CNBC’s Fast Money is “America’s post-market show to bring you the actionable news that matters most to investors.” The panel of traders discuss stocks, ETF’s, options, and bitcoin. They talk in technical terms and use graphs and charts to highlight their main points. They sound convincing and make it look easy as if all you had to do was buy a stock after it bounces off the 200-day moving average and ride it until it hits resistance where you can sell it for a tidy profit.
Trading is like a sporting event with winners and losers. It’s also profitable to brokerage firms and exchanges. The more you trade, the more money they make. If they make more, you make less.
When you trade you’ll be competing against professionals and large Wall Street firms capitalized with trillions of dollars. Your emotional behavior will have a huge impact on your trading success more so than professional traders. Will you be able to set strict trading rules? How will you react when your stock breaks the 200-day moving average and falls 20% in a single trading session? Will you sell it? Will you buy more convinced that you’re correct and that everybody else is wrong? Will you sit on your loss hoping it rebounds to your purchase price? Day traders in J.C. Penny (JCP), Sears Holdings (SHLDQ), and GE are still waiting. Did you notice the “Q” in the Sears symbol? It represents bankruptcy.
What if you want to trade the market? If you want to commit your hard-earned dollars to trading, limit it to 2% to 3% of the money invested in your taxable account. Do not trade in your IRA because you can’t write off your losses.
Let’s look at three different companies – Company A, B and C. All three have different chart patterns. Company A is rising and trading at all-time highs. Company B is in a free fall trading near historical lows. Company C is in a holding pattern and it appears to be building a base. Which stock would you buy? Which one looks more appealing?
Company A is Amazon from June 1, 1997 to July 31, 1998 not long after it launched its IPO. The stock rose 1,100% during this window.
Company B is Amazon from November 1, 1999 to October 31, 2001 where it fell 92%. Amazon was hit hard during the tech-wreck.
Company C is Amazon from July 1, 2004 to March 31, 2007 where it gained 2.2%. It’s hard to believe, but for about three years the stock barely budged.
The best time to have bought Amazon was after it fell 92%, as it did in chart B. If you had the courage to buy at the low, you would’ve made over 23,000%! In hindsight it appears easy, but if you bought it in 2001, you would have endured 19 different months where it dropped 10% or more. Its worst monthly drop occurred in July 2004, falling 31%. It takes courage, conviction and luck to time the market.
Is there a better way? A slow money strategy based on your financial goals and dreams can treat you well over time. A financial planner can design a portfolio of low cost, globally diversified mutual funds based on your objectives. This strategy can minimize your investing mistakes and costs, allowing you to keep more of what you earn. Your plan will help you prioritize the things that are most important to you and your family allowing you to grow your wealth across generations.
Short term trading with fast money can be detrimental to your long-term wealth, so go slow instead!
It doesn’t matter how slow you go so long as you do not stop. ~ Confucius
Bill Parrott is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process.
Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog.