The Evolution of a Stock Market Shark – RealMoney

When I first started trading and investing, I held a set of very traditional beliefs about the stock market. Some of those beliefs were developed in business school at the University of Michigan, and some of them developed from listening to 'experts' in the popular media.

The conclusion that I reached was that if I wanted to be a great investor and make a lot of money, then I should approach the market like giant mutual funds and institutions. These pros were often on television talking about how they were buying certain S&P 500 stocks and were holding them for years. Warren Buffett was held in god-like esteem by many who believed it was simple to do what he did. It seemed logical to conclude that to outperform these folks, all I had to do was use the same style but pick better stocks and wait for my genius to be proven.

There were several problems with this thinking. The first was I didn't have the patience for it. I sat on some big-cap stocks like IBM (IBM) and Coca-Cola (KO) for years and had some gains, but there was no way I was going to produce substantial gains with these boring big caps.

It eventually occurred to me that the experts that champion this approach to the stock market aren't trying to produce exceptional gains. They are just trying to hold on to client funds and don't want to take too much risk. The main goal of much of institutional Wall Street is to gather assets. The way that a big fund or money manager makes money isn't by producing returns but by having billions of funds under management.

I can't beat these funds at picking S&P 500 names. They have far more money than I and they have a tremendous advantage as far as information and research. Their analysts could pick up the phone and talk to management any time they wanted. How can I compete with that?

It makes no sense for a little guppy like me to compete head-to-head with Wall Street whales. They have done a magnificent job of convincing folks that they hold all the answers to navigating the market, but that is just a marketing tactic. The truth is that they really have no interest in helping me produce a great return.

Rather than try to be a mini-whale, perhaps I should try a totally different tactic. What advantages do I have over institutional Wall Street? The primary advantage is flexibility and speed. I can enter and exit a stock in the blink of an eye. I can trade thin small-caps that move quickly, and I can control my risk by simply moving to the sidelines when conditions are difficult.

Why not focus on enhancing those advantages that I have rather than pretend that I'm going to beat a huge fund by doing exactly what they are doing on a much smaller scale.? The funds don't even care about great returns. They just want to sell their services to investors.

That is the foundation of what I call 'Shark Investing.' Sharks and whales coexist very nicely, but the shark is always in motion. They take big bites, feed in a frenzy, and quickly move on to the next opportunity. It is a perfect metaphor for what small investors should do if they want to outperform the whales of Wall Street.

For about 25 years now, I have been refining the Shark Investing approach to the market. The primary proof that it works is that there are still investors that have been working with me since the 1990s. It isn't easy, and many fail, but many have found this approach to the market to be life-changing.

I still find it fascinating that nothing much has changed in the financial media over the years. They still worship slow-moving big-cap names and pretend that the only valid way to approach the market is through a buy-and-hold strategy.

There has been some acknowledgment of the social media trading movement recently, but this really is nothing new. These are fledging sharks that are doing the same thing many of us have been doing for decades. Many of these new traders are learning some very hard lessons, but some of them will develop lifelong skills that will serve them well for the rest of their lives.

If you want to be an Investing Shark, the first step is to develop the right mindset. Stop looking at the market like a Wall Street whale. Your job isn't to gather assets by offering profound investment wisdom. Your job is to produce the best returns that you can. When your agenda is clear, it changes the process you use to achieve it.

Once you recognize that most Wall Street experts really aren't trying to help you produce maximum gains, then you are on the road to being an Investing Shark.

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.

Follow this link:

The Evolution of a Stock Market Shark - RealMoney