Day trading is a stupid endeavor

5 stupid stock market wisdoms - These phrases are always used incorrectly

You hear them again and again. The supposedly profound sayings about speculating, trading and investing. But unfortunately all too often in the wrong context.

In many conversations, discussions and forum posts, wisdom is spread almost like a prayer wheel that you have picked up somewhere. They are used whenever you think they would support your argument.

Too bad that many of the stock market wisdom has been taken out of context and can therefore be dangerously misinterpreted. And even more stupid if someone tries to make a special impression with the wrong use of these sayings.

For the professional, on the other hand, these propagated stock market stupidities are a very good indicator for assessing the professional quality of the people they are talking to.

In the following, I'd like to address five of the most annoying sayings that I just can't hear anymore. Not because they are untrue. On the contrary, I would also sign some of them. But they are constantly being used incorrectly and thus pervert the actual message.

In order to properly classify and understand everything, knowledge of the definition of speculators, traders and investors is necessary.

# 1 You can't be better than the market, the market is always right

Anyone who pulls the “You can't beat the market anyway” joker will immediately be disqualified from further conversations. On a knowledge scale of 1 -10 in relation to the stock market, this interlocutor is on a smooth ZERO.

The interesting thing is that you often hear this argument from supposedly highly educated people. I've even heard this saying from a university professor (specializing in finance and risk allocation) and a former fund manager! These people believe in the Market Efficiency HYPOTHESIS and make wrong conclusions.

In the case of the professor, he has to be credited with the fact that his focus is on risk minimization, not on performance (beta-beta-beta instead of return-return-return). And the fund manager was probably limited in his ability to act. When managing a lot of money, the whole thing is completely different.

That is what is meant by it

Behind this statement is the following belief: No matter what you do as an INDIVIDUAL when trading or investing, in the long term your own portfolio return will align with the total market return. Active action can therefore not bring any advantage. So you don't even need to make an effort, trading is something for dream dancers.

That is why the statement is stupid

Why this is not true, I am listing here in an incomplete list:

  1. There is no such thing as “the market”. The relevant market is a selection of stocks, industries, countries, capitalization levels, company characteristics, chart constellations or the like. Each selection already has fundamentally different return expectations.
  2. Anyone who believes they cannot invest better than the average as an individual must also believe that they can never be better than the average in exams such as classwork. What can't be, look at the "nerd"?
  3. If there are people who are better than average, then some must be worse than average. However, the argument is often only aimed at an upper limit, while no one would seriously doubt that one can definitely be worse.
  4. A random selection of stocks is assumed, but nobody can do it with any sense.
  5. A buy & hold strategy is often assumed.
  6. The general difference between economic and scientific studies was not understood (the argument is based on the market efficiency hypothesis): While natural science observes the world and derives laws, regularities or significant facts from it, economic theory CREATES a world (using assumptions) in order to be able to demonstrate an abstract principle as isolated and precisely as possible.
  7. No assumption is made about the time horizon.
  8. No assumption is made about position management. If I only invest in growth stocks and exit when the fundamentals align with a market average, then I'll only be there in the agglomeration phases, but not in the saturation phase.

That's actually behind it

The idea that you only achieve average and that you can't change that comes from the market efficiency hypothesis from the 1980s. Here, under the assumption of a perfect market (i.e. everyone is always informed about everything, there is 100% competition (= every product is always interchangeable = whether Apple or PC, whether Cola or Pepsi is irrelevant), there are no transaction costs, etc. .) assumes that you would never pay too high or too low a price for a share.

Everything is always priced in. But it is well known that problems arise over the course of time when companies or entire markets change: They become larger or smaller, they are recreated or abolished. Companies fail and benefit from this. This information is only available up to the present and not into the future.

So if nobody knows at the moment that Alphabet already has a new sales driver up its sleeve, then even a market cannot react to it. He only reacts when the "bomb burst".

But of course you could have a vague expectation: Alphabet, Tesla, Apple and Co are more likely to have further growth and innovations than Daimler or Deutsche Bahn, for example. So who do you trust to grow? And is it actually already priced in? Certainly not.

An application of this slogan can therefore only find approval in scientific specialist discussions and only has sufficient informative value in the model world. But investing is not a science, it is a craft. Or have you perhaps made the observation that academics in particular are good investors? Spoiler: That is not the case. I would even say otherwise.

So whoever brings this slogan is either too theory-heavy on the subject of investing, is too academic, or simply doesn't know that there is a discrepancy between general theory and tangible practice.

# 2 Back and forth makes pocket empty

The emerging ranks of newcomer value investors seem to have discovered this statement as their mantra. You enter in a market phase (from 2016) where it only makes sense to hold on because virtually every share rises towards the sky.

That is what is meant by it

This saying is always used when someone in stock communities comes up with the idea of ​​introducing a trading approach. The commentators then want to prevent someone from trading stocks that have already been bought (from time to time). Because, in their opinion, only passive holding of stocks brings the highest return. Or? And, after all, a trade also costs transaction costs!

Unfortunately, the real core message is different.

That is why the statement is stupid

"Back and forth makes your pocket empty" is just a blanket statement in the sense of the above opinion, which testifies to little knowledge about the topic of trading. I don't want to deny expertise in investing. But even the most fundamentally positioned investor has to part with an investment from time to time.

However, this statement negates the sale in favor of Buy & Hold. With this, the investor could get stuck on toxic papers even though he actually saw it coming.

Then a few extra transaction costs are a far lesser evil.

That's actually behind it

“Back and forth empties your pocket” has a different, more differentiated basis. Actually, this saying was used to counteract the "shaky". In other words, those who are strongly guided by their emotions and, for example, want to react to any news about the company or the political situation.

In addition, the idea shows that there is a lack of strategic foundations. Anyone who hears today that a company is great, buys it and has doubts again tomorrow has no idea what he is doing. And that's the big neck breaker for investors and traders. Only transaction costs are paid, but no price gains are realized.

This is very extreme in day trading. The emotions fear and greed in combination with a ticking clock lead to short-circuit actions and make you sell in corrections, only to get back on at the end of the movement (see Fig. 1).

Then back and forth will definitely empty your pockets.

# 3 The thing about the sleeping pills, stocks, and getting rich

One of André Kostolany's best-known sayings is “Buy stocks, take sleeping pills and stop looking at papers. After many years you will see: You are rich. "

The famous speculator had already complained during his lifetime that his statement had been misinterpreted and had initially tried to correct it. But it was already too late, the quote had developed an unstoppable momentum of its own.

That is what is meant by it

This comment is also often used by long-term investors to clarify what a buy & hold strategy should look like. It's that simple, after all: time beats timing. Just wait and wait and wait.

What if a stock's price goes down? What the hell. Everything that falls, rises again ...

That is why this statement is stupid

Unfortunately, André Kostolany never intended to create an investor mantra. He was not an investor and has resisted this label all his life. He was a speculator! And it is important for a speculator to anticipate a trend, as well as active trading on the basis of bets.

And are for a speculator Context and timing the statement is of particular importance. However, this is often completely left out (or reinterpreted) in the context of the quote, which makes the quote grossly wrong and extremely dangerous.

We certainly all remember how some people who bet on unconditional buy & hold did at the beginning of the new millennium. When prices go down, you can remember the sleeping pill and just stay in the T-share. Will rise again sometime. Most certainly!

Ironically, in the situation (1998) the same Kostolany warned of a collapse of the markets and was laughed at:

https://www.youtube.com/embed/SHW6MscSolc

That's actually behind it

The quote is from the post-Cold War era. Germany had just reunited and the Eastern bloc had disintegrated. The Cold War suddenly ended just like that. Many were unsure of what might come next and asked André Kostolany what to invest in now.

Kostolany was a great macroeconomic thinker and a burning critic of the socialist idea (as it is an enemy of prosperity and freedom) and knew that peace would last for a long time.

On the other hand, he never gave a public tip.

But in times of peace through the disappearance of the affluent killer socialism, you didn't have to be particularly bright to understand that a golden age would now dawn. Therefore, he (rightly) speculated on a bull market lasting at least 20-30 years. And in such a market environment, it simply doesn't matter which stocks you hold. The main thing is to keep.

So he allowed himself to be “persuaded” to make his investment recommendation. Take sleeping pills NOW, buy stocks, then get rich. The new great peace does the rest.

He never related this statement to individual stocks, only to the overall development of the global economy. That a solar world will rise and sail down gloriously cannot be justified on the basis of this stock market slogan.

A quarter of a century has passed since then. Time has proven him right in relation to the overall market (except for the New Economy, which he warned against). However, it is not entirely clear how long this statement will be valid. It was only one, after all situation-related assessment, not a general tip on how to deal with stocks.

According to Ei des Kostolany, the pendulum could swing back soon: According to him, sooner or later cheap money ends up on the stock exchange and causes price increases there. If money becomes more expensive again (interest rate hikes by central banks), money is also withdrawn from the financial market.

We can then presumably adjust to slower rising or based markets.

The US has raised interest rates several times. The ECB will certainly follow suit soon. What will happen to the stock market? Will Kostolany live on as the nostradamus of the financial market? The chances are good.

# 4 The connection between money and speculating

“Anyone who has a lot of money can speculate; those who have little money are not allowed to speculate; if you have no money, you have to speculate. "

This stock market slogan also comes from André Kostolany. In itself, you can't say anything about it. But unfortunately this saying is also misinterpreted and used in the wrong context.

That is what is meant by it

If you read this saying somewhere, it is often used in a diffuse trading context. One wants to scare a novice trader with a small bank account. He should better still save and do “solid investing”, he couldn't afford anything else as long as he only had a few thousand euros. But that is - we already suspect it - simply misunderstood.

That is why the statement is stupid

Someone who throws something like this at a trader has no idea how speculation, trading and investing are different. Most of the time, these are novice investors who don't think outside the box. They believe the lies of others that trading is a fundamentally unlucky or even reprehensible undertaking. They often just don't know any better themselves.

Speculation is unthinkable for a rule-based trader. In order for the stock market wisdom to be appropriate, the citing must not only have knowledge about trading, but also correctly identify it as a speculator. But that doesn't happen in the vast majority of cases. Only: for no one else but speculators, this quote makes sense at all.

That's actually behind it

In addition to long-term, fundamental investing and rather short-term, rule-based trading, there is also the discipline of speculation. It thrives on anticipating certain developments in the market through discretionary, interdisciplinary anticipation.

This means, for example: Kostolany believes that he knows that if interest rates rise, the markets will soon collapse. Not immediately, but in the medium term. Now he is waiting for the first signs and it is best to get out shortly beforehand. Only then does the market (maybe) develop in that direction.

Another example would be a trader who shorts a bull market in order to be prepared for a sharp correction that follows. He speculates on a turnaroundthat cannot be seen.

In contrast, a trader would not short order until he did clear signs for a turning point.

We see that speculating is a fundamentally different approach. To a bet. And you can only bet if you consider your stake as play money (a lot of money), or if you have no choice but to take the risk, there no money available is.

But if you have to budget, you shouldn't bet. He should be strategic and get the odds on his side instead of betting too hard on a large but unlikely win.

# 5 Not all eggs in one basket, lack of diversification is dangerous

"Have I diversified enough?" - This is the question that many newcomers ask in forums and post a portfolio with 20-30 stocks from a wide variety of industries. After all, they are told everywhere that they absolutely must have to diversify as much as possibleso that they do not suffer total loss. Diversification is often very subjective.

That is what is meant by it

There are people who believe that it is imperative that you spread your money widely. And they try to suggest that to everyone who does something like that with the stock market. Everything else is totally dangerous, a sector flash crash can always occur! Or so. In any case, you can't just buy internet stocks. What if my mom breaks the internet again tonight? Then you stand there stupid! Better buy the MSCI World.

That is why the statement is stupid

If a layperson advises another layperson to diversify, then again only generalizations are made. In fact, it makes sense to diversify. But the degree of diversification is, roughly speaking, inversely proportional to the trading frequency.

Because if you hold shares and no longer pay attention to them (not to say: neglected), you must necessarily diversify. But an attentive investor or trader can reduce diversification. He can have a lot fewer stocks in his portfolio and still use a much safer strategy.

One could compare the situation to a shepherd:

If he has 1,000 sheep, he cannot take care of each one. He does not notice whether someone is sick or perhaps has already died. He just doesn't care.As long as half of the herd is not carried away, everything is fine.

With only 10 sheep, however, he always has an overview. As soon as one is conspicuous, a decision is made whether it is only being observed or whether the slaughtering process must be initiated immediately. Before the sheep can become a threat, it will be removed and perhaps replaced.

That's actually behind it

Without the previous question about the trading frequency, or at least the knowledge about the market proximity of the counterpart, one cannot make an adequate statement about the optimal degree of diversification.

So if a newcomer to the stock market wants an external assessment of whether his portfolio is diversified enough, he basically always has to indicate how much he wants to take care of his positions: how often he looks into his portfolio and how he wants to react.

Of course, there is always the risk of a sudden loss of value. Everyone deals with it differently:

  • The passive investor has as many values ​​as possible in his portfolio. He doesn't even notice.
  • The active investor looks for strategic exit targets. He sees the sick position, but only shoots it down based on fundamental decisions.
  • The trader (general) has already chosen his position size based on the maximum loss (2% rule).
  • The long-term trader hedges every position with a stop loss. His tolerance for loss is low and reacts immediately.
  • The short-term trader lends a hand as soon as something "twitches". He's mostly out long ago when everyone else groans.

Conclusion

There are a lot of stock market wisdom that one comes across again and again. They all have a true core and are easy to understand from their origins. But what uninformed market participants make of this wisdom is stock market stupidity.

These stupidities are best ignored and under no circumstances included in your own vocabulary unless you have 100% understood the circumstances under which they make sense.

Because whoever uses them incorrectly will always immediately come out as an ignorant beginner in conversations and discussions. As someone who still has a long way to go to finally reach the Olympus of successful 10% outperformers.