There are a few things that you won't read in the text books about investment that you probably need to know. Here are a few:
The stock market only ever crashes
Have you ever seen the opposite of a stock market crash? I'm not sure what you would call it even. A "flash" perhaps? Humans, especially human investors, lose trust three times faster than they build confidence, so the market rises slowly and falls quickly; that is, it "crashes" but never "flashes". A 7 per cent rise in the US market in the two weeks after Trump's election is about as close to a "flash" as we're ever likely to get but, point in proof, the 7 per cent rally doesn't feel nearly as good as a rapid 7 per cent fall in the market would feel bad. That of course is because it's not three times more painful to lose money, it's 10 times more painful. Rule No. 1: don't lose money. Until you can control that you can never be comfortable as an investor or trader.
![There's no Smart Money, there's just competent and different levels of dumb, just like in the Jim Carrey movie Dumb and ...](/web/20161209133937im_/http://www.smh.com.au/content/dam/images/g/t/4/2/z/b/image.related.articleLeadwide.620x349.gt42ut.png/1480905222522.jpg)
The stock market has no personality
The market doesn't have a personality. Accrediting it with human traits is surely just an investor's way of feeling better about something they couldn't control and don't want to be responsible for. So they blame the market, as if it had intent. But the market is inert. It has no personality, it feels no pain, it feels no gain, it doesn't care about you or your money, it just is. It both punishes and rewards without distinction and to suggest the market is ever to blame for an outcome is the figment of a rather weak investment brain trying to come to terms with bad luck.
There is no Smart Money
I cringe when I read or hear someone talking about the Smart Money. The implication is that you are Dumb Money, which may be true, but I'm afraid there is no echelon of smart people out there that always have the jump on you. Smart Money simply refers to anybody that bought at the bottom or sold at the top but unless they can do that consistently, it's more likely they're just Lucky Money. The only genuinely smart money in the markets is not actually smart, it is just big, because the Big Money can start and finish trends. So when the head of investment at Fidelity decides to sell resources and hands out orders to sell $50 billion worth of resource stocks, resources peak and start to fall. In reality, the head of investment isn't necessarily smart, he just has a lot of money. I don't think anyone's really "smart"; there is simply a level all investors or traders get to with experience and below that there are just different levels of dumb.
There are no certainties just probabilities
Every time you trade or invest you open yourself up to a thousand risks. The obvious ones are plain vanilla, company announcements, results, downgrades, upgrades but beyond that are myriad unknowns from aeroplanes hitting buildings to reality show billionaires becoming the president of the United States. So much is unknown. Buying a stock before it goes up is never going to be based on certainty but it is always going to be a function of probabilities and this is the only way you can add value as an investor or trader. By narrowing the probabilities. Understanding that is the first step. Knowing how to narrow the probabilities is the next.
Marcus Padley is a director of financial services company MTIS Pty Ltd and the author of stock market newsletter Marcus Today. For a free trial please go to marcustoday.com.au.