“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”
– Mark Twain
Is there such a thing as a foolproof investing system?
After nearly 20 years of research and first-hand experience, I believe that I finally have an answer…
There’s a saying at the poker tables of the world, “If you don’t know who the sucker is, then it’s probably you.”
It didn’t take me long in my investing career to figure out that I was the sucker. What I found amazing is how long it took me to figure out how to not be the sucker.
I had been at least moderately successful at most things I’d tried in life – except investing (and selling encyclopedias one summer). I was accustomed to winning at most things. So why was I always losing at investing?
Eventually I figured it out. Investing is a rigged game.
There are the obvious riggings – like financial advisors charging excessive fees, brokers churning accounts to generate commissions, Madoff-style Ponzi schemes, rampant insider trading and high frequency spoofed trades.
But, with apologies to J.R.R. Tolkien, there’s one rig that rules them all – financial markets are rigged against human nature. As Benjamin Graham famously said, “The investor’s chief problem – even his worst enemy – is likely to be himself.”
Graham, much like myself, was speaking from first-hand experience.
There are, of course, legitimate market functions such as capital formation and allocation. I estimate that these legitimate functions make up maybe 10% of market activity – and that’s being generous. The other 90% is smoke and mirrors intended to distract the suckers while their pockets are picked in every way imaginable.
While preparing for a presentation I’m giving this week, I was looking up information on behavioral finance. I am already well aware of the major behavioral biases of investing – things like regret avoidance (not selling losers to avoid regret), recency bias (overweighting recent information) and overconfidence (see Mark Twain quote above).
What I was astonished to find, however, is a list on Wikipedia of 170 known and documented cognitive biases! As I read through the list, it seemed to me that at least half of them were relevant to investing. Feel free to check out the list for yourself here .
Is it any wonder investing is difficult? (If anyone has an hour to spare, there’s a fantastic talk on YouTube by Charlie Munger, Warren Buffett’s partner, on The Psychology of Human Misjudgment.)
All of this is to say that investing ain’t easy – and there are deep reasons why this is so.
The good news is, all of this can be overcome – for a cost. We have to give up “what we know for sure that just ain’t so.” We have to acknowledge the fundamental uncertainty of investing – and embrace it.
That’s the basis of the “foolproof investing system” that I’ve been working on for the past 15 years. It is “foolproof” in the sense that it’s “proofed against fools” – and yes, I count myself amongst the fools.
As Robert Cialdini says in his book Influence: The Psychology of Persuasion, “I can admit it freely now. All my life I’ve been a patsy.”
Just as Cialdini researched the psychology of compliance in order to better understand it and to defend himself against mass media “compliance practitioners,” I’ve put together my investing system to protect myself and others from the market riggings.
So, without further ado, I present to you my “10 Steps to Foolproof Investing”:
- Find a source of good investment ideas. If you don’t currently have a source of good investment ideas, there are numerous outstanding low-cost financial newsletters available today that are chock full of good investment ideas. A few such newsletters that I have first-hand experience with (and have personally back-tested) are:
- Look for investments that have an active Smart Trailing Stop status. These investments are still in uptrends (per my Smart Moving Average) and have not corrected beyond their normal expected volatility range.
- [Optional]: Look for investments that have pulled back into their Low Risk Buy Zone.
- Invest in 10 to 15 different stocks and funds.
- Risk 1% of your capital on each position. It’s okay to double down (risk 2% of your capital) on a couple of low risk / high conviction opportunities.
- Position size for equal risk using my Volatility Quotient indicator as the measure of risk.
- Don’t put all of your eggs in one basket.
- Keep your average Volatility Quotient below 20%.
- Exit when your Smart Trailing Stop is hit and congratulate yourself for doing so.
- Look for a new investment idea or wait for a re-entry trigger and always remember, capital is finite… opportunity is infinite.
I know that just looking at this written list of “10 steps” might not look all that “foolproof” but I’m not just giving you a list. I’m giving you the tools to follow this script – all of the tools. In fact, most all of these tools are already available to subscribers of TradeStops.com and the last couple of remaining items will be available within the next month.
I’m going to be going over all of this in a lot more detail in the coming weeks and months, so don’t worry if it isn’t jumping off of the page at you right away.
Finally, I know that there are other viable solutions out there to the “investor’s dilemma.” But I designed the 10 Steps to Foolproof Investing with a few unique things in mind.
- Anyone can do it.
- The annual cost of the tools and information sources is less then $50/mo.
- It leverages the advantages that we have as self-directed investors and gives us a chance to separate ourselves from the investing herd and beat the markets.
- It puts you in the driver’s seat and makes investing the fun and prosperous adventure that it was meant to be.
To the growth of your wealth,