It doesn't matter if your investing approach is fundamental or technical, timing trumps both when it comes to making or losing money.
Tip One: Don't fight the tape. Fight your emotions instead.
Since 1999, only 11 of the 525 biggest companies have negative correlations to the S&P 500 (SPY). More than a third have positive correlations greater than 50%.
|Clear Channel||CCO|| |
|Las Vegas Sands||LVS||90%|
|C B R E Group||CBG||87%|
This means it's easier to make money buying a horrible company in a rising market than a great company in a declining market.
It also means there is no single piece of information more relevant to making or losing money than determining whether the market is in an up or down trend.
But while positive correlations mean you can be more aggressive in an uptrend, it also means you're more susceptible to falling victim to your success.
Last month, Bloomberg published an article questioning the conventional theory of playing the hot hand. The article discussed the work of former derivatives trader John Coates, who makes his living studying trader biochemistry.
Mr. Coates' studies led him to conclude traders increase risk as they win, which inevitably causes big losses when hot streaks end.
As an investor, recognizing a market uptrend will help you make bigger profits. But, it also poses the secondary problem of making you too willing to take risk. To keep this in check, make sure you stick to your stock picking rules and if you find yourself reaching - or running too many victory laps - take a breather.
Tip Two: Volatile markets allow you to be more selective.
If markets are range bound or in a downtrend, you need to use volatility to your advantage.
The standard deviation of the markets has consistently increased since the 1960s, which means markets volatility is more likely to give you opportunities to enter and exit positions at the prices you want.
If markets are range bound or in a downtrend, it pays to be selective. If the stock you're interested in buying is bucking the trend and hitting new highs, avoid the temptation to chase it higher.
For example, simply look at a three year chart for Apple Computer (AAPL). During the market pullbacks in 2010 and 2011, investors got rewarded for patience with lower entry prices.
Instead of rushing in, wait for the inevitable pullback and dollar cost average into the position. After all, it's better to miss an opportunity than to go all-in ahead of a drop.
Tip Three: Improve Your Odds.
Professional gamblers understand more money is made when odds favor winning. Successful investors similarly look to improve odds by tracking the seasonal tendencies of markets, sectors and industries.
Throughout the year, particular baskets or individual stocks typically rise or fall. In many cases, whether stocks rise or fall depends on industry spending cycles. Knowing when these cycles are likely to positively or negatively impact your positions can help you capture more of your gain or avoid a likely loss.
Consider the performance history of the consumer discretionary ETF (XLY). Clearly, knowing its seasonal patterns provides an opportunity for bigger profits.
There are a number of resources you can use to learn about seasonality. You can visit free online sites like Yahoo (YHOO) Finance or Google (GOOG) Finance to download historical prices. And, of course you can keep an eye out here on Seeking Alpha.
Or, you can visit The Seasonal Investor site, offering pre-made seasonality databases across widely traded ETFs and over 1500 of the most heavily traded equities (I also write a quarterly ebook on the subject).
Either way, since there is no ringing bell telling you its time to buy or sell, arming yourself with information and thinking strategically about when you buy will help you keep more money in the win column.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.