Nothing Always Works, but Here Are 3 Market Truths

Even after trading for more than a decade, I still haven’t figured out any market maneuver that always results in a guaranteed profit. From “Don’t Fight the Fed” to the January Effect, markets are littered with a long list of “surefire” tips that don’t always turn out.

There’s a fantasy, especially among new traders, that markets function as some sort of ATM machine to which you can roll up and make a withdrawal whenever the feeling strikes you. In reality, the shorter the time horizon, the more difficult it is to make money. That’s why so many day traders fail miserably after even a few weeks time.

Traders in such an immense hurry forget the biggest wins come from buying and holding over a sustained move, not trading an investment away the minute it shows a gain.

2. Winning trades usually start out as winning trades.

Another truism holds that, more often than not, winning trades are profitable right from the start. Of course, it doesn’t mean XYZ never goes a point against us, but that winning investments have a tendency to show a profit — even a modest one — within the first few days after having taken the position.

Where traders often fall off the track is that they take a position and hold on, even as it falls sharply below their initial purchase price. Of course, because of the mathematics involved, they end up digging themselves a hole out of which it’s nearly impossible to climb. For Citigroup (C) to get back to the levels it was at two years ago, the stock needs to climb some 1,600%.

3. Avoid buying stocks solely because they are cheap or boast good dividends.

Finally, experienced investors know to avoid buying a stock or fund solely for cosmetic reasons — namely, because it's either low-priced or has an attractive dividend. Low-priced stocks, as we’ve covered in this space before, are the lottery ticket of the market world, albeit probably with worse odds. With a small handful of exceptions, low-priced stocks are low priced for a reason — and it’s not because they’re poised to make a miraculous comeback. Penny stocks, the pink-sheet-listed companies that trade for a few cents a share, should be avoided altogether.

Similarly, don’t be fooled into buying a stock simply because of an attractive dividend, a common error, especially among older investors looking for income. The problem with picking a stock solely for the dividend is that not only can it be cut at the company’s whim, but that the payout always ends up paling in comparison to the price action of the security itself. Just witness the performance of San Juan Basin Royalty Trust (SJT) or Provident Energy Trust (PVX): Even double-digit dividends couldn’t help overcome the losses from holding shares as they fell with energy prices. Same goes for high-yielding REITs. Even a 10% dividend yields means nothing when the stock falls 25%.

Michael Jackson’s songs are piling up the profits for Dutch pension fund Stichting Pensioenfonds ABP, whose Imagem Music Group subsidiary, as reported by Bloomberg, owns the rights to Jackson hits including “You Are Not Alone,” “Dangerous” and “Remember the Time.”

Music royalties aren’t an easy asset to buy. But the individual investor with a risk appetite and taste for illiquid assets might check out shares of Mills Music Trust (MMTRS.OB), a music royalty trust on the OTCBB based on a collection of songs with copyrights established prior to 1964. Highly speculative and thinly traded, the trust now yields approximately 13%. But unlike Jacko’s catalog, Mills Music is rather undiversified: Seven of the top 50 songs account for approximately 65% of the earnings attributable to the 50 songs. The good news? The earliest copyright expiration is 2024.