The Biggest Blunders Investors Make

Larry Edelson

I’m often asked what I think are the most common, most ruinous mistakes that investors make. Unfortunately, there are a lot of them.

There are things such as risking too much money on a single trade or investment … not using protective stops … not using disciplined money management … trading too often … not doing your homework … taking on too big a position in any market … not diversifying enough … and so forth.

But in today’s column, I want to cover what I think is the most dangerous mistake investors make, bar none.

It’s what I call getting caught up in all the “market myths” that are always out there. Or put another way …

It’s having a set of preconceived notions
about what markets can and can’t do.

The fact of the matter is that markets can do whatever they want to do.

Markets are never wrong. Markets are never irrational.

They are what they are and if you don’t understand a market, it’s not the market’s fault, the fault lies instead with your analysis.

For instance, have you ever heard someone say “a market is defying all logic?”

Or that a market is “disconnected from its underlying fundamentals?”

I’m sure you have. I hear those kinds of phrases all the time on shows such as Bloomberg and CNBC.

But the fact of the matter is that …

Markets NEVER defy logic.
And they never defy the fundamentals.

Only people defy logic. Only people can make such statements about fundamental forces as well, because when a market is allegedly defying fundamentals, what it’s really doing is operating on fundamental forces that the analyst or investor simply hasn’t figured out yet.

I fully realize that what I’m talking about here is hard to grasp at first. But if you take the time to think deep and hard about what I’m saying, you will elevate your trading and investing to a whole new level. Markets are never wrong. Only people are.

Especially dangerous for most traders and investors is
getting caught up in the various “market myths” that are out there.

For instance, how many times have you heard that rising interest rates are bad for the stock market, and that declining rates are good for stocks?

If you’re like the average investor, you’ve heard that theory literally hundreds, if not thousands, of times before. Tune into any media show today, and I’m sure you’ll hear it at least once, if not more.

Most stock brokers, and the majority of analysts and newsletter editors espouse the same causal relationship between interest rates and stock prices.

But the fact of the matter, the plain truth, is that there is no “standard relationship” between interest rates and stock prices. Period.

Consider the period from March 2000 to October 2002, where the Federal Funds rate declined from 5.85% to 1.75%, and the Nasdaq plunged 78%. Put simply, stocks and interest rates went down together! Exactly the opposite of what most would expect.

Or the period from March 2003 to October 2007, where the Federal Funds rate more than tripled and rose from 1.25% to 4.75% …

And the Dow exploded higher, launching from 7,992 to 13,930 — a 74.2% gain! Stocks and interest rates went higher together!

The fact of the matter is that the relationship between interest rates and stock prices varies considerably depending upon a host of factors, including the value of the dollar and where the economy is in terms of its economic cycles.

Never get caught up in conventional thought about what a market can or can’t do — or you will most likely lose your shirt.

But the bottom line is this: Never assume anything and never, ever get caught up in conventional thought about what a market can or can’t do — or you will most likely lose your shirt.

Let’s look at another market myth. Almost everyone believes that gold and the dollar cannot go up together.

And so, they also believe that the dollar and gold can’t go down together.

But that’s completely inaccurate. There have been plenty of times when the dollar and gold have gone up together … and there have also been plenty of periods when they have gone down together.

In fact, in the not-too-distant future we are probably going to see another such period for gold, where it and the dollar go higher together.

Indeed, when the European Union really disintegrates, which is not that far off, that’s probably exactly what we will see: A mad rush of European money into the dollar and into gold — and out of the euro.

Or consider the normal view about a country’s widening trade deficit. The common theory is that a widening trade deficit is bad for stock prices and a narrowing deficit is good.

But history proves that to be entirely wrong, and nothing more than a myth.

Fact: From 1976 to 1998, the U.S. trade deficit ballooned from $6.08 billion to $166.14 billion, and guess what? The Dow Jones Industrials went from 848.63 to 9,343.64!

In truth, the relationship between the trade deficit or surplus and stock prices is exactly the opposite of what most pundits claim.

Or consider the myth about corporate earnings that says they have to rise for stock prices to continue higher. Yet from 1973 to 1975, the combined earnings of the S&P 500 companies rose strongly for six consecutive quarters — and guess what? The S&P 500 Index fell more than 24%.

In other words, rising corporate earnings does not guarantee rising stock prices, by any means. Nor do falling corporate earnings guarantee falling stock prices!

There are many myths or biases out there about the relationships between economic fundamentals and markets, about stocks, or between markets and other markets.

But the fact of the matter is that almost all of them are exactly that: Myths, and nothing more.

The bottom line: To avoid making the biggest investing and trading blunders …

1. Never assume anything when it comes to the markets …

2. Question everything, and most of all …

3. Think independently!

Happy New Year, stay tuned and best wishes,

Larry

P.S. You can avoid the biggest blunders investors make with actionable information. My new Supercycle Investor podcast connects the dots between global crises, economic cycles and your investments. Listen for free and let me know what you think of the show!

Larry Edelson, one of the world’s foremost experts on gold and precious metals, is the editor of Real Wealth Report and Supercycle Trader. Larry has called the ups and downs in the gold market time and again. As a result, he is often called upon by the media for his investing views. Larry has been featured on Bloomberg, Reuters and CNBC as well as The New York Times and New York Sun.

Comments 40

Siggy Latarski December 30, 2015

Larry, does your Feb Euro option recommendation remain viable?

Jerome Ceasar A. Azura December 30, 2015

Now, pls, larry help. Me i wont to go in the the bank. To veryfia my account money i got. But i dont have money.to provide to pay eney payment for i pay for. Im going there.to know if i got i have my money.achive for i got plz.help me we got here banko central. What i going dairect to thame.so that i got my account i got..i got nothing.plz this my thinking i got. To i have..salamat pi,,thank you soch po,guys

GEARGE SEGAL December 30, 2015

what the f

A.J Close December 30, 2015

Larry your cycle analysis are super, but your timing on stock picks stink like rotten fish ,fcx timing and euro puts.

Jerome Ceasar A. Azura December 30, 2015

Now, pls, larry help. Me i wont to go in the the bank. To veryfia my account money i got. But i dont have money.to provide to pay eney payment for i pay for. Im going there.to know if i got i have my money.achive for i got plz.help me we got here banko central. What i going dairect to thame.so that i got my account i got..i got nothing.plz this my thinking i got. To i have..salamat pi,,thank you soch po,guys

John December 30, 2015

Reply to Larry's M&M: I really like Larry, and I have found over the years that he is one of the better thinkers about markets. He is also the most independent thinker at Weiss Research (that I am aware of), which in part is why he's been able to make so many good calls over the years. There is a lot of research about financial thinking that points to independence as a key to good work. But the main point he's making in this particular Money and Markets column is not some of his better work. While I have no issue with his telling investors to beware of various forms of pop wisdom, and I am perfectly fine with his ending advice - 1) Never assume anything when it comes to the markets, 2) Question everything, and most of all, and 3) Think independently. But there are some clear errors in the middle that I would hope someone of Larry's stature would avoid. In particular I have an issue with the following: But the fact of the matter is that … Markets NEVER defy logic. And they never defy the fundamentals. These are not facts - they are opinions. Furthermore they are neither correct (the way I see it), nor are they useful. My response to the first: Markets NEVER defy logic. This looks like a wise statement when you compare that you see happening in the market to YOUR logic, because those frequently don't match up. But as long as you don’t say what kind of logic is being followed rather than yours then this statement is impossible to evaluate. Not only does this open it up for - anything goes - (which is not exactly what being "logical" means) it is also not useful because it is a nebulous statement upon which no sort of action can be taken. All it means is something is going on and you don't understand it. Again - that may often be the case, but what does that get you as an investor; not much. Furthermore any casual examination of the markets, and of particular companies in the will tell you that while "something may be at work" it's going to be a stretch to call it logical. For example a company's stock can't be worth $30 a share one month and a few months later three or four times that - then a few months more back to $30 a share or less - without all that much change in their business. Yet there are plenty of examples of wide variations like this. Which brings up Larry's second statement: And they never defy the fundamentals. Although there may be a few exceptions (like VW during the options take over struggle with Porsche a few years back, or USG when their asbestos liability problem surfaced) many times there seems to be no rhyme or reason for the large changes of price seen in company stocks at times. The rapidness of the change, as well as it's up and down nature (or it's down and up nature) are hints that fundamentals have little or nothing to do with the price change. In fact the market is full of evidence that fundamentals do not rule some portion of the time - which is in direct contradiction to Larry's statement. Even Ben Graham, the "father of fundamental analysis" knew this. He said (paraphrased) "In the long run the market is a weighing machine, but in the short run it (may be) a voting machine". Translated into plain English Graham was saying that in the long run fundamentals will be reflected in the stock price, but not necessarily in the short run. That "not necessarily" part is where fundamentals do not project the stock price. There is a difference, and that is where Larry's claim does not hold up. Warren Buffet has been taking advantage of those differences his entire career. But if Larry were correct there would be no such difference. This perspective is stated by theory called the "Efficient Market Hypothesis", which says (more or less) the price of the market is always the right price and consequently nobody can ever beat the market. Well for one thing the Efficient Market Hypothesis, which I have studied in graduate business school - is a lot of horse $#*^%@. It is neither a theory (it is a collection of claims) nor is it a hypothesis (which must be stated in such a way that it is testable). It is just a claim - and an unsupported one that that - and nothing more. And anyone who's spent any time in the markets will know that this proposition is not correct. It may be hard to beat the markets, but it is not theoretically impossible - which is what the Efficient Market Hypothesis says. Nonetheless the Efficient Market Hypothesis remains a favorite of academics - who (I suspect) have no real stock market experience. Warren Buffett's reaction the Efficient Market Hypothesis - he said if it were true "I would be a pauper with a tin cup." That tells you all you need to know about the Efficient Market Hypothesis. I am disappointed in this particular column from Larry; I expect better from him. John

Daniel Victor December 30, 2015

Markets did defy both logic and fundamentals during the dotcom boom.

John December 30, 2015

During the "Dot.com" era - the US stock market experienced what's called a bubble. It probably should be called a spike - but the term bubble is good to explain what happens when "it's over" - the bubble "pops", and down go the markets. Bubbles are not driven to their heights by the fundamentals of anything, although Warren Buffett says that bubbles start out with some good fundamentals in the beginning. Rather they are driven my mania among market participants who become increasingly convinced in the "greater fool theory" - that I may be a fool for buying this but someone else who is a greater fool than I will take it off my hands at yet a higher price. Studies have shown this to be a factor, although there are likely many factors in any given market bubble. And all market bubbles are examples of price action that moves out of kilter with fundamentals. But market bubbles happen all the time. I have a book titled "Panics and Crashes" by Harry Schultz (ISBN 0-87000-147-7) that traces the history of the stock markets back to the early 17th century and he points out that bubbles have happened with some regularity for the last 400 years. Way back there was the "Tulip Bubble" - in Holland (from 1634-37). Then there was the "South Sea Bubble" which started in 1712 in London, and later the "Mississippi Bubble" in 1718 in France. So this is a known phenomenon, and it is anything but a new one. And while some fundamentals may apply (the South Sea company SHOULD have enjoyed the same success as the British East India Company - because they had a complimentary charter form the King) but there were a lot of other things going on - such as manic stock buying including with absurd amounts of leverage on the London Exchange. These are non-fundamental factors. BTW - in the Introduction of his book Dr. Shultz (PhD) provides the following quote: Uneven economic and political development is an absolute law of Capitalism - by Nikolai Lenin Get used to it because it's not going away. John

$1,000 gold December 31, 2015

two rules, dan: 1. the markets are always logical. 2. when the markets are illogical, refer to rule #1. i think that's larry's message today.

Edouard D'Orange December 30, 2015

I'm in particular agreement with John because he spells out his logic. Besides fundamentals, there are trends, fibonacci analysis, etc. Many analysts and traders hold these in high esteem and follow them religiously. I can't go without mentioning that money decisions, mostly by the Federal Reserve and government spending, has a lot to do with influencing markets, in my opinion. Seems to me that makes markets irrational. Also, money velocity has slowed which keeps inflation low.

Will December 30, 2015

The maze taken by Larry to reach the self evident conclusions was amazing to say the least.

Al December 30, 2015

Great article Larry; However, I do question your statements regarding Europe's inevitable total unraveling since they "in total" are not much worst off than we are here in the good old USA. If you think about it, Europe somewhat resembles the U.S. in that they are like a group of states and they are under one overall set of "national" E.U.policies, monetary policy and economic constraints. With that being said, they also have some "states" that are in more trouble economically than others. A similar scenario can be observed in the U.S., whereby many of our states are in a poor economic position as opposed to others. I personally would welcome an unraveling of dictatorial countries like Russia, China, and Saudi Arabia, each of which has impact on the world economy yet their "citizens" basically have no rights. At least the E.U. is democratic and and although they as individual countries can demonstrate poor fiscal policy, they also care about prosperity for all their citizens.

David December 30, 2015

Good article/response Al, I have made the same point a couple of times myself. I would add that most European countries are more stable than our states because most people in Europe do not move as much mainly because of language 'restraints', which especially affects schooling. Although I am originally from England, my wife is from Belgium, our son went to his first kindergarten, at the age of four, in Germany where I was working. We have been proud Americans for the last thirty years.

John December 30, 2015

Reply to Al: I agree that the EU hasn't fallen apart on the Weiss Research schedule, and it may actually wind up staying intact long term. Germany has a lot at stake to keep it together because they are the chief beneficiary of the lack of a currency differential between their money and the money used elsewhere in Europe, especially in the economically weaker EU countries. Were they all on their own currency the German currency would appreciate as a reflection of their economic might which takes some of the edge of their product pricing (makes their exports to Europe more expensive). But without it they can complete with both domestic and other EU producers on an eyeball to eyeball basis with no currency adjustment. And let me tell you going head to head with German efficiency is a hard row to hoe. Germany is raking the money in - because they are so darn good. While there is nothing wrong with that (and certainly not for consumers who are eating it up) domestic producers are getting squeezed without the currency adjustment to protect them. So Germany has the deep pockets AND the incentives to keep this ship (the Eurozone) afloat and they may succeed in the end. But things are not good in Europe and the common currency is clearly at risk. When I was at the Wharton School of Business this past fall a professor of finance in a mini class I was taking said that Europe is a LOT, LOT worse off than we are in the US. And he happens to be not only Spanish - but a Spanish national - so it's not like he's rooting against Europe. He's not - it's just that there is a lot of trouble there, which is why Larry's point of view on European risk is not off the market. The professor explained his thinking on this but it's not something I can get into on the blog. John

Ian F December 30, 2015

Al The EU comprises a collection of democratic states of which my country, UK and adopted country, Greece, are 2. The EU is not a democratically run Union but a collection of self elected politicians who impose and foist their own 'fuzzy logic' and ideas onto the democratically elected governments, such as my UK, much to the chagrin of myself and other like minded citizens who are considered individual members of the EU. Two examples of EU interfering in other member country's affairs are the 'Human Rights' fiasco which allows criminals to have 'rights' where none are deserved, over those of their victims and the other giving police officials, of one EU country, the right to issue an arrest warrant for a member of another member country on the strength of flimsy unfounded charges. ...care about prosperity for all their for all their citizens!!! try telling that to the Greeks. A Happy and Democratic New Year to you Al!

Henry B. December 30, 2015

Although I certainly cannot match John's detailed analysis above, I agree with him. Larry in his column is saying that you cannot trust any commonly invoked guidelines to predict the market, and you should "question everything, never assume anything, and think independently". Well, what ideas or concepts CAN one use to try to predict the market? He doesn't really offer any suggestions here. Of course in other columns, he touts his "cycles", which he says have accurately predicted everything in the world economy since the Big Bang (a little exaggeration there). However we do not have direct access to his "cycles", so I guess we just have to await his recommendations. Hmmm good luck!

John December 30, 2015

Larry says that cycles and their use is the lynch pin of his analysis (or something like that). And he shows evidence of this thinking and use of them from time to time - but he does not share his methodology or his sources of data for this. So you can't (as far as I know) do your own analysis of the kind he does - you have to get it from him, which means you have to be a subscriber. But Larry makes it clear that his work with cycles is his own proprietary material, and he does not plan on sharing this fully with subscribers. He does share a piece here or a chart there - but he basically holds onto it as his own methodology. Larry makes his living by selling subscriptions to his analytical work. It's not a game; it's his profession so I don't blame him on bit for doing so.

Barry Knabe December 31, 2015

John, I have been following Larry for about 3 years now and not sure what to think about his knowledge about the markets. He seems to twist his words around to adjust for events that don't happen like he predicted. At this point I have lost more money than I have made with him. I would be interested to hear more about your thoughts on the markets and Larry's suggestions. Do you have a blog I can follow? Kind regards, Barry

Michael from Oz December 30, 2015

Its good to see never ending predictable confusion amongst traders...its predictable fodder for experienced selective short term traders. At least Larry does some short term...

franklin December 30, 2015

Larry misses one huge mistake that many investors make - and that is paying good money to people like Larry, Mike Larson, Weiss and other gurus who make THEIR money by telling you how to do it. They get rich off of YOUR money, not their market savvy. Only silly, naïve fools believe the junk fed to them. Can you believe the sensationalist subject lines in Larry's promotional emails? Best thing about those emails is they give a good laugh.

Jerome Ceasar A. Azura December 30, 2015

Now, pls, larry help. Me i wont to go in the the bank. To veryfia my account money i got. But i dont have money.to provide to pay eney payment for i pay for. Im going there.to know if i got i have my money.achive for i got plz.help me we got here banko central. What i going dairect to thame.so that i got my account i got..i got nothing.plz this my thinking i got. To i have..salamat pi,,thank you soch po,guys

John S. December 30, 2015

I have to agree with Franklin that most financial advice writers make most of their money from selling advice rather than following their own advice. They are right occasionally and shout those successes to the heavens and glance over their losers. Larry does get directional calls often correct but his timing is terrible. I subscribe to too many financial news letters and the more I read from them and observe the results is none of them know where the market will be 2 months from now let alone next week, they use blind luck and educated guesses and all too many of us follow blindly and willingly pay to do so. But what is the alternative?

shmuel sharir January 3, 2016

Suggestions: 1. Buy major indexes (ETFs). This is buy and hold (for a long time) system. No need to pay for advice. Depending on you personality and your specific situation (age, wealth, existence of pension) you may want to sell when an index falls by 25% (and that will happen infrequently), and buy it again when its price returns to the price at which you sold it. 2.Buy individual stocks (of main companies in several industries) especially those that are also "dividends Aristocrats or kings" as well as 2 [Vanguard or i share] ETFs for other developed and emerging areas, 1 for Real return bonds (e.g. TIP) and maybe 1 for regular bonds . Buy and hold (or sell if fell by 25% as suggested above). No need to pay for advice. If you are a gold bug buy GLD as well. I assume that you will be fine. Treat conflicting advice simply as "noise". However you will not probably become too rich and you will not have a 10 bugger. Good luck

Fedex December 30, 2015

Much of what Larry is talking about can be filed under the title of "Market Canards". He has a point. There are many. Here is one: most people believe that the market will go up when company profits are good. It might, but it might not. The correlation for these two events is actually not that good. Definitely not something you would bet on in Vegas. You can check it out by looking back at the history of the market over the last 75-80 years or so.

Max December 30, 2015

When markets temporarily defy fundamentals it is due to investors' PROJECTIONS. Investors always project what they think will happen in the future into their decisions. For instance, Amazon wasn't turning a profit for years, yet investors have continued to bid up its price because they projected that someday it would become profitable. And now it finally has; with a current PE of around 1000. But if it never became profitable, sooner or later investors would give up and lower their projections. And then then price would begin to be more influenced by the fundamentals. And such a shift could come rapidly or slowly.

Vicky December 30, 2015

Are Brokers a safe way to invest money? Thank you

JAB (Jaap) December 30, 2015

Jaap. From the Netherlands an other way of thinking. Germany, the Netherlands and England have in secret an other way of idea of Europe. The want to have a strong Europe in the same way as the USA have. A lot of different states in the countries of Europe needs to have there own freedom. But this costs a lot of rearangement of the countries it selfs and Europe in total. The politic and the people are not yet ready for it but Europe is stronger and more flexibel the you thinking in the USA. The big problem is that the old Easten states like Poland and Hongaria don't realise what freedom and selfcritical means. I stil have hope that Europe will become one nation with a lot of selfdepending parts. Larry thanks for your very good lectures and folks sorry for my bad Englisch.

Bob Wortock December 30, 2015

I still have not gotten a response on how YTD profit or loss based on percentage in 'Super Cycle' is determined. What is the % of gain or loss if one does not consider using options? I have been with Wiess since 2009 and have subscribed to many program which has put me in the 'elete group'. However, I am getting very dissapointed in the 'over kill ' of contradiction of information received each day on Weiss emails with rather very poor results over the past 6 1/2 years. I would like limited information that have positive results of making some money and not spend 2 -3 hours each day trying to decipher Weiss' emails on what to do. I don't need to constantly be lectured on a number of topics just to feel that I am getting my moneys worth. I too am beginning to think that this all is just a subscription to unproductive misallanious information. If enough mud is thrown on the wall some of it will stick and accomplish its' goal, but the majority of the mud falls to the ground. My limited time is important at my age. Respectfully yours,

John December 31, 2015

Reply to Bob Wortock: There are some problems at Weiss that can affect the reliability of their work for investors. And one of the biggest ones is that Martin and most (if not all) of his content and service operators are bears. If you ask Martin himself, he will say he is a bear. (I have seen this in print on more than one occasion) But there is a problem with that. And furthermore this problem has manifested itself over the time period that you are talking about, the years between 2009 and today (end of Dec. 2015). That problem is that markets have gone up during that time. Bears want to make money when the market do down, but if the markets go up bear (or short) positions do not make money. In addition a bearish outlook does not provide the right kind of guidance for investors when markets are rising because they live in fear of a collapse. But "Mr. Clear Skies and Warm Sunshine" will do much better in a rising market than "Mr. Thunderstorms and Hurricanes". There are a lot of very smart people, including Martin Weiss, who are better characterized as the latter. But when it comes to anticipating directions of the markets - you don't get any prizes for being smart, you only get prizes for being right. Martin Weiss is among my favorite investment thinkers, and his company is a wonderful source of financial research, news and other wonderful information. He truly endeavors to give you his best each and every time. I also want to credit Martin for running his business without lying or making up data as many of the advisory services do and for generally doing a good job not forcing his personal viewpoint on upon his research staff. Martin is a good man. I have no question about this. However it is a fact that markets go up on the long run. There are many reasons for this. And evidence from price action in the stock markets for the last 400 years supports this view. So when you take the point of view that you are a bear you are putting yourself in a position where the odds are against you. That is the problem with Weiss Research. You will notice that Warren Buffett almost always comes across as "Mr. … Sunshine". There is a reason for this. John

John T January 4, 2016

Couldn't say it better myself. Thanks for the honest input.

Gerry December 30, 2015

The way I see it is "the market is the market" so no matter what it does, it is still the market. HOWEVER, as we all know, there are no free markets any more, as they are all manipulated, so what the market does, does not provide a clue to what will happen in the future like it used to do. One must think outside the box, and attempt to determine what will happen when the manipulators choose to stop the manipulations, or when economic forces make manipulations cease for other reasons. Those who guess right, and can stick it out will gain big time. It is hard to criticize Larry or other newsletter writers, since they may or may not guess right, but they make money on their newsletters no mater what. Larry has made a lot of good calls, but that will only continue until it does not.

bobi December 30, 2015

several places in article I see &mdash.... please enlighten me

Glenn Welch December 30, 2015

Please sent newsletter

The30WeekMA December 30, 2015

What you must focus on most is Price. That is the reality. Everything else is just opinion and storytelling.

Beverly January 1, 2016

Nothing is improving in Canada, so it is good to get an American perspective.

Steve omambia January 1, 2016

Please enlighten me to know more about money and market cause I'm not understanding properly.

Steve omambia January 1, 2016

Enlighten me about money and market.

shmuel sharir January 3, 2016

SEE MY SUGGESTIONS TO JOHN s ABOVE.

shmuel sharir January 2, 2016

The statement that a rise in interest rate will have a negative effect on the value of stock will be proven correct in a world that nothing else changed (i.e. that all other variables are constant). Even Larry will not be able to prove this statement to be wrong!!!!

Phillip January 5, 2016

Larry; Is this the "DROP" in the Dow you've been talking about that would scare the dickens out of investors and Analysts that does not have a clue about Market Fundamentals? How low is the Dow are going to go Down? or When is the Dow going to Thrust Higher? Is the downturn in China going to Drag the global economy?