In my 30+ year career as a self-directed investor, I’ve learned many lessons about how the stock market works. Most of them, especially early on, the hard way.
You know, the standard try, fail, fail, fall on your knees, get up, and try again way.
Yet there are 4 lessons that stand out from the crowd. Because when I truly accepted their teachings, the gate to success and consistent profitability finally opened.
Plus, when I began mentoring other investors, I noticed not learning said lessons was THE main roadblock on other people’s paths to long-term profitability as well.
And I’m not talking about a couple of people. But 1000s of self-directed investors. Each with a unique background, yet each struggling with at least one of the lessons I’ll try to pass on to you below.
If you manage to internalize said lessons and then adapt your investing process based on that understanding…
I believe you too will start knocking at the gates of success and consistent profitability soon.
On the other hand, if you don’t recognize and overcome the 4 hard lessons I’ll cover below — they will become (if they aren’t already) major roadblocks on your journey to consistent profitability in the stock market.
Before we dive in, let me just note that I’ve covered these lessons in previous articles, social media posts, emails, etc. But never all in one place, along with guidelines to internalize them (at least not for free).
IMO, when you have your “enemies” grouped, along with ways to combat them — it’s far easier to actually take action. Hence, I decided to create this article.
Okay, now we can dig in:
Hard Lesson 1: What & When To Buy Are The Least Important Investing Decisions To Get Right
What & When to buy are the least important investing decisions to get right.
But all the stock tips dished out by gurus, analysts, etc., focus on exactly those two decisions.
Well, because as two editors of two completely different financial magazines told me without being aware of each other’s existence:
“Stock tips sell.”
To this day, the best way to sell magazines, newsletters, etc., is to stick a headline like “5 Stocks Set To Soar” or “10 Best Stocks For The New Year” to the cover.
But if you rely on these stock tips and aren’t just reading them for sport (like I do) — you’re in a pickle. I’ll explain in a moment exactly why stock tips sell magazines but don’t do you a lick of good. But first, let me make one thing clear:
If you base your investment decisions on stock tips, this means you don’t have your own reliable, consistent, timely, and verifiably profitable CTA (Call To Action) for what and when to buy.
Yes, having such a CTA takes considerable effort and skill to create. But it’s a must if you want to become a consistently profitable investor. Without a system and plan on which to base your investment decisions instead of doing so subjectively and on-the-fly…
The market will crush you (and your profitability) sooner or later.
Here’s why stock tips and most other similar instant shortcuts don’t work:
- You can’t measure if the criteria behind the stock tip actually work
The only way you can do this is if you get a corresponding sell signal that went with the original tip. And the magazines, newsletters, etc., dishing out these stock tips seldom provide such a signal.
Plus, they rarely offer sell tips timely enough to help you lock in a profit or prevent a large loss in real time. Meaning it’s impossible to measure if the source decision criteria produce an “Edge” that can bring consistent profits in the future.
- You don’t know what kind of analysis stands behind the stock tip
All you have is a persuasive story expertly designed to “sell” the tip. But you never get to know if the story or analysis produces an “Edge” over a large sample of tips you can consistently use in the future.
- You can’t measure the effect the stock tip had on the value of your portfolio
Positive or negative, it doesn’t matter. You can’t precisely measure it because stock tips never tell you how much to buy.
Nor do they tell you WHEN to sell.
Both of these decisions are left up to you. Or, more precisely, your gut feel and the ability to “read” the enthusiasm of the tipper.
Yet such decisions have a far bigger impact on your long-term profitability than deciding what and when to buy.
The Actual Most Important Investment Decisions And How To Make Them
There are only four decisions you must make for any single stock investment.
And despite what the gurus, analysts, and financial fraternity want you to believe, this is the order of importance of said 4 decisions:
- When to sell.
- How much to buy.
- When to buy.
- What to buy.
In my 30+ years of experience, I’ve found that nearly everybody practices the exact opposite order of importance. For example, fundamental analysts put 95% of their effort into No. 4 (what to buy).
But the truth is knowing when to sell and mastering position sizing (how much to put in each stock position) are the biggest determinants of your profitability. And its size and sustainability over the long term.
That’s because “when to sell” determines how big your percentage Profit and Loss Positions are. And “how much to buy” determines how big your absolute Profit and Loss positions are.
So, if you merely apply the above order of importance in practice with your investing system and decision-making…
You’ll instantly get ahead of most investors out there.
Hard Lesson 2: Succumbing To “Noise” Kills Your Performance & Profitability
When I say “noise,” I mean the oh-so-many opinion articles, writings, reports, forum discussions, TV shows, water cooler talk, and everything else going on around the market and related to it.
Including ‘happenings’ that seemingly have nothing to do with the market. Such as geopolitical events, politicians’ speeches, changes in regulation, weather, wars, pandemics, or disaster events that could affect particular stocks or commodities.
All of the above is external noise. But there’s yet another, at least equally dangerous kind of noise…
Internal noise. It includes your heuristic biases, ego, expectations, emotions, attitudes, level of confidence, and current beliefs about how the market works.
All these external and internal ‘noise’ variables interact both with the market and your decision-making. In fact, there are millions of variables affecting the market (and specifically, the price movement of stocks) at any given moment.
And you can’t possibly be aware of all of them at once. Which is the main problem with noise — it not only comes from lots of varied sources…
But you can only ever account for a tiny subset at a specific time. Usually, the loudest and most recent noise we hear has the most impact on our decisions.
Your success in the stock market hugely depends on your ability to not let that tiny subset guide your investing actions. And instead rely on a structured method with a verified Edge.
Look, you’ll never be able to predict what will happen next in the stock market. Especially not in the long term. Just trying to do so makes you a likely next prey for noise.
It leads to forming assumptions, creating subjective opinions, reacting to fear, giving in to feelings of uncertainty, imagining visions of what may happen, etc.
All of which results in making impulsive decisions on the fly instead of doing so based on a structured process and plan.
As I’ve said, each time you interact with noise, you’re aware of a different subset of it. Meaning each combination of ‘noise’ comes from a different source…
Making it varied, unplanned, and irregular every single time you decide to interact with the market. In a nutshell, noise creates randomness.
And when randomness guides your decisions, your results become random too. As well as inconsistent and mostly losing.
I say “mostly” because randomness generates winners every now and then. But never consistently.
If you want consistent (profitable) results, you need a systemized plan. Yes, it’s far from easy to create one. But, IMO, it’s much easier and safer than having no plan to follow and just reacting to noise with no discernible pattern.
Not to mention the emotional toll of the latter.
The tricky part is actually overcoming and disregarding the noise we’re so accustomed to listening. The best way to do so is, in my experience, by building a mindset of consistency. And the stepping stone prerequisite for doing so is having an investing system with a market-verified Edge.
If all this system and mindset talk sounds way too abstract to you, this article may help. The bottom line is that until you learn how to remove the effect of noise from your decision-making…
You won’t become a consistently profitable investor.
Hard Lesson 3: Short-Term Volatility Is The #1 Enemy Of Long-Term Profitability
When volatility occurs (and it inevitably does), too many investors go into a state of panic. In fact, the fear of volatility is what keeps the majority of people from even venturing into the stock market.
That’s because the portfolio drawdown and money loss volatility brings cause emotional pain. And such pain activates sub-conscious avoidance mechanisms that create a skewed and distorted picture of the investing landscape…
Which leads to making mistakes without even realizing it at the conscious level. Until volatility withdraws, that is.
In my experience, short-term volatility, and the attempt to avoid the emotional pain it causes, is the number one reason people undo themselves in the stock market.
This is why I created a separate article that introduces 4 mental techniques to help with not only guiding you through it unscathed…
But also to profit from the ensuing rise that tends to follow volatile periods.
Read the article and make sure to actually use the mental techniques, not just nod in agreement with them.
Hard Lesson 4: Your “Societal Paradigm” Doesn’t Work In The Market
If you want to be a successful investor, you mustn’t transfer beliefs from your personal life to the stock market. That’s because the norms society teaches us simply don’t work there.
The market is more a reflection of mob mentality and the madness of crowds, where nonsensical and illogical fads can create momentum. And then that momentum takes on an inexplicable life of its own.
In other words, how stock prices move doesn’t in any way resemble how most orderly societies in which we operate tick.
Take the “buy low, sell high” myth, for example. If you look at historical data, you’ll see that most stocks bought at low “bargain” prices are sold at even lower rates.
More often than not, investors pick out laggards instead of rising stars. Exceptions exist, sure. And they fuel this “standard” belief system. But over a large sample, trying to “buy low, sell high” is a losing strategy.
The strategy that works best in the market is, in fact, “buy high, sell higher.” It’s the absolute opposite of what we learn in life because, there, nearly everything we buy depreciates. In the stock market, almost everything we buy should appreciate organically over time.
Look, if you try to “dominate” the stock market and strive to always be right and never lose — you’ll get hurt. And because of that hurt, you’ll act in ways that kill your long-term profitability.
But, if you accept that losing and not being able to predict everything is normal and don’t let it sabotage your long-term strategy…
You’ll be en route to consistent profitability and funding the retirement life of your dreams.
Only people who can follow the market instead of trying to lead and anticipate the future…
And who understand that the market doesn’t generate hurtful information (we only perceive it as such) while learning how to reframe it in a way that brings profits instead of sabotaging their long-term stock market goals…
Have the chance to win in the long run.
In a nutshell, you must learn how to think from the market’s perspective and do the OPPOSITE of what feels “natural” based on your societal programming.
Shut up and let the market lead and talk. Then listen as it communicates to you in its own unique language — the language of price movement.
You do this by using thinking patterns that emanate from the market. Meaning you start thinking in probabilities, which accepts hurt. Instead of thinking in terms of safety and certainty, which don’t accept hurt.
I won’t lie to you, making this shift isn’t easy. But with a verified system and the right guidance — it’s possible.
The first step is understanding the immense power and profitability that putting probability on your side unlocks.
Heed The Implications Of The Above 4 Lessons Now And Your Future Self Will Thank You
If you recognized your current investing behaviour in one or more of the fallacies outlined above — don’t fret.
That’s completely normal.
I myself am guilty of committing virtually all the mistakes I mentioned today in my humble beginnings.
You have a problem only if you read this article and continue investing in the same old way. Do this, and you’re burying your chances of becoming a consistently profitable investor.
On the other hand, if you take today’s four lessons to heart, think long and hard about how to implement their teachings into your investing process, and then actually do so…
I daresay sustainable profitability will soon follow.
And, as always, if you want my help with treading the path to consistent profitability in the stock market — you know where to find me.
To your investing success.