The following is an excerpt from a recent client letter concerning the ugly truth about trading: everyone loses money, no one makes money 24/7, 365, and Substack and social media are rife with scams.
I want to spend a little time talking about how the markets work before diving into this week’s developments.
I’ve been actively trading and researching stocks for over 20 years now. I’ve written well over 10,000 pages of investment research including two best-selling books on macroeconomics/central bank policy and their impact on the financial markets.
My first ever recommendation to clients was Nvidia (NVDA) back when it was trading at $1 per share. Since 2015 (11 years), I’ve maintained a win rate of 72% on all closed trades. I’ve beaten the S&P 500 throughout that time which would place this newsletter’s performance in the top 10% of professional investment funds (mutual and hedge). This performance has only improved in recent years: since 2020 I’ve outperformed the S&P 500 by over 60% (193% vs. 130%).
The point I’m trying to make here is that I know how to read the markets and make money trading them. In today’s world of Substack and social media, the investment research space is rife with phonies who claim they produce huge gains from their investments, but in reality, they have little to no experience in the markets, don’t even trade their own capital, and don’t actually make any money for their clients.
I am not like that.
Having established all of this, I want to provide some brutal truths about investing/ trading.
First and foremost, everyone and I mean EVERYONE has bad streaks. I just had one in which we closed out eight significant losses in a single day. As I write this, most of our current portfolio is in the red.
I hate this. But it is a reality. The fact that I’ve been doing this for over 20 years and have one of the best track records in the investment research space doesn’t make me any less frustrated by these situations. But it happens. It’s part of the game. And the only thing I can do is cut those losses and move on.
To be clear, losing money is not atypical in investing.
Warren Buffett, George Soros, Stanley Druckenmiller… all these legends have lost BILLIONS of dollars investing. Heck, Buffett just wrote off over $7 BILLION in losses on Kraft Heinz in the last 10 years alone.
$7 billion in losses. On a single investment. That is more money than most FAMILIES make over a century of work and investing.
The reason these guys are legends is because they’ve also made tens of billions of dollars. But I can assure you that their losses eat at them just as our losses eat at me and you. Buffett famously once said the first rule of investing is “don’t lose money” and the second rule is “don’t forget the first rule” but he has lost billions and billions of dollars investing. In fact, the bulk of his fortune comes from just 15 positions (out of over 300 investments), which he made over the course of 50 years. And he made more money from a single pick (Apple) than he did from every other investment he ever made combined.
So again, losing money is part of this game. There is no hiding from this fact. Those accounts you see on social media or on Substack who act like they never lose money or are wrong are lying to you.
Which brings me to the second most critical point about investing: you make MOST of your money during brief hot streaks that occur a few times a year.
No one, and I mean NO ONE consistently makes money year-round. Stanley Druckenmiller is arguably the greatest investment fund manager of all time (he averaged 30% per year for 30 years straight). By his own admission there were many years in which he was down for most of the year and then suddenly experienced tremendous outperformance in the last few months or even the last few weeks.
The same is true for every trader. I personally know hedge fund managers and traders who are worth tens of millions of dollars who will trade little to no real capital for prolonged periods (months of the year) and then get aggressive when it’s time.
Again, NO ONE makes money year-round. Rather, you make MOST of your money during two to three periods per year, when the market as a whole, or at least several key sectors, are in strong uptrends. These periods usually last about six to 12 weeks when a particular theme is “hot” and there is a lot of momentum in the markets.
Those are the times in which you need to allocate capital aggressively and push. A great example of a period like this is from late March to early June of this year. At that time, the S&P 500 ripped higher from 6,300 to over 7,600. We produced the following profits during this period.
In between these periods of excitement, the markets tend to do little if anything. These are the times in which it does NOT pay to get aggressive or try to force trades. Doing so usually leads to losses.
“But what about XYZ trader on Twitter/Substack, Graham” you’re probably thinking, “he shows huge gains week in and week out no matter what the market is doing.”
XYZ trader or (insert name of large social media account) does NOT make money consistently. Instead, he or she is engaging in one of two tricks.
- Posting a ton of trades, some of which work out, most of which don’t, then emphasizing the winners and deleting the losers from their social media profile.
- Not trading with real money, but rather goal-seeking trades, i.e. finding trades that have already worked and then posting them after the fact as if they were real trades.
Regarding #1, if you are constantly making trades, some will work out. Provided you emphasize those gains while ignoring (or worse, deleting) the losers, you look like a genius capable of making large returns every week of the year. The reality is that someone who follows you in those trades did NOT make money.
The worst cases of this involve social media/ Substack accounts who tracks tens (or even hundreds) of positions and then cherry pick the winners every day. If you’re tracking 100 positions as if you own them, then yes, on every day of the year at least ONE stock will be up a lot. But parading that one stock while ignoring how the other 99 are doing is a scam/ gimmick.
Remember, there are ALWAYS companies that are exploding higher. Heck even on a day in which 99% of the market is falling, some company will announce a breakthrough for a new drug, or new product and its stock will rip higher.
Social media and Substack are teeming with accounts that find those situations and then write about them as if the author made a trade and profited from this. They didn’t. They are simply hyping up price moves they didn’t predict…OR, even worse, they are cherry picking the one trade that is up a lot while ignoring the fact that all the others aren’t doing anything of note.
I hate this kind of thing. It is now EVERYWHERE I look. Heck, just a few weeks ago, I saw multiple posts from “traders” who claimed they were up 3,000% this year or making a million dollars a year trading.
I do NOT want you falling for that stuff. These are scams.
I hope this helps. I’ve lost money over the last month. I know you have as well. It’s part of the game. The best thing we can do is move forward, maintain our discipline and work to catch the next period of extraordinary gains.
To join 30,000 investors in receiving our daily market commentary every morning before the market’s open…
Graham Summers, MBA
Chief Market Strategist
Phoenix Capital Research
