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When I coach investors and traders, I’m often asked what I think are the most-common, most-ruinous mistakes that investors make. Unfortunately, there are a lot of them.
And these days, it seems like investors are making almost all of them at the same time.
There are mistakes like risking too much money on a single trade or investment … not using protective stops … not using disciplined money management … trading too often … not doing your homework … taking on too big a position in any market … not diversifying enough … and on and on.
Then there are mistakes like not knowing when to trade, and equally important, knowing when not to trade or invest, like today’s sideways markets.
Over time, I will explore each and every one of the above in greater detail, and more, to help you learn how to become a better investor and trader.
But in today’s column, I want to cover what I think is the most-dangerous mistake investors make, bar none. It’s having a set of preconceived notions about what markets can and can’t do.
Consider this weekend’s Doha meeting on oil prices. There was no agreement reached. And what happened Monday morning?
Oil prices (logically you might say) crashed, nearly 7 full percent.
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| Oil prices crashed &mdash but then quickly bounced back after the Doha meeting. |
But then what happened? Oil prices roared right back, ending the day virtually unchanged.
Why did that happen?
Because longer term, oil is already back in a bull market, and savvy investors are buying the dips. That’s why.
So you see, the fact of the matter is that markets can do whatever they want to do. But they are also never wrong. Markets are never irrational.
They are what they are, and if you don’t understand a market, it’s not the market’s fault; the fault lies instead with your analysis.
For instance, have you ever heard someone say, "A market is defying all logic"?
Or that a market is “disconnected from its underlying fundamentals”?
I’m sure you have. I hear those kinds of phrases all the time on shows on Bloomberg and CNBC.
But the fact of the matter is that …
Markets NEVER defy logic.
And they never defy the fundamentals.
Only people defy logic. Only people can make such statements about fundamental forces as well, because when a market is allegedly defying fundamentals, what it’s really doing is operating on fundamental forces that the analyst or investor simply hasn’t figured out yet.
I fully realize that what I’m talking about here is hard to grasp at first. But if you take the time to think deep and hard about what I’m saying, you will elevate your trading and investing to a whole new level. Markets are never wrong. Only people are.
Especially dangerous for most traders and investors is getting caught up in the various "market myths" that are out there.
For instance, how many times have you heard that rising interest rates are bad for the stock market, and that declining rates are good for stocks?
If you’re like any average investor, you’ve heard that theory literally hundreds, if not thousands, of times. Tune into any media show today, and I’m sure you’ll hear it at least once, if not more.
Most stock brokers, and the majority of analysts and newsletter editors, espouse the same causal relationship between interest rates and stock prices.
But the fact of the matter, the plain truth, is that there is no “standard relationship” between interest rates and stock prices. Period.
Consider the period from March 2000 to October 2002, where the federal funds rate declined from 5.85% to 1.75%, and the Nasdaq plunged 78%. Put simply, stocks and interest rates went down together! Exactly the opposite of what most would expect.
Or the period from March 2003 to October 2007, where the federal funds rate more than tripled and rose from 1.25% to 4.75% …
And the Dow exploded higher, launching from 7,992 to 13,930 — a 74% gain! Stocks and interest rates went higher together!
The fact of the matter is that the relationship between interest rates and stock prices varies considerably depending upon a host of factors, including the value of the dollar, inflation and where the economy is in terms of the economic cycle.
But the bottom line is this: Never assume anything and never, ever get caught in conventional thought about a market or you will most likely lose your shirt.
Let’s consider another myth that rising oil prices are bearish for stocks. That’s a bunch of baloney, too.
The fact of the matter is that there have been plenty of times when rising oil prices were bullish for stocks … and where falling oil and energy prices were bearish. Exactly the opposite of what most conventional thought tells you.
Or consider the normal view about a country’s widening trade deficit. The common theory is that a widening trade deficit is bad for stock prices and a narrowing deficit is good.
But history proves that it is entirely wrong, and nothing more than a myth.
Fact: From 1976 to 1998, the U.S. trade deficit ballooned from $6.08 billion to $166.14 billion, and guess what? The Dow Jones Industrials went from 848.63 to 9,343.64!
In truth, the relationship between the trade deficit/surplus and stock prices is exactly the opposite of what most pundits claim.
Or consider the myth about corporate earnings that says they have to rise for stock prices to continue higher. But from 1973 to 1975, the combined earnings of the S&P 500 companies rose strongly for six consecutive quarters, yet the S&P 500 Index fell more than 24%.
Moreover, according to research conducted by analyst Paul Kedrosky, since 1960, the average annual return on the S&P 500 was greatest when earnings were falling at a clip of 10% or more … while the smallest returns on the S&P 500 occurred when earnings were growing at up to 10% per annum!
In other words, rising corporate earnings does not guarantee rising stock prices, by any means. Nor do falling corporate earnings guarantee falling stock prices!
There are lots of myths or biases out there about relationships between economic fundamentals and markets, or between markets and other markets.
But the fact of the matter is that almost all of them are exactly that: Myths, and nothing more.
The bottom line: To avoid making the biggest investing and trading blunders …
- Never assume anything when it comes to the markets …
- Question everything, and most of all …
- Think independently!
Right now, gold is trying to bounce a bit. But it won’t get far. It’s headed lower overall, probably to below $1,200 an ounce …
Before it bottoms for good, in a sort of double-bottom way. Same for mining shares.
The stock market, meanwhile, is also bouncing. But don’t be deceived: It’s headed lower, too. It has not broken out yet.
Stay tuned and best wishes,
Larry
P.S. To help you get ready to take full advantage of the bull market of a lifetime, I want to send you a complete Dow 31,000 Preparedness Kit — five distinct free reports! The first free report spells out step-by-step what you must do now to position yourself for amazing profits (and protection) over the next two years. Click here to download now!
bob April 24, 2016
larry was right about his april cycle if you watched his video in jan ! BOB
Deam Striker April 23, 2016
Naw, the most ruinous mistake investors make is holding investments in, and represented by, the Dollar, also called “Money”.
When the Great Global Collapse finally hits, those investments will disappear along with this GOVERNment which prints Fiat “Money”. Enjoy the slide.
George April 23, 2016
Larry,
Could you share your thoughts about graphite/graphene market and graphite miners? Also, lithium miners?
Thank you.
Rick April 23, 2016
Thanks Larry, always enjoy hearing your thoughts. I also enjoy hearing from those that take time to write in. In my short time in the markets and investing I have noticed it’s like sports . When a new football season begins, everyone can give reasons why this team or that team can win the duper bowl. But stuff happens along the way. Same with the economy. ????
I kind of enjoy trading the simple S&P e mini futures. See a good set up, take the trade, hit your target snd get out. Certainly not my retirement money or my long them investments, but it is fun , most days.
James April 22, 2016
Individual consumers have both rational and irrational spending. The Market determines the price of things. It doesn’t always have to follow logic.
al April 22, 2016
Larry u still my hero. Just got tired of waiting so I backed the truck up with silver at 14 dollars and gold at 1100 hundred so for I’m looking pretty good.just do my own thing I still like listening to your thoughts. …keep up the heard work…
DLF April 21, 2016
<<>>
I agree with Larry. Everyone makes investing so difficult with all the free and paid advice. Its really simple. Pick 10 to 20 good paying dividend stocks. Put 10% of your money in a Precious Metals mining stock that pays a dividend. Pick companies that will be around in the future. That’s all Warren Buffet does. I got dividends coming in all the time. All I do is buy more dividend stocks with free money coming in. Since the lows in precious metal mining stocks, I am way above 10% of my money in it. If the USA stock market fails, the world fails period. I guess you can survive if you live on a mountain, raise your own live stock, plant your own food [can it], have a windmill and solar panels on your house, fresh water from a stream [doubt it]. So everyone stop crying and live your life to the fullest, enjoy it, while it lasts and stop worrying about making money. Everyone that writes here are all set in life anyways.
April 20, 2016
why does the market keep going up? i don’t understand, everything is so negative???
what next? gold will do down?
Peter April 21, 2016
MANIPULATION !!!! But the crash is coming, better have some gold and silver. It may be your salvation.
randy April 21, 2016
the last few years it goes up when the fed gooses it, that’s why. all markets are rigged.
Carman April 20, 2016
B.M., you had the exact same question I had when reading this column. Why didn’t Larry mention anything about the manipulation. This is big news and could change things. I want to hear his take on it.
F151 April 20, 2016
Larry,
Thank you for pointing out all of these market canards. This list needs to repeated every few months. The one I constantly hear from the talking heads on CNBC/FBN/Bloomberg is the myth that corporate earnings have a direct correlation to the rise or fall of the markets. For individual stocks, they probably do for a few days after earnings announcements……for the market as a whole over time……the correlation is poor.
Old Jack April 20, 2016
Larry is right about one thing. The markets will act as they wish, usually driven by human emotion, which is what makes them so difficult to predict in the short term. As for the correlation between interest rates and stocks in his examples, I think it is important to remember that as stocks climbed along with interest rates in the periods 2000 – 2002 and 2003 – 2007 that this was more likely a warning sign (ie bad for stocks) as look what happened at the end of each of these periods. So the basic premise is not that rising interest rates are by themselves bad for stocks but that it is a red flag that investors are caught up in a frenzy of greed rather than the fundamentals of what should be driving stocks. In this scenario the best advice comes from Warren Buffet. Be fearful when others are not. As my old father used to tell me over 50 years ago, greed in investing as in business is a terrible thing and will more often end in disaster rather than success.
Concerned gold guy April 20, 2016
Why would you wait to buy physical gold and silver? The risk of waiting to potential save 5% back down to $1,200? Seems extremely foolish. I would not wait if I were you. Larry is a day trader. Be careful not to miss the boat everyone. He’s been right before, but wrong even more. Charts are one thing… Gold and silver sometimes defies all charts. Can’t control the world events!
David C. April 20, 2016
To be fair to Larry he did say in a recent post, and the RWR, that he didn’t expect Gold to pull back much, only to $1,180, so I agree with you why wait to buy when the downside appears to be only about 3%; interestingly though Larry is still forecasting a 20% to 30% pull back in the Miners if you look at his buy in prices. I think that Larry’s forecasts in the RWR are much more conservative that his Trading Service, something he points out himself.
April 20, 2016
look at the charts. the only time there’s demand for gold is if stocks go down. this has been going on for a really, really long time. if stocks go down, gold will go up. do you think stocks are going down?
George Willard April 20, 2016
why are miners so strong here? GDX seems to be breaking out of a rising wedge…
Stu April 20, 2016
Just raised the same question I always have about markets and everything else in life. Which way is up?
Karin April 20, 2016
It depends where you are
April 20, 2016
everything in this world is about supply & demand. it’s why the market is always right, as larry said.
Mark April 20, 2016
If gold is going to 1,200 or lower where is silver going? 12.00 or lower? Do you ever respond to comments by your readers?
UDO April 20, 2016
Mark ,
NO
NO
NO
S Murray April 20, 2016
Great insight Larry! Keep up the good work.
Will April 20, 2016
In this day and age of falsified interest rates, EPS bloated by stock buy backs, more attention paid to hype than GAAP, and hidden hands pulling strings; we certainly have to think independently and not assume this year will be the same as recent years. So this makes me question the concept of cycles where in the past there was no ZIRP or NIRP. Can you clarify this for me please, as this is why until now I have no faith in cycles.
David C. April 20, 2016
Will, you are thinking along the same lines as I do. A lot of cycle and technical analysis does not seem to work at this time mainly, I think, because there is so much manipulation with QE and ZIRP distorting the picture; so I believe that a lot of conservative investors are probably in cash.
Will April 20, 2016
David, I totally agree with your reply; and would like to add that I consider physical gold and silver as part of cash holdings. Not only that, but the part of cash that is showing better returns than currencies these days. The eagle flies higher than the dove.
Richard April 20, 2016
Good thoughts. Right on. rat
Robert Setele April 20, 2016
Larry, What is going on with silver ? Up to about $17.08 /oz this morning. You said to buy some when it was $15.3/oz if it went down to 14.7/oz. But it is not going down, it is soaring. I understand China and hedge funds are buying like crazy. Did we miss the bottom ? Should we buy now before it climbs more ?
Solly R April 20, 2016
This is excellent education for the investor community. There are so many varied factors at play during a given point in time that it is hard to draw forth concrete universal truths. Consideration of such factors should go into an independent analysis, you cannot depend on anyone as your GURU, getting GOOD information is important, but investors must take responsibility for there own goals, decisions and outcomes. Test your strategy and let it evolve as conditions dictate. There are so many things at play that the average investor may not be privy to: rapid trading programs, after hours trading, foreign capital, corporate decisions and policy, etc. Consider, test and if applicable ignore the myths, the investor must be their own General directing their OWN investment program.
Sohail April 20, 2016
Larry has been on the money with his forecast of cycles no question.
J Sanderson April 20, 2016
An investor mistake would have been missing the 300 point rally in the S&P 500 !
george stewart April 20, 2016
Larry- Could you explain how buying some gold at this juncture is so dangerous? If it is actually going to begin a major leg up in the ‘near future’, then an interim dip of 3, 5, even 8 or 10 percent is not a really big deal. And if it should head up from here, (and as you yourself point out- markets do what they want to do) then at least you would be ‘onboard’. Interested in your comment. Thank you- George Stewart
Peter April 20, 2016
Well Larry, you say that gold is in a sideways market but I made 91 % on Almaden , 73% on First Mining Finance and more than 30% on 4 other miners this month. Yes I opened and closed the positions within this month. So you are wrong !!!
UDO April 20, 2016
Peter,
did you realize what you said ? You said : Larry claimed gold is just in sideways market but you made big gains in miners . Larry talked about the material – and he is right with that . The miners ( they are stocks ) are a diff. animal and have been undervalued for some time – catch – up time for them .
Peter April 21, 2016
read his comment . at the end it says miners too
anthony g April 20, 2016
thanks Larry
B.M. April 20, 2016
Larry,
For years you’ve been stating there has been NO manipulation of gold and silver prices, COMEX & LBMA were simply reflecting reality of markets, yet Deutsche Bank just this past week admitted it and several other banks have been illegally manipulating the price of gold and silver for several years. Exactly, what the precious metals “conspiracy theorists” had been claiming all along.
Would love to hear your comments on this.
Thanks,
B.M.
April 20, 2016
larry just said it well, the markets control the price. the market is alway right in the end.
Sandor April 20, 2016
Nature always seeks balance and so do the markets regardless of manipulation.