Do You Make This Mistake When Investing?

And trading is, when you anticipate the movements in stocks. As you might have noticed, stocks don’t always move solely based on the fundamentals in the short run.

Stocks can be driven by all kind of factors in the short run. A short squeeze, A panic, rumors, new investors, optimistic expectations (based on hype), pessimistic expectations, an article.

All these factors can affect stock prices in the short run – and sometimes in the long run. But studies show that stocks ultimately (at some point) trade around their intrinsic value.

Successful traders study market participants (the ones who are investing in or trading a stock) and their decision making process. They find patterns that are predictable and trade based on it.

My favorite example stems from the development in cannabis stock prices.

It’s mainly retail investors who invest in cannabis stocks, as institutional investors don’t invest in the industry for two reasons - the career risk for portfolio managers and the relatively high valuation of cannabis stocks.

If an institutional investor wants to invest in the cannabis industry, they would likely invest in the private cannabis companies, as they are valued at significantly lower multiples than the publicly traded cannabis stocks.

We also know a great deal about this kind of retail investor’s decision-making process based on data from surveys. Based on this data we have concluded that cannabis stocks are driven by retail investors’ interest in cannabis stocks.  

We have used this information to create an indicator that have predicted the development in cannabis stock prices with over 80% accuracy on a week-by-week basis.

Some people use our indicator to trade of, while others use other methods. A great deal of people use technical analysis.

How You Can Avoid The Mistake

You can avoid the mistake of mixing trading and investing by clearly defining what you are doing – and sticking to one method. It usually gets dangerous when you are confused by all the information and mixes the different signals from the different methods.

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Disclosure: None.

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