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Jim Rogers' Trading Secret

By Dan Ferris, editor, Extreme Value
Thursday, April 1, 2010

If you're a trader, you're a loser.
That's what a Journal of Finance study found.
As the two Journal of Finance researchers said in their article, "Trading is hazardous to your wealth."
They studied over 66,465 online trading accounts for a period of six years, from 1991 through 1996. They found that the average trader's returns were about 6.5% less than the overall market. That's even worse than most mutual fund managers, who routinely do about 4.8% worse than the market.
Nobody ever tells you that actively trading in and out of stocks every day is too risky and too hard for most people. And the more active the average trader is, the more he loses.
For one thing, there's too much competition. As a trader, you must compete against gigantic firms, like Goldman Sachs, that have billions of dollars of trading capital and armies of people sifting through mountains of information – information they often get before anyone else. Their executives are in touch with the highest levels of government around the world. No wonder traders do so poorly on average.
Another thing is, most traders have no idea that they should use small position sizes and strict stop losses. They take huge risks against the Goldman Sachs of the world... so one bad trade blows them out of the water.
There's a much better alternative to getting involved in all this action...
Building enormous wealth in the stock market is possible – and it's not nearly as complicated as Wall Street, CNBC, and a zillion newspapers and magazines would have you believe.
If you want to get rich investing, you should listen to someone who has actually done it. Jim Rogers knows. Rogers wrote Investment Biker, about how he drove around the world on a motorcycle, looking for new investment ideas. He's not sitting in front of a computer trading his online brokerage account all day.
Here's what Roger's says you should do to get rich:
Take your money, put it in Treasury bills or a money-market fund. Just sit back, go to the beach, go to the movies, play checkers, do whatever you want to.
Then something will come along where you know it's right. Take all your money out of the money-market fund, put it in whatever it happens to be and stay with it for three or four or five or 10 years, whatever it is.
You'll know when to sell again, because you'll know more about it than anybody else. Take your money out, put it back in the money-market fund, and wait for the next thing to come along. When it does, you'll make a whole lot of money.
Billionaire investor Warren Buffett doesn't day trade either. Like Rogers, he's an investor. A few years ago, in Omaha, someone asked Buffett about managing money. As usual, he cut through all the crap and gave simple, easy-to-follow advice that made sense:
Your default position should always be short-term instruments. And whenever you see anything intelligent to do, you should do it.
That just means you should keep your money in cash and wait for an investment to come along which you understand well, is safe, and looks like a winner.
Buffett clearly follows his own advice. His latest Berkshire Hathaway balance sheet shows total cash and equivalents of more than $46 billion, equal to about 27% of the entire company's current market value. That's a boatload of cash. He's been very active the past year or so, but he still keeps plenty of cash on hand. You should do that, too.
There's just one problem with this simple strategy of sitting in cash and investing only when circumstances are ideal: human nature. Nobody wants to be patient. Everybody wants to buy and sell quickly and make a fortune overnight. Judging from the results in that Journal of Finance study, they really just want to buy and sell quickly, whether they make a fortune or not!
Of course, the average investor's impatience is just another easy way for us Extreme Value types to get an advantage. We can sit in cash, wait for something too good to pass up, then buy it and hold on.
What could be simpler than that?
Good investing,
P.S. Throughout my career, I've seen ordinary folks buy the worst stocks and options in the market... by following what they believe is legitimate financial advice. All the while, their "professionals" are using a unique – and far more profitable – style of money management. For example, one professional says he's generated over $300,000 so far by using this style. It's the most profitable form of investing, period. You can learn how it works here.

Further Reading:

Thirty years ago, the average holding period for stocks trading on the New York Stock Exchange was five years. Today, the average holding period for NYSE-traded stocks is just six months. "That's crazy," Dan writes. "Compounding takes time." If you know that, you've got just about everyone beat. Learn more here: The No. 1 Advantage You Have Over the Average Investor.
When you've got patience, that's all you need. As Dan writes, "What value investors do is never, ever worry about mere timing." It's the broccoli of investment advice. It's nobody's favorite. But it's the greatest sure-fire method to get wealthy in stocks. Read on here: The Fine Art of Sitting Still.

Market Notes


The latest on the "war of the financials." The XLF just staged an "upside breakout"... and the bulls are in the driver's seat.
About a month ago, we noted how our colleague Jeff Clark expected the financial sector to head lower in the next few months. We also noted how several bright, "big money" investors like John Paulson and Bruce Berkowitz expect the sector to head higher. We pointed out we would know which camp was right when the big financials fund (XLF) moved out of its six-month-long price base in either direction.
As you can see from today's chart, the market says the bulls are right for now. Like copper, XLF recently surged to a new 52-week high. And at $16 per share, this collection of big financial companies is well out of its six-month base.
For traders, this breakout is a sign to go long the sector. You see, for better or worse, the government's giant E-Z-Credit "goosing" has nearly every asset floating on an ocean of cheap credit. As master investor Jim Rogers reminds us, this E-Z-Credit solution to the 2008 credit crisis is a lot like Tiger Woods deciding the solution to his marital problems is to get a few more girlfriends. But it is what it is... and the trend is now UP.

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