A superstition is normally defined as “a widely held but unjustified belief in supernatural causation leading to certain consequences”. Some make sense—although not supernatural, as in, “It is bad luck to walk under a ladder” because the guy on top may drop a hammer on your head.
Others, like “breaking a mirror will bring you seven years of bad luck,” have root in history in that when first commercially available, mirrors were ridiculously expensive. Breaking one was like taking your new Maserati out for a spin and going full speed into a concrete wall. People figured if you were that “unlucky” with your mirror, it was probably a forecast of things to come.
Superstitions about black cats went both ways. The ancient Egyptians revered black cats; the Medieval Europeans were scared to death of them. Maybe a better term than “superstition” for the stock market would be “false belief,” and this can cost you money.
“The trend is your friend” is one of those. The trend is not your friend. It is Satan in the Garden of Eden with lying promises. It is Anubis taking Egyptian souls to the underworld. The trend is the Fourth Horseman of the Apocalypse riding a pale horse with the name “Death.”
Just ask anyone who bought Bitcoin at $19,000.
The trend seduces a person into believing that what happened in the past will continue in the future. With sweet and convincing words, you easily miss the fact that things have changed like a lover who suddenly had to work overtime in the office. And, suddenly, you have been replaced without warning.
I will talk more about this at the Financial Literacy Summit 2018 for The Global Filipino Investors at the SMX Mall of Asia on April 8.
Believing that “higher risk returns a higher reward” will cost you money. Initially, some investors do not want to handle higher risk for the higher reward. That is fair. However, the truth is that during the last 10 years, data shows higher risk has actually generated lower returns in the equity markets.
Risk is often measured by price volatility in that prices fluctuate more, creating difficulty in knowing whether you are on the right side. It is not that prices are necessarily going down but that an investor gets caught on the wrong side of the trade.
Since 2012 the highest “risk” is found in the Latin American stock markets, yet the overall return was negative. The S&P’s 500 Index showed half the risk and gave back a 15-percent
Look at the opposite of that high risk/high reward belief. The five largest local companies—“the least risky”—generated a 41-percent return had you bought equal amounts of all five. SM Investments Corp. gained 51 percent in 2017. The five most volatile PSE Composite Index issues went negative by 2.9 percent.
But aren’t those issues that suddenly go up by 50 percent in one day “high risk/high return”? The reality is, those are “low risk/high return” issues. Come and see me at the FinLit Summit and I will tell you why.
Believing that you can “manage risk” is false. You can’t. In fact, there is no such animal as “risk management” in stock trading. There is only “risk avoidance.” Saying that you can manage risk is like saying you can manage a speeding bus without brakes slamming into the back of your car. You might be able to reduce the damage by wearing seat belts, like selling a losing stock position. But what you need to know is how to avoid risk. Don’t believe the stock market superstitions.
E-mail me at email@example.com. Visit my web site at www.mangunonmarkets.com. Follow me on Twitter @mangunonmarkets. PSE stock-market information and technical analysis tools provided by the COL Financial Group Inc.