Thoughts for beginners part 6: Trading and investing are like driving
I am more of a macro investor than individual stocks...not the best with those. I remember there were a bunch of questions that I had that confused me when I was brand new. A handful of CAPS players got me to where I am today, so I am offering my opinion on a few misconceptions. There will probably be about 10 of these blogs over the course of a few weeks.
This sixth blog is a little different than the others. I am not talking about specific misconceptions or specific types of things. I just wanted to point out how I think driving on the highway is like investing, and two mental mistakes to not make in this regard.
When you are driving on the highway, do you ever notice how theres one lane that usually moves faster than the other for maybe 30 seconds, and then as soon as you switch to that lane, it becomes the slow lane and the lane you moved out of starts moving fast? Think about this in investing. If you can catch a trend early, jump on it without needing 100 layers of confirmation. By the time you have seen it last long enough and jump on it because you think it is clearly going to continue forever, that's when everybody else thinks the same thing and the trend changes. Try to identify new trends, not chase ones that have been going on for a long time. This might cause you to sell at the bottom in one sector and buy at the top on the other.
The other way that trading is like driving, is the notion of what "should" happen versus what does happen. If you are pulling up to an intersection, and the perpendicular driver has a stop sign, but it is a giant truck that is accelerating and not slowing down as the stop sign approaches, what do you do? Do you drive through the intersection because it "should" have stopped? Or do you stop because you realize what should happen is clearly what is not happening? I would hope you pick the latter option. Relate this to stocks. When you see a bubble, don't short it just because it shouldn't be that big. Another example, is the stock SAN. Phenomenal company, big yield, and diversified globally. Currently I think it is way too cheap. But, I know it trades down on euro related fear. So if I know there will be some of that in the news, I don't buy the stock, regardless of what it "should" trade at.
I know this blog was a little more scattered than the other ones, but I thought it would be an amusing comparison as well as point out some things that could cause your portfolio to crash.