Tuesday, May 11, 2010

Financial Advice - It Needs Context

One of the things I learned early on about writing on the markets and trading is that you are never right. There is always someone out there who has a different opinion. That's cool, it is the markets. Knowing that, one of the things I also learned early on was to provide some context to my market analysis. If I am going to say gold is going higher, then my analysis should not only include the reasons why I believe gold is going higher but when my analysis will be wrong. In other words, a "call" that gold is going higher is not useful if it loses 25% first and takes another 6 months to eventually claw its way back to being higher. Yes, the analysis was correct, but it wasn't very good or timely analysis.

But let me be clear. I am not talking about analysis that is wrong. I am talking about analysis that doesn't include the context of when it is wrong or when it is right. Getting the call right is only half the battle, because once prices move in your favor, the call is only good if you are able to exit the position with profits. But so often, many market analysts and bloggers "shoot from the hip" as they want to be the first to make a "call".

So what should readers do to protect themselves and their portfolios against those analysts and bloggers who make the "calls"? I would say do your own homework. Make the trading process your own. Never rely upon someone else. You know your own tolerance to risk and you know your own financial situation. If you are unable to do the research on your own or put the necessary time in, then seek professional help. Let others worry about your bottom line.

When I see analysts proclaim that "gold is going higher", I often ask myself how long do I have to wait before gold does go higher and how much money do I have to lose before it does go higher and how much higher are we talking about here anyway. Too often, analysts just make the "call" to make the "call". Without context, it is just a lot of nothing.


Anonymous said...

Ah, Gold. I can't wait to see your gold content. As soon as the chinese, other asians, Iran, venzuela, etc.etc, sell all the Euros they bought as a reserve currency to thwart the US, we will see some serious volitility in gold. I'll bet the sauds aren't buying euros this week. With the exception of Lula, I can't believe the anti US-ers are buying dollars, can you? Yen looks to have taken some of the slack with 700 pips in one moment. Ah, gold.

Anonymous said...

Guy, you are so right. The Internet has become this vast cosmos of opinion (most of it crap), and a trader must simply avoid 99%--however tempting it is. I have blown so many good trades because I put money down and then read somewhere that such and such a thing was going to happen, which influenced my thinking, causing me to sell too early or hold too long. You can only do it on your own. I read your blog because it makes me thoughtful rather than emotional. I don't miss the others.