“Markets are never wrong; opinions are,” is a quote from Jesse L. Livermore, one of the most colorful, flamboyant and respected traders of all time. We agree wholeheartedly with his comment, and we embrace his thinking. You should too, if you want to become a highly successful investor.
Human nature is the same today as it was in the 1920s and 1930s when Jesse Livermore was a major force on Wall Street. Investors have the same hopes and dreams today that they did then. Mr. Livermore saw that the opinions of many of his colleagues were often wrong, as the market went on its own merry way in a direction contrary to what they had expected. This, too, has not changed.
We learned long ago that it’s a mistake to argue with the stock market. To understand why, you need to remember that market prices are determined by the actions of millions of investors every day. Thus, if you believe that the market is wrong, you are actually saying that the net result of all the people participating in the market must be wrong.
Knowing that these investors include thousands of well-trained security analysts, technical analysts, insiders, and friends of insiders—in short, a lot of smart people who know just how the stock market works—are you willing to say your thoughts are more insightful than everyone else’s? We think not!
Rather than fighting the action of the market, a much more rewarding strategy is to identify the current trend and stay with it as long as it persists. In other words, let the market tell you what the market is thinking. The only reliable way to uncover the net effect of all the various factors affecting the market is to look at the market itself. No fundamental market analysis will tell you more than the market will tell you. Believing in opinions and forecasts instead of the market will only lead to poor investment decisions.
Next: Market Timing