Courtesy of John Nyaradi.
Do the opposite of what Wall Street tells you to do.
A new book, The Indomitable Investor, from Barron’s columnist Steven M. Sears, reveals how top investors and traders think and details a new approach to investing designed to improve returns and avoid loss.
John Nyaradi: Hi, everyone, my name is John Nyaradi, publisher of Wall Street Sector Selector, a financial media site specializing exchange traded funds, global markets and economic analysis. Today I’m honored to welcome my special guest, Steven Sears. Steven, welcome to Wall Street Sector Selector.
Steven Sears: Great to be here. Thanks for having me.
John Nyaradi: Thanks to you. Steven M. Sears is a senior editor and columnist at Barron’s and Barrons.com. He has also been a reporter for the Dow Jones Newswires and The Wall Street Journal and is a member of the Economic Club of New York. Now he has a new book out from John Wiley and Sons called The Indomitable Investor: Why a Few Succeed in the Stock Market When Everyone Else Fails. The book is doing great and is on several business best seller lists, and today we’re going to talk about the book and what investors can get out of it.
So, Steven, let’s start with why did you write the book? What’s the benefit for investors?
Steven Sears: I’ve been fascinated since the Internet bubble burst in 2000 with why people continually make the same mistakes in the stock market, have not been able to learn anything from their experiences. So back in 2000, I was a young reporter at Dow Jones and when the Internet bubble burst it was very common to hear on the street that this was just like the 1929 crash.
So I’ve been fascinated since then with how history repeats itself but no one seems to learn from their mistakes. And so when the current credit crisis occurred, it was like Yogi Berra who said, “It’s deja vu all over again.”
And I set out to try to answer this very simple question, which is why is it that retail individual investors have such a hard time with what I call the good investor rule. This is what I have always thought and it’s simple. Bad investors think of ways to make money, good investors think of ways to not lose money.
John Nyaradi: We hear a lot about the dumb money versus the smart money. What are some ways that we can become the smart money?
Steven Sears: People have to develop disciplines. People can become smart money in, you know, a couple of steps. They’re easy to say but not necessarily easy to do. You have to approach the market by looking for investments that will not make you lose money, right? You have to put risk before reward, you have to put process before profit.
And what do I mean by process before profit? Most people come to the stock market because they want to make a ton of money. So this is like — why do you rob banks, because that’s where the money is. But that’s what they want you to do. What you need to do instead is rather than buying a stock that you see on TV or on the cover of some magazine, instead you have to develop some type of metric for investing.
So what I mean by metric? You have to look at things like price/earnings ratios, you have to look at analyst coverage, you have to look at the products, you have to look at the financial reports. There’s a ground work that you have to do, but most people don’t do any of that and so they have no real conviction about what they’re buying other than they want to make money.
Dalbar has measured investor behavior over the past 20 years and what they found is that individual investors always trail the standard S&P 500 index. So if the market was up say, 10%, individual investors might only be up 2%. And this pattern always — is always present. Why? Because they never hold stocks long enough to actually benefit.
John Nyaradi: You’re in the news business and there’s so much noise around that I think tends to confuse people. How can people use news or how should they approach news to help them be better investors?
Steven Sears: I think the thing that everyone must remember and too often they forget it is that the stock market is a discounting mechanism. On any given day, stock prices reflect the sum total of all human knowledge. So you have to use the news as a sentiment indicator in many instances and you can use the news to sort of keep track of how people feel. What you want to do is if you’re using the news as a sentiment indicator, you want to be a so-called seller of confidence and a buyer of fear.
John Nyaradi: You talk in your book about chaos. How do you view chaos, how do people deal with it?
Steven Sears: Well, with apologies to Friedrich Nietzsche, “An investor without a plan isn’t an investor.” So you have to always recognize that there’s always going to be chaos and things are always going to be messy. But investors have to stay focused and know why they’re doing things.
And one of the ways you can monitor chaos is by looking in the options market at what they called skew.
The options market is where the most sophisticated investors come to express their views about what will happen in the stock market. And they’re able to express their views by trading put or call options.
So skew, which is a very funny little word, measures the pricing differences between puts and calls. Now the implied volatility is essentially the probability that the stock will rise or fall. And in order to figure out if it will fall, you would look it at put options, and if you see that the implied volatility is saying 85% for the put but 20% for the call, what you’ve just learned is that the most sophisticated stock investors think something bad is going to happen and you could use that decision to combat chaos.
John Nyaradi: How about VIX? Woudl VIX be in line with what we talked about here with put options?
Steven Sears: VIX would be like the waves on the surface of the ocean. The VIX is also based on implied volatility but it’s always designed to give you a surface snapshot out for 30 days. Skew goes deeper.
John Nyaradi: How would an investor find skew, learn more about it?
Steven Sears: The simplest way to do it and probably the first step should be to to to CBOE.com. That’s the Chicago Board Options Exchange’s website, they have an index that they have developed for skew so that’s a good first stop.
John Nyaradi: I’d like to end this discussion with an open-ended question. What’s the one thing on your mind right now, we’re talking here in June, 2012, maybe the thing that keeps you awake at night or that people should be watching out for as we move further in to the year?
Steven Sears: The situation in Europe has many times brought us to the brink. Even though a lot of this seems to be discounted, I’m not quite sure what the response will be anymore if Europe collapses. It has gone from being viewed as a a political situation to now largely being viewed as one of global economic growth. So Europe is what I’m watching right now.
John Nyaradi: Well, folks we’ve been talking with Steven M. Sears. He’s a senior editor and columnist with Barron’s and Barrons.com and hs new book is The Indomitable Investor: Why a Few Succeed in the Stock Market When Everyone Else Fails. It’s on several best seller lists and has garnered great reviews. You can learn more about the book and Steven’s work by going to the link below. Steven, it has been great chatting with you today. Thanks for joining us and I know we’re all looking forward to talking with you again soon.
Steven Sears: Thanks so much.
The Indomitable Investor: Why a Few Succeed in the Stock Market When Everyone Else Fails
(recorded interview, edited for length and clarity)
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