This is the Way to Gain an Investment Edge

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While stocks have tanked over the past few weeks, guess which sector is making a resurgence?

Aussie gold stocks!

Quite a few broke out to new highs recently, which is a bullish development. The timing is good too…

At the end of this month, I’ll be attending and speaking at the Annual Precious Metals Investment Symposium in Sydney. The event takes places on 26–27 October at the Four Seasons Hotel, and features a whole host of precious metals speakers.

I’ll be giving some ideas about the best gold stocks to invest in. If you’re interested, go here for details.

Kerry Stevenson is the woman behind this world-class event. You may know her from attending some of Port Phillip Publishing’s conferences. She usually takes on the role of MC and does a wonderful job.

Last week, Kerry interviewed me on a podcast. If you find yourself bored senseless this coming footy-soaked long weekend, and want to find out a bit more about me, go here. There are other interviews on the page too, including Bron Suchecki from the Perth Mint, who is always has something interesting to say.

All this talk of gold brings me to another topic. I raise the issue because it might just help you to navigate these volatile markets. As you’re no doubt aware, after Tuesday’s savage sell-off, the market was back in happy land yesterday, surging 2%.

But there’s no point getting all worked up about the market volatility. There is absolutely nothing you can do about it.

Let me ask you this. Are you a bull, or are you a bear?

Do you cheer when the market rises, with dreams of getting rich from stocks, or do you rejoice when the market falls, hoping to buy stocks at bargain levels?

Thinking about your natural disposition is an important point when it comes to investing. Because your natural disposition will influence whether you’re a stocks or cash kind of person.

When you’re in stocks during a bull market, you do well. You tend to think you’re a bit of a legend. And when you’re stuck in cash while the market advances, you feel like a dunce.

But in times like these, the roles are reversed. The cash holder is king and those loaded with stocks feel depressed.

I ask the question because I’ve experienced the roller coaster. I was, and still am, bullish on gold. I rode the gold bull up, and got beaten up by the bear on the way down.

Some say that this is just an inevitable part of investing. There are ups and there are downs, and you have to take the good with the bad. That is true to some extent.

But I learnt one massive lesson from my experience betting on gold. That is, you do not get any investing edge from being a bull or a bear, whether on gold, oil, or stocks in general.

The ‘edge’ may work for a while, but it is not sustainable. That’s because when you’re emotionally wedded to a view, you can’t see that you’re wrong until it’s too late. Then you tell yourself it’s too late…and hold on. And then it gets even later.

I changed my investment approach about a year ago. I decided to ‘fuse’ some trading techniques with my fundamental analysis. The trading techniques rid you of biases, and make you much more flexible in your thinking. There is no bull or bear mentality, it’s just playing what’s in front of you.

So far, the results have been excellent.

To help develop this approach, I went looking for mentors. I like dead mentors…people whose work has stood the test of time. Phil Anderson (not dead, BTW) who writes the insightful Cycles, Trends and Forecasts newsletter along with your Daily Reckoning editor Callum Newman, got me onto the work of William Gann.

Gann was a genius trader in the first half of the 20th century. One of his earliest books is Truth of the Stock Tape. I thoroughly recommend it to anyone who wants to be a better investor.

It’s not only a book for ‘traders’. It also contains a wealth of insight and wisdom about how to conquer your biases. If you can do this, you’re on your way to gaining a big edge over the rest of the investment herd.

Here’s one of his greatest insights. It’s also incredibly simple, which is one of the hallmarks of all great things. I rolled out this quote recently to my Crisis & Opportunity subscribers…

To make a success in speculation, you must master yourself. You will find that you are either a natural born bull or a natural born bear. Then, you must discount your weak points in trading, and know that a lot of your judgement is not judgement at all, but the result of your natural weakness or inclination for one side or the other. Learn to see things in the normal state and do not exaggerate either on the bull or bear side.’

My favourite part is the observation that much of your judgement is not judgement at all, it’s simply your bias. If you have some experience in the investment game, I’m sure you can identify with that.

Keep it in mind during the current volatility. My natural inclination is to the bearish side. And right now the market is telling me I’m right. The trend is definitely down. More to the point, the banks are leading the market down…a bearish sign.

But the worst thing that can happen is to be right, and then not change your mind when the bull resumes. Because you’ll miss out on all the gains and undo all your hard work.

I’m not suggesting a bull market is imminent. I think this bear has some way to play out yet. What I am saying is to remain flexible in your thinking. Don’t become overly wedded to a view. Because it will make you a hero, then turn you into a fool.

As Gann said, ‘a wise man changes his mind. A fool never’.

I’ll leave you today with Gann’s best advice. Don’t forget it!

The Royal Road to Success is to be a Bear in a Bear market and a Bull in a Bull market.

Regards,

Greg Canavan

Editor, The Daily Reckoning

Greg Canavan
Greg Canavan is the Managing Editor of The Daily Reckoning and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to The Daily Reckoning for free here. If you’re already a Daily Reckoning subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Daily Reckoning emails. For more on Greg go here.
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