When you pick and choose stocks, you’re making a bet that you know more than the sum total of human knowledge that is constantly being priced into the stock market. And there are big trading companies out there that take advantage of humans who do this.
One of my favorite examples is a story I heard about an algorithmic trading company on Wall St. This type of company starts and ends every day with zero shares of stock. But they have billions of dollars and when the market is open, they use advanced computer software to make millions of stock trades, often holding shares for less than a second.
These companies compete for real estate a few hundred yards closer to trading servers so they can make a decision 1/1000th of a second faster than their algorithm competitors.
And to make their decisions they crunch massive data sets. They look at historical prices, earnings, profits, news, weather in Manhattan, social media. They look at satellite images of Tesla plants to see how many cars are being manufactured. They look at every data set you can imagine and even more than you can’t. And given ALL of that data, do you know what their #1 most valuable source of data is when deciding to make a trade? It’s human trading behavior. They look at that and do the opposite.
So when you have a “hunch” about a stock, think about what you’re up against. There are trading companies making billions or more based on those human hunches being wrong.
But there’s good news. There’s an easy way to beat these trading companies. Or at least not lose to them. Just buy and hold index funds. The fewer decisions you make the better. The fewer trades you make the better. The longer you hold the better. That guarantees you your fair share of all market growth, without funneling your profits to algorithms that know more than you.
As always, reminding you to build wealth by following the two PFC rules: 1.) Live below your means and 2.) Invest early and often.
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