Step #2. Use Common Sense
This is by far the best tool you have in your tool set. As the saying goes, “If it sounds too good to be true, it probably is”. Meaning and as you have probably noticed, most market pundits (whether it’s the economists, talking heads or the money managers) are perpetually bullish. No matter what the situation is they are always talking about how great things are and how all stocks will be going up over the next 12 months.
That is an excellent point of view to have if you are working in the self-help inspirational type of an industry, but a dangerous one to have if you are working with stocks. If you haven’t noticed, stocks do go down at times. Sometimes they collapse (aka 2007-2009). That is why having your own, well researched common sense opinion is so valuable.
Case and point, today’s economic environment presents us with a perfect example. (Written Nov 7th, 2013)
Majority Opinion: Today’s stock market closed at an all time how with the Dow at 15,746. If you listen to the main stream media, the economists, read the newspapers and magazines, listen to market pundits and talking heads you would undoubtedly walk away with an overwhelmingly BULLISH opinion. According to most of them the US stock market and the US Economy are in the early stages of a major bull run and economic recovery. If fact, you would probably be so excited that you would invest every single penny that you have.
Common Sense Opinion: Yet, if you would listen to my or form your own opinion you would see an opposite point of view. You would understand that today’s economic recovery is nothing more than a mirage driven by a massive infusion of credit into the system through monthly QE of $85 Billion, low interest rates and massive amount of speculation. After digging deeper you would see that all asset classes (stocks, bonds, real estate and even art) are in a massive speculative bubble that is unsustainable.
Digging even deeper and looking at the technical picture you would probably think twice about going long here. Instead of looking at the market and saying it’s at an all time high with many years of bull left on the table, you would probably look at the market and say, “Hmmm, this market is way overbought and given the current economic environment and the fact that everyone is so bullish I think the market is setup for a large bear move”. Instead of going long you would consider either getting out of the market all together or going short. Your research and common sense understanding of the economic situation would clearly support that decision.
As you can see the difference between Majority Opinion and a Common Sense Opinion is vast. One would have you buying every stock under the sun while the other makes you want to run for the hills. Which one is right? Well, that is for you to decide, but I would always pick a well researched Common Sense Opinion from a trusted source. More often than not it pays to do so.
In conclusion, following the two easy steps above will put you well ahead of the competition within a short period of time. It will put you on the fast track of fully understanding the macroeconomic picture and what is going on in our financial markets. More importantly, you will become self proficient and 99% more accurate than most of the economist and talking heads out there. You will be able to make much better investment decisions and avoid unnecessary losses most often caused by following the crowd.
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