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Daryl Guppy on Market Myths
One paid session of the ATIC that I attended was the one by Daryl Guppy. The title of his presentation was “Myth Breakers – Understanding real market behaviour“.
Market myths are commonly accepted thinking or explanations related to the stock market. These myths do not really reflect the real situation.
“Uncommon results, such as superior market returns, do not come from common thinking.”
Daryl started his presentation by listing out seven common thinking, and then explained to us each one of them.
- Exclusive information or technique are required before you can make money in the market.
- The market always goes up over time.
- Volume and price are related.
- Market manipulators, inside traders, or syndicates win and we lose.
- Markets where you cannot trade short are more volatile.
- Expensive shares.
- We can all be rich trading options/secret systems/forex.
Which one do you think are myths? Let us look at them.
Exclusive Information is Needed
These point was illustrated to us by having us play a game. Daryl started by showing us the chart of a stock and told us to assumed we had bought it. Throughout his presentation, we were shown the price movement and then asked to buy a decision whether we would sell or hold the stock.
Obviously, everyone made different decisions and so the profit made were different. Now, no one in the room had any exclusive information, yet some people made more money than the rest.
The point is:
Your results ultimately depends on your skill, personality, psychology and trade discipline. You don’t need a secret tool or technique.
The Market Always Go Up Over Time
You might have been told before that the market always go up over time and were shown tables or charts of indexes to prove the point. While inflation really has a part to play in ensuring that prices will generally go up, looking solely at the index can be misleading. Why?
The index has a natural survival bias built into it. Periodically, the stocks representated in the index are often added or dropped to more accurately reflect the successful companies in the market.
This means that losers are often dropped while winners added. In such a case, naturally the index will go up.
Volume and Price are Related
These are commonly told to us:
- Changes in price and volume are related.
- Price follows volume.
- You need liquid markets.
Using a series of charts as examples, Daryl Guppy has the view that:
- Volume tells us little about trend changing points.
- More often, volume follows price or is simultaneous.
- Your smaller trade size gives you an advantage about trading in low liquidity stocks.
Market Manipulators and Insiders
These sort of thing does happen even though it is illegal. But it doesn’t mean that they win and we lose. With a disciplined trade plan, we can also take advantage of such volatility.
Markets that You Cannot Short are More Volatile
Sometimes, you can read newspaper reports telling you that short sellers cause the market to go down. But really, is it the ability or inability to short that adds to volatilty?
The truth is, shorting is not the only cause of market decline. Short sales only only contributes about 5-10% of the daily turnover. Forced margin calls on long positions contribute more to price drops.
Ultimately, markets fall or rise because of market sentiment and investor confidence.
Expensive Shares
If given two shares, one that trades at $5 and another at $10, the novice investor might immediately conclude that the $10 share is more expensive. This is a big mistake.
The correct way of comparing the relative price is the compare the earnings per share (EPS) or book value per share. Of course, other valuation methods can be used.
We Can All be Rich Trading Options/Secret Systems/Forex
There are often advertisements for seminars that claim all sorts of numbers. 20% in a month. 1000% in a trade. 10,000 students, and so on.
If they are really so good, how come your fund manager missed the opportunity?
Using an excel sheet, Daryl Guppy showed us how rich we could become if we could achieve those returns. We would become richer than the richest person (and investor) in the world, Warren Buffett after a number of years.
Now, how would that appeal to you? 🙂