading the Financial Times make you feel smart and more informed?
The above could perhaps to some extent make you more lucky. To increase the chance to win in a lottery, it would be good to buy a lottery ticket. If you want to earn money with real estate, you actually have to buy a property. The more doors you knock on, the better chances you have. Factor #3 (trend) goes even deeper into how to make the circumstances more favorable.
2. Inside Trading
If you have too much luck, then it may raise suspiscion of inside trading. This is a reason why a lot of professionals refrain from buying securities completely. If the stock you bought ten-folds the next day, you might loose your job. For once you are ready to admit that it was pure luck, but now no one will believe you.
Previous performance is not a guarantee of future performance. But it's an indication. A lot of investments are done with this in mind. A lot of parents would be happy to have their kids go to Harvard. There is a clear trend of success there. It's all based on the school's previous performance. The same holds true for large pension funds. Sure, their portfolio managers are studying companies. But they are not betting on turn arounds, they are betting on trends.
Firstly, we will of course expose our investments to luck by actually buying something. Secondly, we will avoid newly established markets where inside trading is rampant. Thirdly, we will try to spot a trend in a favourable environment. And only then will we pick a stock.
Let me elaborate on the last point and give you an usable 5-step example of optimizing your circumstances.
1. Find out how your stock portfolio is taxed. What impact does your nationality and residency have? Would it be more favorable to incorporate or to use an insurance wrapper? Are long term investments taxed more favorably? Don't ask me, ask the tax authorities. After all, your tax money is paying their salaries.
2. Find out how much broker commission will be charged and if you have any alternatives. You can for instance buy deposit receipts of major stocks on several markets. Did you know that the settlement costs in the US are a tenth of what they are in Europe?
3. Switch off the news feed and look at statistics instead. Don't read the explanations and stories. The numbers in the statistics will tell you the story. You can for instance visit www.msci.com and upload country or industry specific stock market performance in Excel format. Sort the data to see which market or industry is popping.
4. Use your conclusion from the three previous steps to narrow down your choices.
Suddenly, it will seem as luck would be on your side.
Why is Explosive Mode publishing financial articles?
Athletes are usually paid in lump sums, whether it's prize money, sponsorships or for commercial appearances. Professional athletes tend to earn considerable amounts of money during their active careers and have to learn how to manage it in order to survive after their sports careers are over. Explosive Mode featured athlete Eric Snaell (the Fit Businessman) writes about financial topics that cater to these athletes. His experience in banking, equity investments and entreneurship provides valuable information that is not taught at schools. You can find out more about these investment strategies in his upcoming book Independent Mode (Resign Anytime).