The Online Investing AI Blog

One popular solution to financial freedom is through trading. Virtually every daytrader loses their entire account at some point. The reason for this is because daytrading offers high leverage, and the risk loving daytrader takes on way too much risk. In addition, they never even measure their risk!

In contrast, swing traders hold their positions for several days, and sometimes weeks. Since margin requirements for swing trading are much higher, these traders cannot access as much leverage. To someone who is new to trading, technical indicators and strategies such as selling short can seem to be a daunting challenge. However, with diligent practice, swing trading can be effectively learned.

The single biggest challenge for any trader to overcome, be it daytrader, swing trader, or even mutual fund manager, is to overcome their ego. When a trader thinks that a stock is going to go up, and she buys it. Then, the stock goes down! The successful trader will notice that their prediction was wrong, and quickly close or reverse their position.

In contrast, what most traders do is allow their ego to take over. They say to themselves, “I know I’m right.” And they watch their investments go down and down and down. They believe they are right, but they have lost all the money.

As a matter of fact, this is exactly what happened with Bill Miller and Value Trust Fund. As you can see from my previous post, he kept thinking that his investments in banks would go up, but as bankruptcy threatened these institutions, the value of his investments plummeted.

So, what’s the solution? As usual, the answer is education. Instead of merely opening a trading account, and doing what all the other traitors do, the best thing to do is to learn successful strategies from successful traders.

Investing, Online Investing AI, Success Bill Miller, day trading, ego, financial success, Success, swing trading, trading, value trust fund

A recent article by the Wall Street Journal details how Bill Miller’s Value Trust Mutual fund lost most of its value. This year, the fund went down 58%. How is it possible that a successful mutual fund manager can do well for 15 years and then lose most of the funds money in a short time?

The answer is risk. As you can see from the chart, when the market was going up the fund made money. In fact, the went up more than the market. The problem, at least for Bill, is that when the market went down, his fund went down even more!

The challenge is that most people have no concept of risk. They believe that something is risky, and never try it. In this case, they actually have no idea and never find out.

Conversely, often people will try something once and it will work. They quickly conclude that there is no risk involved. Perhaps, since Bill was successful for 15 years, he decided that there was no risk.

So what? What does this mean to you, trying to figure out how to invest or what is going to happen with the market? It means that a track record, of even 15 years, does not negate risk. It means that even though many mutual funds make money after a year or a few years, they are still risky. It means that if you believe what mutual funds and investment industry tells you, there is a high element of risk.

What’s the solution? The solution is a way to measure risk. But not in a university statistics class, that nobody understands and has no practical value in your financial life. The solution is to find a way to measure risk, and create a way for people to invest while measuring and minimizing that risk.

Investing, Money, US Economy Bill Miller, finances, financial, Investing, mutual funds, value trust