The Stock Market Insight That Changed My Life

I become active in the stock market in the mid-1990s after becoming totally deaf and unable to continue my career as a lawyer. I knew little about the stock market beyond some basic finance classes in business school, but since I no longer had a job, I had plenty of time to figure it out and educate myself.

I’ve discussed my trading journey many times over the years and will continue to share the many lessons I have learned. One critical insight gradually took hold and provided the foundation for my success in the market.

That insight was that if I wanted to produce superior returns in the stock market, it would be a mistake to try to compete against massive funds and professional traders with advantages I would never have. Trying to be a mini-hedge fund wasn’t going to work very well because they had tools and connections that I didn’t.

They spent millions on research and could call the CEO of a company at any time. How could I compete against that? I needed to identify the advantages that I had as a small, unsophisticated trader and find a way to use my advantages.

What advantages does a deaf guy sitting at home with no connection to Wall Street or special knowledge about the market have that would allow him to produce exceptional returns? The main advantage I had over the whales of Wall Street was speed and flexibility. I don’t have to manage a diversified portfolio or follow the conventional wisdom about how to invest. I could aggressively trade just a small handful of stocks in short time frames and capture some great gains.

The biggest mistake most small traders make is that they have a gambling mentality and don’t effectively control risk. When you have limited capital to work with, you have to protect it zealously and can not trade in a conventional manner.

Many small traders are pure technical traders who make very emotional decisions based on price action. They like to believe that they can predict the future and fail to appreciate how random the market can be.

I wanted to use my advantages as a little guy but without the stupid emotional mistakes that wipe out most small traders.

In addition to speed and flexibility, I had the ability to use psychology and emotions to trade against other traders. Time and again, unsophisticated traders would make the same emotional mistakes that gave me an edge if I moved quickly. Many small retail traders are just gamblers, and I could benefit from understanding how they think.

The first step to an effective trading methodology was to understand all the fundamental rules of investing and trading that people believe. The second step was to figure out how to exploit those conventional beliefs to my benefit. One of the ironies of the market is that the herd of investors is right much of the time, but there always comes a point when they go too far and pay a hefty price.

Small traders fall into two categories: gamblers and mini-hedge funds. The gamblers just rely on luck, and the mini-hedge funds embrace an institutional mindset without the capital or information to make it work.

If you are a little retail investor, your secret power is to understand the psychology of price action and then use your speed and flexibility to trade it. That is the essence of what I try to do every day, and over the years, it has made me a lot of money.

This column is the theme of a book that I am currently trying to put together. Small retail traders have the ability to turn the stock market into an ongoing source of income for the rest of their lives if they develop an effective approach. It isn’t easy, but if it was easy, you couldn’t get rich doing it. I’ll be delving into the details in future columns.

More Trading Basics:

At the time of publication, Rev Shark had no positions in any securities mentioned.