Heard the one about the securities trader and the oil price boom? George Christison thinks you ought to pay attention.
Listening to stories about investments – and taking these tales with a grain of salt – is one of the top pieces of advice an investor should heed, says Mr. Christison, an investment planner and founder of IFM Planning Services, based in Lantzville, B.C.
"Investing is all about the creation and telling of stories. Smart traders understand that great investments and trades have a great story, and they are able to decipher the great stories from the not-so-great ones," Mr. Christison says.
For example, remember when oil prices hit $148 a barrel and were supposed to head toward $250? While pundits were commenting about the arrival of peak oil, "demand was beginning to falter due to the adoption of alternative energy, government regulations on new automobiles and slowing economies in the U.S. and Europe," he explains.
"Today, the original [prediction] has crumbled and long-term investors are still holding on to the old story and buying the dips. Traders on the other hand have moved on – they've sold or gone short on the commodity," he says.
Properly interpreting the real meaning of stories from the street is just one of the lessons that top traders have learned, Mr. Christison says. Here are a few more, from him and others:
1. Learn from the dogs as well as the stars. Not every trade is brilliant. A good trader needs perspective, Mr. Christison says: "You need to have experienced both success and failure as a trader/investor. Those who experience early trading success often think they are geniuses," as an investment grows in a bull market, only to have outside forces later shrink it.
2. Have discipline. Smart traders follow a set plan for each trade, and they often support that approach with charts. They keep a keen eye on fundamentals, factors such as the investment's momentum on the market. Plan for both success and failure by having a preset exit strategy mapped out before the trade is made, and don't deviate from that plan.
3. Don't hesitate to sell even if your stock is up. It may sound trite, but trading has only two components, buying and selling. A smart trader isn't afraid of missing out on unrealized profits when an investment goes even higher than expected. Likewise, a good trader shouldn't be afraid to cut losses when it's time to say goodbye to a particular security, Mr. Christison says.
4. Small is beautiful. "Effective traders are happy with a whole bunch of small successes. They are not typically looking to bet the farm," Mr. Christison says.
5. Be patient. The crash of 2008 wasn't all that long ago, and the long climb of the markets since then is even more recent. While no one knows for sure what will happen next, it makes more sense to take the longer perspective. It's a bit like following hockey; it was nice last fall when the Toronto Maple Leafs won a bunch of games, but their real task is to build a contending team, and that has been taking nearly 50 years.
6. Don't necessarily follow the herd. "Traders are often the contrarians in the investment crowd. Unless they are early to a great story, traders typically look for opportunities that are unpopular or often thought to be outright stupid by the majority," Mr. Christison says.
7. Be patient. Good traders wait for opportunities – sometimes for years, Mr. Christison says. Others have advised practising by making imaginary trades, to see whether they are on the right track with their investment philosophy.
8. Be aware before being active. Just as it's important to be patient and not jump into trades, it's also helpful to be engaged in market news. An experienced trader will keep informed about world events and economic, financial and business decisions (the recent surprise interest rate cut by the Bank of Canada, for instance). It's important to absorb this information without jumping to conclusions too quickly, though.
9. Seek advice. Even if you're an expert, you don't know everything. Seeking and weighing opinions from your financial adviser is really a form of research.
10. Think about ETFs. With exchange traded funds you can avoid many fees and you are buying a broader market rather than individual companies, which can be more complicated to analyze.
Remember that in the end, it's all about the stories. Advisers are usually great storytellers, says Mr. Christison. While some are true, others may be too good to be true.
It's up to the individual to be a good listener and decide which is which.