THE KEY TO INVESTING is to not lose money. If you focus on avoiding the losses, the gains tend to take care of themselves. While there isn’t a strategy that always works in the market, there is one I know that always fails. It doesn’t involve tracking a stock, but rather a group that never seems to get it right.
As regular Tradecraft readers know, few things are as financially dangerous as following the uninformed mass of investors to which we often refer to as “the herd.” While nobody makes money all the time, the herd has an undeniable knack for losing it again and again, in almost every conceivable fashion. Following the herd’s movements, therefore, is a worthwhile endeavor. The more I study what the herd is doing, the better I’m able to avoid following in its footsteps.
When it comes to investing, what matters isn’t what we say, but what we do. So it’s not too surprising that, when opining on the market, the herd tends to talk in generalities or about things that have no impact on the bottom line. When you’re uninformed and just part of the pack, it’s a lot more convenient to talk about the economy, Bush, jobs or some other piece of non-tradable minutia than actually commenting on what’s happening in the market itself. When you hear someone talking loud (but saying nothing), chances are they’re part of the herd. (more…)
