“How do I make money in the market?”
This is a question I get a lot from friends and family or someone I just met that knows what I do for work.
What’s funny is that they don’t ask it quite like that. They won’t ask, “JC how do I make money in the stock market?” even though that’s what they really mean to say. It’s usually more like, “Which pot stock do I buy?” or “Which Crypto Currency should I buy?” depending on where we are in the cycle. It’s rarely an “if,” and more of a “which one?”
The way I see it, you can add the same amount of money every month for decades and just let it compound. If you’re disciplined enough to do it (most of you aren’t), I can see a good case for that strategy. But if you’re looking to get into more specific trades or investments, I think a well-defined risk versus reward strategy is the only way to profit. If you can’t manage risk responsibly you’ll be gone soon.
I study a lot of the greatest investors of all time. Especially the mistakes they have made. For instance, Warren Buffet made a mistake early in his career – had he not done that he would be worth twice what he’s worth today. All because he was just being a little bit stubborn.
What approach you take depends on who you are and what your objectives are.
But there are two basic approaches that require two very simple rules.
Rule #1: Passive Consistency
For the majority of investors, they should ideally be putting money away every month. Every single month. Same amount.
What that does is it gives you entry points where you’re going to be buying at the height of the market. But you’re also going to be buying at the bottom of the market – and everywhere in between.
And because you’re consistent – that’s the main thing. As long as you’re putting in the same amount every month, all of that is going to compound and you’re going to win at the end of the day.
By owning the S&P 500, for instance, at the end of the day there is a momentum strategy built in because the bigger the company gets the more of the company the S&P 500 own.
For the majority of investors, I think that’s a good idea, if you have the discipline to do it.
Rule #2: Active Consistency
For traders and swing traders – anybody who’s more active – it’s also a matter of being consistent, in my opinion.
I think it’s identifying where you’re wrong before you enter the trade, instead of just buying and hoping for the best. There needs to be somewhere between where you buy it and zero, where you decide “hey, I’m wrong.” And then have your potential reward exponentially greater than that.
IF you can do that consistently and have risk/reward skewed in your favor? I think at the end of the day you win. I see it all the time.
As a reminder, I’ll be in Washington D.C. October 10-12 for this year’s edition of the Irrational Economic Summit.
It’s really an excellent event that Harry Dent and his team at Dent Research put on. And this year I’ll be speaking at it. So if you’re in the Mid-Atlantic area and want to talk technical analysis in October, the National Harbor is the place to be.