In order to make any money in the sharemarket you need to focus on the unknown and stop wasting your time on the known. Every year the top- and bottom-performing stocks are not those the market predicts most accurately, the big money is always in the stocks that the market gets most wrong.
In other words, you will not make money knowing what everyone knows. You will not make money listening to an adviser telling you about consensus forecasts, price-to-earning ratios and yields, or calculating valuations based on accurate forecasts. All that is valueless, because it is already built into the price.
The only thing that will make you money is knowing what is not in the price and that means working out what assumptions the market has gotten wrong, not right, because as it turns out all the money will be made in the stocks that the analysts get the most wrong.
Think about it. It's what everyone else doesn't know that moves a share price. If BHP hits its forecasts it doesn't move. If it surprises it does. In which case, to predict a share price, you have to accurately deduce or imagine the things that others haven't.
There is a saying, "if you are not on the inside you are on the outside", suggesting that the sharemarket is a Machiavellian plot run by the "smart money" which is taking advantage of the "dumb money" and that the only people making money are those with illegal inside information.
Laughably I used to work with a stockbroker who would exploit this desire for an inside edge by whispering everything on the phone like it was a secret. The fact that we had all heard the same story in the morning meeting was irrelevant, his clients thought they were special. Very effective.
But let me tell you, by the time you or I hear what purports to be inside or illegal information, we are the bunny at the end of the chain. What sounds like inside information is often fabricated to serve a purpose, to move the share price. As one seasoned stockbroker once said to me resignedly, "If I'd never been told any inside information in my life, I'd be a million dollars better off."
On the contrary the only "dumb money" is invested by the people who think that you can find stocks going up in price by looking at a spreadsheet of numbers everybody else has got. That's pointless. Far better you go looking for your own insights, or your own legal inside information.
On this front, it may surprise you to know, that a lot of investors don't realise they have their own (legal) inside information but are not bothering to exploit it. Ask yourself, what industry do you work in, who do you know who is doing well, what business are they in? It's all out there in plain sight if you bother to look and ask.
So what do you know? Ask yourself that. Ask around. Keep your eyes open. You'll be amazed what you know that the sharemarket doesn't.
One way to generate your own ideas is to stop reading, to pour yourself a cocktail and lie back and imagine. As an example of what you are looking for, imagine if you can that you could go back a year and leave yourself a stock market tip or two written on a Post-it note plonked anonymously on your own trading screen. What would it say? Two or three themes in the past year would have delivered you a great edge. Like "the government will attack the banks", "China will not drop in a hole", "Resources will bottom", "Amazon will kill retail sentiment", "Milk powder will continue to fire".
Now ask, what will next year's Post-it notes say? What themes and events can you think of that will appear or persist beyond the expectations of investors this year. Themes and events that will surprise the market and make you or save you money. The answer is in that cocktail. Walk away from your screen, get outside the sharemarket zone, be the man in the moon for a moment, look down and see what everyone else is doing and what everyone else is missing.
Marcus Padley is the author of the daily stock market newsletter Marcus Today. For a free trial of the Marcus Today newsletter please go to marcustoday.com.au.
