5 Modern Rules Of Playing The Stock Market Game
During the great boom ignited with the baby-boomers generation, there seemed to be only 1 direction the stock market was moving – UP.
Yes, there might be some market corrections here and there , but the big picture was always about appreciation… until the market implosion of 2008.
The mortgage crisis of 2008 was not just an event cause by a few players in the financial industry, it was the result of collective “cowboy” corporate behavior that had been going on for decades.
Eventually something had got to give.
Somehow the players in this generation failed to kick the can down the road for the next generation like how previous generations have done. And the whole volcano erupted into a sea of red.
For the individual investor who does not manage millions of dollars, it was actually a day of reckoning. The events of 2008 finally laid bare what regular individuals have been suspicious of all the while… that the system is not what it is made out to be.
- How do you make investment decisions when you can’t trust whether the profits of a company are real or not?
- How can you short a stock with confidence when it’s inevitable financial collapse can be halted by governments unnaturally?
- How does a company obtain a value of $10bn when it hasn’t even started to generate profits?
This is the world of the modern stock market. A game that defies all common sense and makes a mockery of academic economic studies. A casino that a few players win BIG while the rest loses…
And here are 5 rules of playing this modern game of money.
1) Stocks have risks that are hidden from the eyes of the public
If you think that regulations that listed companies have to adhere to will protect you from fraudulent companies, you must be kidding yourself.
There have been numerous cases of companies cooking their books to present a beautiful picture of their financial health when in fact they are already in the later stages of stage 4 cancer.
Investors are of course, not school children. They do know about the risks involved with trading on the stock market… at least that’s how it’s supposed to be…
But I’d think that most would believe in good faith and won’t know that:
- uncovering an overstatement of earnings can send share prices plunging due to the P/E ratio
- financial media often reports on information that is available instead of being close to the ground
- brokers often offer better deals to a select clientele while the public buy at retail price
- public listed companies go bust more often than they imagine
- crashes in unrelated industries can send a panic shockwave into the whole market
Even if you consider all of the above risks as folklore, what if just one of them turn out to be true next week that affects one of the stocks you have bought heavily into?
Does anyone even need to reminded of the circus that was the internet bubble?
2) “Expert” tips will most probably cost you rather than help you
Look. I’ve been around the block.
I remember when I knew someone who was working for a listed company at a low level. But the manner in which he positively talked about his employer which made me think that he knew something the public doesn’t.
I thought that I was getting real inside information from a insider.
Actually it was just casual talk. But being the newbie I was, I interpreted that conversation wrongly and lost money.
Everybody and their dogs think that they are experts in equities. It’s just the way it is with the stock market.
This includes your stockbroker who is supposed to assist you.
With the “expert” advice that is constantly drummed into your head via the media, you usually:
- buy into stocks which you have absolutely no idea of
- buy into programs that lock you into some weird financial products that charges you exit penalties
- make bad trades that inevitably makes your broker rich
What’s up with all this?
What’s going up are usually the net worth of the people on the other end of your trades.
Taking free advice from “professionals” who you cannot ascertain with 100% confidence is on your side, is like walking into a used car sales gallery.
He draws you in with the attractive neon signs on the store front. Then sells you something as a baiting price. After which he gives you a discount while throwing a whole bucket load of freebies. And after the transaction is done will you realize that you have grossly overpaid for the car. It’s already too late.
I used to trust advisors who charge a subscription fee for investing newsletters that offer what I thought was great content. But when I kept getting hammered with upsells and paid “special” reports clearly written by aggressive copywriters, I realized that these businesses operate more like publishers.
They don’t unearth great information and tips. They just focus on creating exaggerated content to package with attention grabbing headlines and sell them to you.
The rule of thumb is never to make trades based on advice from others.
3) Conventional investment truths no longer hold true
If you start your stopwatch the moment you start a conversation with a stock “guru” of some sort, it would probably take 14 seconds before he throws in one of those stock investing cliches just to sound wise.
Yet if you probe deeper into whatever wise saying he threw into the discussion, he would always fall back on his own butt and acknowledge that it really “depends”.
The truth is that there no “rules of thumb” in the stock market. At least not anymore.
Rookies are most vulnerable to wise quotes as they have no idea what they are doing!
Here are just some supposedly timeless stock investing principles that no longer hold true in today’s global economy.
- Buy low, sell high
- Don’t follow the crowd
- Buy more to bring down your average per unit cost
If fact, they make so little sense these days that any expert caught giving out advice like these should be brought to court for manipulating the market via misleading rookies.
4) Big companies with household names can be just as reckless
Whoever told us that we can trust big companies need to get their head checked. Because after so many big brand fiascos that have gone on, only an ignorant investor would continue to have unwavering confidence in well-respected firms.
Huge corporations can be brought down to it’s knees… sometimes from the mistakes of one individual. In worst case scenarios, they can fold before you even have a chance to cash out.
You know why you won’t be able to cash out?
Because the Exchange would usually halt trading of their shares when there is impending bad news… which really defeats the purpose of a free trading market of securities.
You probably don’t need me to list down some examples of mega companies falling on the wrong side of the law. You would already know a lot of them if you even watch the news or read the papers once in a while.
The problem is that investors, especially individuals, never learn the lesson. They always feel that what ever setbacks are remote cases that were unique. Other companies would learn from the mistakes made and avoid stepping on the pitfalls of those before them.
I got news for you. They never learn. At least not all of them.
Let’s look at the simple problem of creative accounting for example. In the past, so many companies have cheated investors by painting a misleading picture of their financial statuses. Yet almost every year, a big name takes center stage for how it’s accounting practices are artificially inflating their revenue and profits.
In terms of stocks investing, you cant place more trust in a company just because it has a big name. In fact, the bigger they are, the more leverage they have in bending the rules.
5) Don’t leave it to the government to protect you
So you still think the authorities will protect you from bad practices of listed companies? Even after 2008?
It’s time to grow up!
If anything, 2008 taught us that governments are more interested in protecting corporations rather than individuals.
I get it. The bailouts of 2008 and beyond were ultimately meant to protect the general public… so that they can continue to be taxed…
But do take note of the distinction between the general public and the individual investors. When you are investing, loss is a legitimate outcome from your activities. So there is little you can do to get your money back from loss due to corporate misbehavior… except take the case to court.
You are really left to fend for yourself in the modern world of stock market investing. The days where you can trust a company to concentrate on what it does best and slow organically have long gone.
The new rules investing dictates that you should never get any advice from third parties. Keep your basic concepts in mind. And at the most, treat those advice as just information or noise. Ultimately, you need to do your own calculations and decide based on the information you have deciphered yourself from research.