When most people get into the task of investments in the stock markets, they also end up doing some speculating in determining how they should go about their bussiness. The problem is that their speculating is equivalent to just guessing by hunches and you could generally be better off by just flipping a coin.
In that case, is there a better way to speculate? How do the professionals speculate? Surely they must have an edge. I would like to recommend in that regards Victor Niederhoffer’s book :Practical Speculation
Some history about me: When I got into the bussiness of trading in the markets and trying to earn a buck or two, I ended up thinking that Techincal Analysis is the only way to go about your trading. For those of you who do not know, Techincal Analysis is a method to determine the future behaviour of a stock by looking at past prices of the stock’s chart, and finding some patterns in it.
I think most people, when they want to make some money in the stock market, get into Techincal Analysis. I guess the big reason is that it looks like the holy grail everybody is looking for. It has a very strong appeal because it is visual and it’s EASY. Everybody can do it.
There are some serious things though you need to consider when it comes to Techincal Analysis. Firstly I think that all the charts they show you in those books look good in retrospect. It is easy to spot the bottom price when you already know the future. Your bottom is my top. Secondly, from all the financial research done in regards to Techincal Analysis, I don’t know even one that supports it. This is mainly attributed though to the fact that it is very hard to check such a system, and that is a big reason for concern.
I could go all day long about my doubts about Techincal Analysis but I’d like to get back to what makes the book I recommended good. Firstly, It changes your mindset and view about the stock market. It teaches you the importance of checking things for yourself and showing you how statistical tests can help you with that. Don’t be frightened though, you don’t need to be a math genius to understand the book. Secondly, it talks about how media affects your judgement in determining your future action of stock picks(usually in a bad way). This is a more subtle point to pick up on and realize though.
A major influence from the media is what is called the “Doomsday Scenrio” view. Some media channels and newspaper would like you to think that the stock is about to crash at any moment and thus you should better not get into the stock market at all. The stock market is up 12% this year? so what.. that is the best it can do and it is only a bubble waiting to crash. The fact is though, that people who have invested their money for the long term in the stock market(All over the world actually not only U.S), had a better return than any risk free investment. You should always keep that in mind.
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