Painful But Rewarding

What is hard about investing?  It's not the simple mechanics of investing.  Nowadays if you have the money, it's easy to open an online trading account and start trading.  You don't even have to talk to anyone usually, just mail in a check to the broker and off you go.  So the HOW or mechanics of investing is not hard.

Is finding what to trade hard?  This is an interesting question.  I would submit that finding WHAT to trade is not the hard part about investing either.  Studies have shown that selecting stocks at random, aka monkeys throwing darts at a dartboard, have outperformed market averages in a wide variety of years.  But this is only because stocks as an asset class tend to move in the same direction, creating bull and bear market trends over time.  So picking any random subset of this asset class at any point in time will not improve your chances of success, in most cases, if you're wrong on the direction of the general trend.

So unless you pick a specific company that has a bad business model that is going out of business, picking WHAT is not as important as picking WHEN.  I submit that WHEN you buy an asset is the most important question to ask.  And that makes sense because that is where the greed and fear reside in investing.  That is where the emotion is put in play that makes it "easy" to make bad decisions, or "tough" to make good decisions.

It's easy to buy when things feel good, when people are excited about stocks or whatever asset class is hot at the moment.  Join the herd!  Herds feel good to join for most people, they play right into your natural bias to want to be part of a group.

And it's tough to buy when you feel bad, when an asset class is a mess and no one likes it.  You feel like a lone wolf, and your behavior might seem odd to your friends.  You don't have a group to make you feel good, and you'll usually have people calling you a fool for what you are doing.  Or they make fun of you in hindsight, which is actually pretty ironic because often this is the EXACT WRONG POINT at which they should be making fun of you.

Case in point is an interview I posted where a CNBC anchor attacks a prominent gold analyst for suggesting rebalancing into gold at the end of 2013.  Stocks were up 30% in 2013, gold was down 30%, so it was a simple case of rebalance and buy low.  But the CNBC commentators couldn't resist bashing someone recommending gold due to it's poor performance especially when stocks were up.  Ironically though this is proving to be the exact wrong time they should have been bashing gold, as December 2013 is looking more and more like the bottom in the gold market.

My own experience with 2013 had some painful and fearful moments I won't forget, or at least I hope I won't forget for a long time.  I like to average into positions, never buy anything or sell anything all at once.  And 2013 afforded me some awesome opportunities to add to some positions in the gold sector at great prices.  I felt stupid and alone for what I was buying in a lot of cases.  But deep down I knew those feelings would end up betraying me later on when the bear market was over, and looking back I would wish that I had bought low.  So I did that and took the pain for the time being.

Now that we're well into 2014, some of my buys over the past year in gold miners are up over 100%.  This blows away the performance of most of the stocks you see on TV, but no one is talking about this.  If you look at the universe of thousands of ETFs in the market, in the top 20 for 2014 are at least 6 ETFs that focus on gold or silver stocks.  No one is talking about this outperformance either.   Instead they are talking about stocks like Twitter, which is down 30% this year.  I can find plenty of gold stocks in 2014 that are blowing away the returns of Facebook, Apple, and other prominent stocks that are all over the media on a daily basis.

The funny thing is the move in gold hasn't even barely started yet, but we're already seeing huge returns in the gold stocks.  That's typical of a new bull market, huge returns early when no one is looking or they are still scared or scarred from the previous bear.  That's where you apply the principle of buying right (when things are painful) and sitting tight (when everyone else is jumping in) to get yourself positioned to reap the rewards of a bull market trend.

If you look at gold right now it's still sitting in a Stage 1 base, but a decision point is approaching.  Gold is either going to make a higher high or a lower low soon and tip it's hand to the bulls or bears.  The returns and strength in the miners would lead you to believe the hand should be tipped to the bulls.

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The views and opinions expressed are for informational purposes only, and should not be considered as investment advice. Please see the disclaimer.