Stock market cannibalism

In 1846, 87 members of the Donner party set out on the 2500-mile journey from Illinois to sunny California.

Only 47 made it there alive.

Where did things go so horribly wrong?

Turns out they used a “shortcut” listed in Lansford Hasting’s The Emigrant’s Guide to Oregon and California.

Hasting’s guide was actually more of a lengthy sales brochure, not a guide on how to traverse the dangerous route.

The end result: Half died, and some even resorted to cannibalism as they withered away in the snow-covered Sierra Nevada Mountains.

How many times have you followed what appeared to be a guide to stock market riches, only to find that it leads to death and destruction of your hard-earned money?

Using my own experience as a guide, I’m thinking dozens of times.

The reasons most are horrible at trading are plentiful:

– Universities make millions teaching theory of how markets should work. Observation debunks their beliefs very quickly.

– Observation is actually hard work, so few do it.

– People often trade worse than a monkey picking stocks by throwing darts at a Wall Street Journal because our natural instincts are so poorly attuned for the job.

– Few have a basic understanding of statistics, which explains why so many play the lottery.

– Even system traders screw up by over-fitting their rules to the past, or trading stocks way too illiquid for their portfolio size.

– The double-edged sword of leverage more often than not slits your wrists, sending your portfolio into a death spiral to zero.

– Or they simply take the advice of a “pro” that makes one or more of the above mistakes. 80% of mutual fund managers underperform the S&P 500 index.

Unfortunately, there are countless guides to the stock market that lead to Donner-like disaster.

A friend of a friend who I’ll call “Fred” told me about a $50,000 day trading course he’s going through.

He’s being taught to look for a pattern in stocks that leads to “magic” profits.

“What’s the win rate? Are the winners bigger than the losers?” I asked.

“Like 90%. Winners are way bigger.”

That’s the answer of someone that estimates without evidence.

Imagine if Tesla was staffed full of engineers that just “wing it” like Fred.

They’d be driving themselves off cliffs right?

The days of eyeballing a chart and expecting to make money are long gone (if they ever existed).

Guys like Jim Simons have been using machine learning to beat the markets since 1991. He’s now worth $18 billion.

Companies like Citadel make billions without knowing a dang thing about the companies they trade at the speed of light.

We’ve gone that route, building a 2000-core supercomputer, and are attempting to forecast stock prices with it using pattern recognition…

…similar to how Shazam identifies any song from a 10-second snippet.

Unfortunately, “Fred” is taking a knife to a nuclear ICBM fight.

If you don’t want your portfolio to meet the same fate as the Donner Party, test your ideas first with a computer.

Prove it works first before risking a dime.

It's hard enough to handle your emotions when trading, let alone with a losing strategy.

If someone wants to sell you their “foolproof” system, have them prove it works.

“In God we trust. All others bring data.” – Edwards Deming

Trade smart,