That’s what happened to me when I took a graduate-level class with one of my mentors in technical analysis, Dr. Hank Pruden.

For those of you who are unfamiliar with the term “technical analysis,” it refers to analyzing a market or an individual asset using charts.

I was expecting to learn about trend lines, bullish and bearish patterns, cycle analysis, etc., in this class. But instead, we dove deep into the psychology of the markets, trying to understand what motivates investors and traders to act the way they do.

Today, there are many institutions that teach behavioral finance, but at the time, it was groundbreaking stuff.

One of the most important concepts is that investors’ behaviors repeat time and time again. There are no guarantees, of course, and every situation will be a little different, but humans can be fairly predictable.

We typically fear the worst just before things get better… and we expect things will always be this good just before they get worse.

This course taught me a number of key ideas that I still use nearly three decades later. Here are a few of the most impactful ones.

Confirmation Bias

Confirmation bias occurs when you focus only on the information that confirms your beliefs. People do this with their political beliefs all the time, and the media plays into it by exclusively giving them information that aligns with their point of view.

In the markets, an investor may believe that a stock is a great buy because they see the company’s products everywhere… which may cause them to ignore the fact that the stock has been in a downtrend all year. Despite the market signaling that things are not great for the company, the investor buys the stock anyway.

Overconfidence

I’d bet almost everyone reading this believes they’re a better-than-average driver. In college, I had an argument with a friend about what a horrible driver he was. “How many cars have you totaled?” I asked. (The number was three in the previous four years.) “Yeah, but they were all somebody else’s fault!” he exclaimed.

Enough said.

When things are going well in the markets, investors often confuse a bull market with their own genius and think they’ll know when to get out. Of course, it doesn’t work out that way.

The Herd Effect

How many times have you been looking for a place to eat and walked past an empty restaurant to wait at a crowded one?

We’ve seen this time and again in investing, like when people piled into dot-com stocks, crypto, cannabis stocks, and meme stocks because that’s what everyone else was doing.

Being aware of these concepts can help you question your own decision making and ensure that you’re thinking critically about each buy and sell.

You can also use stock charts to test your opinion.

For example, in early 2021, AMC Entertainment Holdings (NYSE: AMC), the poster child for meme stocks, took off. The stock moved from the $20s (split-adjusted) to over $600 in a few months.

And keep in mind, this was not some new tech company or a biotech that had a cure for cancer. AMC is a movie theater chain. And you’ll recall that in 2021, no one was going to the movies. So it made no sense that everyone was piling into the stock.

Let’s say you were on Reddit or some other message board reading about AMC and all the reasons it should go higher. One look at the parabolic move on the chart would tell you to be very careful… because when the stock stopped going higher, it was likely going to reverse quickly.

Technical analysis is simply the visual representation of investors’ emotions. The more aware you are of those emotions and behaviors and how to interpret them, the better a trader and investor you’re going to be.

The post 3 Lessons Every Investor Should Know appeared first on Wealthy Retirement.

A one-time $10,000 investment in the S&P 500 would have been worth $232,644 after 30 years versus just $20,792 for the average investor. That’s a hell of a difference.

Why is the spread so wide?

Investors get emotional. They get scared when markets fall and greedy at market peaks. Investors consistently make the wrong decisions about their portfolios when emotions take over.

I became aware of this phenomenon early in my investor education. I was fortunate to read the book Contrarian Investment Strategies by David Dreman. Contrarian investing is investing by going against the crowd when sentiment is at extremes. During points of excess greed or fear, the consensus is usually wrong.

Think about the top of the dot-com boom and the bottom of the COVID crash as examples. Markets moved violently in the opposite direction in both of those cases. During the dot-com bubble at the top of the market in 2000, investors were so greedy that doctors, lawyers, and cab drivers were quitting their jobs to trade internet stocks.

I would talk to CEOs of publicly traded companies who had no business model, no revenue, and certainly no profits or cash flow. I would ask them how they were going to keep paying their employees, and they would tell me, “You don’t understand the new paradigm.” And then their stocks would go up another 10 points that day.

It was true. I didn’t understand it. But I understood math and knew that if you run out of money, you can’t keep the lights on. As the dot-com boom continued to inflate and the companies’ financials deteriorated, I avoided nearly all of these stocks, while analysts, internet message boards, and CNBC all breathlessly cheered these garbage companies higher until the music stopped and there weren’t enough chairs.

Millions of investors lost their shirts.

During the crash in early 2020 after the pandemic shut down the global economy, investors headed for the exits quickly, only to watch from the sidelines as stocks quickly rebounded.

Investors who still bore the scars from the 2008 global financial crisis swore off the markets forever, claiming they were akin to a casino.

Meanwhile, the S&P is up 183% since the bottom of the 2020 bear market.

Twenty years ago, my career took a dramatic turn. I was hired by Avalon Research Group, the most contrarian research firm on Wall Street. We were only allowed to initiate coverage on stocks if it went against the consensus.

The firm poked lots of holes in the hype surrounding many popular stocks – so much so that the founders had to hire security after receiving death threats. How’s that for extreme sentiment?

At Avalon, we were right way more often than we were wrong.

I still go against the grain when sentiment is at an extreme. I love nothing more than buying a stock that most or all of the analysts rate a “Hold” or “Sell” or buying stock of a quality company that has been hammered after an earnings miss, despite positive results.

You can’t simply be contrarian for the sake of being contrarian. But when markets make big moves because of extreme sentiment, it’s usually profitable to take the opposite trade.

The post The Power of Contrarian Investing appeared first on Wealthy Retirement.

Did you hear about the struggling actor who got hooked on investing while reading someone else’s mail, landed a job on Wall Street, and eventually became a successful investor, stock strategist, and author?

No?

Well, you receive his emails several times a week.

That’s right. That struggling actor was our very own Chief Income Strategist Marc Lichtenfeld. (Don’t worry – opening the mail was part of his job.)

Last week, Marc joined YouTube personality Ari Gutman for a wide-ranging interview on his backstory, his investing philosophy, his mission, and much more.

It’d be impossible to transcribe the entire interview in one email, but here are some of the highlights. You can click each link below to jump to that portion of the interview.

AG: What exactly is your story, and how’d you get to where you are today?

ML: “I moved to California, I was still a struggling actor, and I needed money. I mean, I wasn’t making very much. And I decided that the stock market seemed like a good place to try to make some. My first trade, I invested $600 in Harley-Davidson, made a $300 profit in about two months, and thought I was going to be – I’d say the next Warren Buffett, but I didn’t know who Warren Buffett was at that point. … I just became obsessed with the stock market.”

AG: Of all the areas of the market you could’ve specialized in, you landed on dividend stocks. Why?

ML: “Basically, because it works. … Over the long term, the overwhelming majority of the [market’s] total return can be pointed back at dividends. … If your sole focus is growth, you’ve got to watch those pretty carefully, because when stocks like those do reverse when there’s a bear market or the individual stocks turn around, it can get nasty really, really quickly. So you have to really be on top of it, whereas with dividend stocks, if the company’s paying and hopefully raising that dividend every year, you can really kind of sit back and just live your life and not be focused on it every day or even every week.”

AG: I want to ask you about your 10-11-12 System. Can you break that down?

ML: “What it comes down to is it’s a long-term strategy. I want to see the yield on any stock that I pick reach 11% within 10 years, and if I’m reinvesting the dividend, I want the average annual total return to be 12% over 10 years. If you have an 11% yield, you are beating inflation. We’ve had one period in the last 50 years where inflation got above that. Even two years ago, when inflation really spiked, the highest was 9%. So if you’re at 11%, you’re doing pretty well. And then 12% average annual total return is pretty darn good as well. You’re tripling your money every 10 years.”

AG: I get a lot of emails from people who are five to 10 years out from retirement saying they’ve really missed the boat on investing early. What would you say to them?

ML: “Invest as hard as you can for as long as you can. If you’re planning on retiring in five years, that means you have five years to put away some more money. Maybe when it gets to five years, maybe you can extend it for another year or get a part-time job or find a hobby that pays just so you’re not pulling more money out if you don’t have to. Every year that you can let that money grow – and compound, if you’re reinvesting the dividends – will just add to what you have in the future. … There’s no real shortcuts, but all you can do is what you can do today, which is invest as much as you can in quality companies that are raising their dividends every year and let it go for as long as you possibly can.”

AG: What was your mission in writing your book, Get Rich with Dividends?

ML: “It was to try to show people that they can have the financial future they want without it being scary, without having to invest in crazy strategies, [and] without having to try to find that next superstar stock. It can be as easy as they want it to be. … For the person that really just wants to make sure that their financial future is taken care of and not have that be a dominant part of their life, it’s really, really easy to do.”

I thoroughly enjoyed the interview, and I think you will too. Simply click the image at the top of the page to watch it in its entirety.

The post Marc’s Journey From Starving Actor to Renowned Investing Strategist appeared first on Wealthy Retirement.

Buongiorno!

That’s Italian for “good morning”… and it’s how Chief Income Strategist Marc Lichtenfeld would’ve greeted you in this week’s State of the Market if he had stuck to his goal of learning Italian during the pandemic.

Luckily for us, though, Marc instead spent his extra downtime completing his certification to become a Chartered Market Technician, or CMT.

This designation is bestowed on those who have demonstrated an all-around mastery of technical analysis – that is, analyzing stock charts. (Marc, of course, has always been very humble about it, but it’s a big deal.)

In the latest episode of State of the Market, our very own chart-reading maestro explains how a quick glance at a stock’s chart can help you minimize your risk and maximize your profits.

The post Become a “Maestro” of Technical Analysis appeared first on Wealthy Retirement.

That is, don’t let your emotions dictate your trading.

It seems simple enough, but resisting investor emotions is far easier said than done.

Not even Marc could keep his head straight without a new secret weapon…

His worst trade scarred him so much that he set out to discover a strategy that would send clear signals of when to enter and exit trades.

The dream strategy he found is called technical analysis, or the study of stock charts – visual representations of investor fear and greed.

Easy-to-understand technical indicators – like support, the price level at which a stock’s downtrend reverses – would have shown Marc that investor sentiment for his foundering stock had fundamentally changed.

Any investor can come to understand the basics of technical analysis, read powerful indicators and visually track shifts in investor psychology.

Check out Marc’s tips so you don’t have to learn his lesson the hard way.

The post A Beginner’s Guide to Stock Charts appeared first on Wealthy Retirement.

Trading isn’t for the faint of heart – yet every trader has their heart in it.

In 2005, researchers at MIT found that it doesn’t matter how experienced you are… even the most seasoned traders show “significant emotional response” when the markets get volatile.

So if last year’s dizzying drop in the S&P 500 left your heart pounding and your palms sweating, you weren’t alone. We’re hardwired to trade emotionally.

Some researchers think that emotional impulse means we’re doomed to mediocre returns…

Another study of more than 1,500 day traders in Brazil showed that 97% of participants who traded for 300 days or longer lost money. Panic-selling, anchoring bias and other emotionally driven fatal flaws diminished their profits.

So how have Chief Income Strategist Marc Lichtenfeld’s recommendations been able to beat the market by more than 8X on average in his Technical Pattern Profits VIP Trading Research Service since November?

Marc isn’t a machine… In fact, in this week’s episode of his YouTube series State of the Market, he shares a story from early in his career about how even he has suffered the consequences of emotional trading.

But he’s since found a way to make even the most difficult calls without being swayed by emotions…

In this week’s episode, Marc reveals the nearly foolproof strategy he has used for decades to inform his short-term trading.

The research-based approach Marc uses, technical analysis, provides clear signals for when it’s time to enter a trade – and, more importantly, when it’s time to take a bow and exit.

Every indicator is informed by investor psychology – so you can take advantage of the market’s fear and greed instead of getting swept away.

With real examples, including a breakdown of how investor psychology led to either profit or heartbreak on Moderna (Nasdaq: MRNA) last year, Marc reveals how to put chart patterns to work.

Be sure to watch this week’s State of the Market to see how technical analysis can maximize your profit potential.

Click here to watch.

Good investing,

Mable

The post Mind Over Money: Trading When Emotions Run High appeared first on Wealthy Retirement.