Psychological Analysis. Adam Sarhan

at the limit price or higher; for example, if you want to sell a stock at $55 and the stock is falling and never hits $55, your sell limit order will not be filled.

      Stop Order: A stop order is very useful when used properly. A buy stop will be placed above the market price, and the order will only be triggered when the stock moves above that price. Conversely, a sell stop is an order that is placed below a specified price and will only trigger if the stock reaches your stop price. It is important to note that when the stop price is reached, a stop (buy stop and or a sell stop) order becomes a market order and is filled at the best available price, so there is no guarantee that you get filled at your stop price (meaning there could be some slippage). A buy stop order is set above the market and is used to enter a long or exit a short position if the stock rallies to your stop price. Conversely, a sell stop is placed below the market and is used to enter a short position or exit your long position if the market declines. We'll talk a lot about sell stops in this book, so this term is essential to remember.

      Trailing Stops: Trailing stop orders are orders that move higher or lower based on the market action. In most cases, they are used as “trailing stop‐loss orders.” For example, the market may be moving higher and you set a trailing stop to exit your position if certain criteria that you define are met. This way, the stop moves higher as the market rallies (or moves lower as the market declines).

      Conditional Orders: Conditional orders are advanced orders that allow you to set instructions for your broker to submit or cancel a trade if specific criteria are met. In most cases, conditional orders are considered the most basic form of automating a trade.

      Day versus Good Till Canceled (GTC) Orders: When you enter a new order, you have the option of setting it so it expires at the end of the day or GTC. Most brokers set GTC orders to expire between 30 to 90 days—or until the trader manually cancels the order. Hence, the name GTC.

THE (GREAT) AMERICAN TAILWIND

I want to continue to reiterate this point about the Great American Tailwind. For most people, especially people who are not beating the market, it is in their best interest to go along with the market and ride the Great American Tailwind, which you can do buying an exchange‐traded fund—a.k.a. ETF—that gives you exposure to the major indices. They are very liquid and can be bought in just about any trading account.

      For more than two centuries, the U.S. stock market has enjoyed a very strong upward bias. Warren Buffett calls this phenomenon the American Tailwind. I call it the Great American Tailwind. The legendary investor coined the term in his 2018 Berkshire Hathaway annual letter where, reflecting on his 77‐year trading career, he noted that if his first trade of $114.75, made in 1942, “had been invested in a no‐fee S&P 500 index fund, and all dividends had been reinvested,” his pretax stake would have been worth $606,811 on January 31, 2019. His point is that America, born in revolution, a survivor of the Civil War and the Great Depression, has experienced an “almost unbelievable prosperity” that is so persistent that a child could invest a sum in an unmanaged American equities market during the darkest days of a global war and achieve a gain of “$5,288 for 1.”

      Now, a note of caution: the American Tailwind does not apply to other markets such as currencies or commodities, or to other stock markets around the world. Over the past few centuries, neither the price of the greenback (the U.S. dollar), nor commodities such as oil, corn, sugar, or gold have enjoyed the same explosive run as U.S. equities. In fact, as of this writing, just about no other liquid publicly traded market in the world that has been around as long as the U.S. stock market has matched its long‐term success. In the future, that may change, but for now, it establishes the baseline for American investors—a persistent upward trend that can create life‐changing wealth for you and your family.

MAKE THE TREND YOUR FRIEND

There is an old adage on Wall Street: “the trend is your friend.” I like to say, “make the trend your friend.” Any seasoned investor and/or speculator can tell you that it is a lot easier (and a lot more profitable) to align yourself with the intermediate‐ and long‐term trend than to try and fight it. Remember, the market and the economy are larger than you. The market does not know you, it is not out to get you, or to do anything to you. It is neutral; it is going to do whatever it wants to do without thinking about your personal situation. It doesn't matter how much money you manage, or even if you are running a major global pension fund; the market is larger than any single participant. This seems like simple advice, but I've seen too many investors in the dumb money circle simply fail to acknowledge market trends, bail out of good positions too early, and try to fight the market, opting to listen to bad advice (instead of listening to the market) or to follow misplaced emotions.

      Extending that concept of making the trend your friend, I find that the biggest returns come from aligning yourself with major market movements. That is why, for most casual investors, a long‐term buy‐and‐hold strategy is the way to go. Barring some major unforeseen disruptive global economic, military, or political shock (perhaps even more disruptive and unforeseen than the Civil War, World War I, the Great Depression, and World War II, each of which the economy survived, then thrived after each event was over), the global economy is constantly growing and will most likely continue to do so. As the economy grows, corporate profits grow, and both factors translate into higher equity markets. As we progress deeper into the twenty‐first century, the global economy becomes more integrated, and I take Buffett's American Tailwind concept a step further: there is a powerful Great American Tailwind and a Great Global Tailwind that investors need to recognize and capitalize on.

INVESTING VERSUS TRADING

      For the scope of this book, I define “investing” as the act of taking long‐term positions in assets, and “trading” refers to taking short‐term positions. For tax purposes, the government considers long‐term (which I refer to as investing) as anything over one year and short‐term (which I refer to as trading) as anything less than a year. So, for the sake of consistency, I'll use the same definitions. Keep in mind, some people make better investors, and others find more success as traders.

      To be clear, I regard trading as speculating. Short‐term traders want to enter and exit stocks for a profit. Plain and simple. On the other hand, investors who buy and hold for years are considered long‐term investors.

Most people confuse “investing” and “trading,” and that confusion leads to subpar performance. I know that speculating has a negative connotation and many people do not like it. I strongly disagree, and I believe that speculating is a healthy and necessary component of a prosperous free‐market society. Think about it for a second: How much wealth has the stock market created over the decades? Wealth for our society, hundreds of millions of people (directly or indirectly), public companies, entrepreneurs, founders, private companies, retirees, pension funds, venture capital firms—the list goes on and on; the market is the engine for the entire economy. Without speculators, the daily volume would be so low that markets would not function the same way they do now, and they would not be as big as they are now. Speculators are a necessary component of healthy markets and healthy economies.

TYPES OF INVESTORS

      You'll hear this repeated often throughout this book: there are many ways to make money trading. The important thing is to find a strategy and style that works for you. Next are some of the popular types of investing styles you may encounter.

      Value

      Value investors are the most common type of investors, and they tend to seek out “undervalued” companies and/or other investments; they avoid overvalued assets. A value investor is interested in the fundamental financial position of a company, and they view their investments as buying a piece of the company. An important side note: value, like beauty, is very subjective and each person is free to determine the value of something however they want.