Common Sense Trading

“If it were easy, everyone would do it”-Eric Thomas

I’m starting off my post with a motivational quote from my go-to and favourite motivational speaker, Eric Thomas.

In this post, I will be talking about how common sense fail in the trading of most people, the general public. Then I’ll proceed to introduce the common sense in trading and summing it up with E. T’s line in at the end.

But first, I would like to seek understanding for my inactivity. University is staked, assignments followed by quizzes followed by mid-term. But hey, I’ll shut up and learn to manage my time even better. No excuses. There’s other strategies and knowledge to pass on and I got to get it done.

Example 1: The Great Singapore Sale

I’m not exactly a fashionista who helps the economy by stacking up my closet with the consumerism habit, but from the picture I found, it seems like the sale is right around the corner, starting 30th May. I’ll use an iPhone for example.

Normal retail price of an iPhone: $1000

GSS price for iPhone: $800-20% discount.

It’s March now. Knowing the price of iPhone is going to be cheaper in 2 months time, would you buy the phone now?

Any rational consumer looking to buy an iPhone would wait for the 20% discount coming up. It does make sense to buy now as this price of $1000 is high. I’m definitely not getting the phone cheap should I get it now. See where I’m going?

Example 2: HDBs

Just last year, the property market was hot! Everybody were buying and from the back of my mind, a HDB unit in Bishan got sold for nearly $1 million! Just to put into perspective, the GDP per capita of Singapore is about $5-$6000. Assuming the person saves half his income every month, he’ll require 27 years to save a million dollars.

However, lately the news have been reporting that the property market is cooling down and property prices are coming down. The million dollar HDB buyer could perhaps have bought a car with the HDB at that price huh!

Lesson Learnt

I think you get my point. 

Going with the herd is the wrong decision. When the stock market is at an all time high, you don’t buy! It’s expensive! Wait for a sell off (I don’t mean buying the dip as the Spu’s are really overbought. A good 10-20% whacking is very much needed.)! Just like waiting for the iPhone that’s going on sale at the GSS! Don’t listen to those idiots telling you to buy at all time high! Common sense already knows. iPhone at $1000 is expensive! Markets at all time high is expensive!

In the HDB example, the seller of the unit was smart while the buyer of the HDB is rich! When everybody is buying, you should be selling. And when everybody is selling, you should be buying. When everybody buys, the prices get driven up. Hence selling expensive is common sense. When everybody is selling, this pushes prices down. Common sense says it’s a sale and things can be bought cheap. This is the art of contrarianism-I’ll write about this in the future.

It’s scary how so many people fail to use their common sense when it comes to investing. So many people get suckered in by the analysts and experts, putting their hard earned money into the market buying at an all time high, thinking it’ll go higher and higher. After the examples, it’s really not that difficult isn’t it. Don’t go with the herd! Never!

Market

The market is at all time high now. This means that many people bought into the market. But think about it, how much more can they possibly buy when everything is so expensive? Pockets are limited!

Picture that there are 3 sellers and buyers of STOCK in the market.

The buyers bid the STOCK at $5. All sellers say no.

The buyers then raised their bid to $6, $7, $8, $9. Again, all sellers say no.

The buyers then raised their bid to $10. Seller A cracks, thinking that $10 gives him a good profit and that it is enough, so he sold his STOCK.

Buyer B and C looking at Buyer A getting it at $10, refuses to pay more. They even want to buy it cheaper, so they bid $9. Now Seller B and C look at each other like hmm.

Then buyer B and C started losing interest and bid $8. Seller B scrambled to sell at $8. Damn!

Buyer C continued to bid lower and lower and Seller C eventually sold STOCK to him at $7.

The scenario pretty much explains how the stock prices are determined. It’s demand and supply. When someone decides to stop buying, the price will go down. When common sense finally takes over and someone decides to sell, you’ll see how thin the market really is.

So let’s see how long this bull is going to run then! I’m short!

As contrarians, trading the market with common sense, we usually take a lot of heat especially in this one directional market. The game of the market favours people with deep pockets, so for smaller traders like myself, we just have to stay small and don’t take on too much short delta. That’s the way to stay in the game in this one directional market.

Like E. T said, if it were easy, everyone would do it. Keep learning, don’t ever quit!

Pok

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