Monday, September 13, 2010
The Insiders: Experience Teaches You to Recognize a Mistake When You’ve Made It… Again
Experience Teaches You to Recognize a Mistake When You've Made It … Most stock traders, hereinafter referenced as the “Trivial Many”, the “Herd”, the “80” of 80/20 fame and others, tend to make two fundamental mistakes when trading stocks and options. They buy heavily at the top of the market, right before it turns over. And…they sell at the bottoms of markets, right before they turn up. Hum…not a good way to make money in the markets. But, there's a bright side. The “experts” blew it too. You see, most stock traders tend to listen to the analysts, their brokers, and their friends for stock tips. Of course, their brokers are listening to the analysts, their friends and other brokers (who are listening to the same analysts, etc.)… So, as the Titanic is rolling over, we're all still raising our glasses. The problem is recurrent. Nobody (stock traders) really checks to see what the track records of these analysts really are. Studies going back as far as 50 years have shown that only a small fraction of what is recommended by the analysts makes money. The bright side is that IF you decide to use the analysts as Insiders and others do, you will use their advice as a contrarian signal. After all, they're WRONG most of the time! I don't mean any single one. I mean the chorus of all of them will be slanted …So, you can learn to use that as a contrarian indicator. Let me illustrate. Back in 2002, the Insiders were selling small and mid-sized companies at record rates. Now, if you were a stock trader then, you were probably tempted to get in on the action. But, you probably were tempted to BUY more stock in these companies. After all, who is going to be selling stocks when they are still going up? Insiders that's who. But, stock traders, a.k.a. “the herd”, “the trivial many”, “the majority of stock traders”, were buying heavily. Unlike drinking heavily, such stock traders do NOT recover easily from their exuberance the next morning. Granted the Dow was struggling even though these stocks were reaching new highs. And, the analysts were ecstatic. One stock analyst after another was paraded across the screen each with his or her own version of the refrain, “Buy.” But, the Insiders weren't buying. The Insiders were selling. Within just a few short months (three months to be exact), those stock traders had lost upwards of 50% of their investment. But, the Insiders had not lost due to their stock selling. They were out long before the market turned over, having kept their profits intact. So, time and again, there is market exuberance close to the top of the markets. The chorus of analyst “experts” are all singing the refrain “buy!” The “herd” kicks into gear and revs up the buying spree. And the market turns over… and hurdles downward, leaving a trail of shirts along the way. But, the Insiders didn't lose their shirts. So… who are these Insiders? And who is this Insiders expert George Muzea? We're coming to that. …Again… So... The new TV analysts are paraded before an adoring public. They present an impressive display on the Tube. Just ask them. They set before us stock tips which will “do wonders for your portfolio.” Just ask them. And, in stock after stock, as they speed their way to the top, greed and irrational exuberance empties more wallets as stock traders and investors buy what they're told to buy. And predictably…in stock after stock, the market turns over…again. What is it about stock traders which makes us learn from our experience at least a dozen or so times before it dawns on us, “This ain't workin'?” I know what it is. We don't know what we're doing… But, instead of admitting it, we say things like: · “Dang. I got whipsawed....” Notice we don't say (well, at least I never said)… “I got faked out of my…” · “Look for divergence in trends.” But the one divergence we NEVER take is divergence from the chorus of the stock analysts! · “Buy on the rumor. Sell on the news.” But, what if the Insiders are buying …or selling,? You could find yourself chasing an extreme top in the market …or…panicking just before the market turns up from the bottom… Experience teaches you to recognize a mistake when you've made it… again. One should always forgive ones enemies… but not before they're hanged. So, who learned from their mistakes? Good question. Perhaps, those who want to leave the ranks of, what Insiders expert George Muzea calls, “the trivial many.” George Muzea advises over 100 firms with a combined asset base of about one Trillion dollars. (Yes, one trillion.). They often pay his firm as much as a $100,000 a year for a consultation of less than an hour per month. If you thought Insiders information was some sort of fad…think again. George Muzea has been successfully calling the markets for 30 years. Learn from him. “Trivial many”? George Muzea uses this term seriously so as to alert stock traders to the fact that the vast majority follow the analysts who are guessing and preening on TV. They are also losing other people's money. Others are found in the ranks of the investment letter writers. They too are members of the “trivial many.” Not a distinguished category to belong to. Those stock traders and investors who follow them are also among the “trivial many.” Use the analysts as a contrary indicator ALONG with a good understanding of the “activities” (translation: “buying and selling”) of the Insiders. Two great contrarian indicators. Again… according to Insiders expert George Muzea. George Muzea is the Insiders expert…and has been for 3 decades. How do I know that? Well, having been in the ranks of the “trivial many” stock traders and investors longer than I care to say (here), I have a singular disdain for the analysts. George Muzea didn't have to teach me that. He taught me rather to use them as a very dependable contrary indicator…the chorus of them, that is. Before I met George Muzea or learned (from him) anything about the Insiders, I determined to forgive and forget the analysts on TV. Of course, one should always forgive ones enemies… but not before they're hanged. Actually, in all seriousness, George Muzea taught me a very satisfying truth. If you know how to use them, those analysts can really be a contrarian help to you. But, I don't wish to give the impression that George Muzea teaches that “opposite is right.” He didn't teach me to think that way. Nor do I teach that when the analysts and news letter writers say, “buy”, the stock traders should immediately “sell.” Nor, that when they say, “Sell”, stock traders immediately knee jerk a Call option. No …no…no. It's far, far simpler than that. Understand that when these analysts preen themselves shamelessly on the Tube or by newsletter, they need not be a factor at all. Just don't listen to them until you see Insiders behavior changing. THEN…you learn to use analyst's antics to gauge the markets as a contrarian. To do that, you need to learn HOW the Insiders and the analysts work. I learned those lessons from Insiders expert George Muzea. You can too.