Scientific Stock Speculation Part 2 | Podcast Episode #403

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Hey, I’m Ryan Mallory and this is my Swing Trading the Stock Market podcast. I’m here to teach you how to trade in a complex, ever changing world of finance.

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Learn what it means to trade profitably and consistently, managing risk, avoiding the pitfalls of trading, and most importantly, to let those winners run wild.

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You can succeed at the stock market and I’m ready to show you how. Hey everybody, this is Ryan Mallory with Swing Trading the Stock Market and today’s episode is a continuation from the last one.

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Now if you remember the last podcast episode, we talked about the book Scientific Stock Speculation by Charles H Dow. Not something I’ve done a lot of where I actually talk about a particular book that I read, but this is one that was written back in 1920, so a long time ago, but it’s still really relevant to today.

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So to give you a little bit of a summary in case you didn’t listen to the first part of the the podcast on this book, I talked about Dow’s medium term focus, We talked about navigating market reactions, the different time frames of price movement is different approaches to trading, the risks of leverage and the importance of record keeping and journaling.

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So all topics that are still very much relevant to trading today.

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Now we’re going to continue on here and finish out the rest of this book. I highly recommend going ahead and reading the book, but if you choose just to listen to this podcast episode instead, that’s fine as well.

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Also, don’t forget to keep sending your questions in.

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We’re gonna get back to that on the next episode here. I have some emails lined up, so keep sending me your questions. ryan@shareplanner.com I do read them all and try to pretty much make an episode out of every one of them.

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So the next topic that we’re going to talk about that came from this book is the fallacy of discretionary accounts.

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Now, what the heck are we talking about when we’re talking about discretionary accounts?

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Well, back in the Day and Age of Charles Dow, Dow warned readers to be highly skeptical of discretionary accounts where outside traders are given authority to transact on a client’s behalf, often promising unrealistic profits.

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Dow believed that the best traders focused on managing their own capital and would take full responsibility for their decisions and trusting their hard earned money to someone else didn’t make sense to doubt particularly those making grandiose claims, which he believed was a recipe for disappointment and financial loss.

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And you think about that today.

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How many websites are out there that are trying to tell you, oh, you are going to get crazy rich if you follow my stock picks?

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You saw a lot of that with the meme stocks in 2021 when GameStop was going through the roof. But now you go onto Twitter.

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Almost every person’s post on Twitter that has anything to do with the financial markets always has some kind of crypto spam.

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They’ve gotten a little bit better with handling that. But there’s tons of people making grandiose claims that if you follow me, you’re going to make tons of money.

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Or remember like, what was it like 1520 years ago?

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You would have the Nigerian Prince always emailing you saying that, hey, just give me your bank account and we’ll send you all this money that we just have to get rid of for some crazy reason.

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I mean, grandiose claims that nobody can actually meet the expectations of there’s that old saying that says if it’s too good to be true, it probably isn’t.

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That held true back then and it holds true today. If it’s too good to be true, then it probably isn’t.

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And so when I created SharePlanner back in 2007, I always wanted SharePlanner to be about realistic expectations, about helping traders help themselves to educate and to develop people and to standalone traders.

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And I do that with a trading block.

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I do that with my research. Yeah, I think I have some really good research and some really good ideas.

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But ultimately what I want to see is people to become knowledgeable and self-sufficient on their own.

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And I think where we get into a lot of problems, and I’m going to be talking about this on my next podcast episode, is with prop firms.

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By and large, prop firms are scandalous.

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Yeah, but I would say 99.9% of them are scandalous.

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I don’t even care if it’s an honest prop firm. I would still say never, ever, ever use a prop firm and I’ll get more into it in the next podcast episode.

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Trust me, I have a lot of say on prop firms.

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But just like what Charles Dow warned about over 100 years ago still holds true today, about not entrusting your money to people who make these grandiose claims.

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You see them on TV, you see them on the Internet, you see them everywhere, still to this day. And then there was the legal considerations that he wrote about as it pertained to brokers and Dow’s time.

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The legal precedent around a broker’s authority to sell out an under margined account during sharp market declines was still uncertain.

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To protect themselves and their clients, he always advised brokers to establish clear written agreements outlining the circumstances under which they are permitted to liquidate positions.

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This was to help ensure transparency that aligned with the expectations between all the parties involved.

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I always believe that the best manager of money is going to be yourself, but you have to apply yourself to it. You know, nowadays we have financial advisors and supposedly financial advisors know everything.

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But it’s amazing to me how many financial advisors, when the market is open, are out on a golf course trying to get that next account.

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Most financial advisors, if they’re in the middle of a 1987 crash, but they have somebody that calls them in the middle of the day saying, hey, I have $100 million that I need a financial advisor for and I need someone to talk to about transferring my accounts over to your particular brokerage.

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Those financial advisors are all gonna stop what they’re doing.

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They’re not gonna care about a 1987 crash or a Black Swan event underway. Heck no.

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You know what they’re gonna do? They’re gonna go meet with that client.

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They’re gonna be like, screw everybody else. We’re going to go meet with this guy who has a big old account that we can start making some serious commissions off of.

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Knock Am I gonna say that every single financial advisor is like that?

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No. But I would tell you this.

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Most financial advisors that I’ve known or that I’ve met are not the sharpest crayon in the box. And you’ll be shocked at how often you actually know far more than they do about the financial markets.

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Especially if you’re listening to this podcast, you’re already more educated than most of them.

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And I know there’s a number of financial advisors that do listen to this podcast. And I’m sorry if I’m offending you.

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That’s not necessarily my intention. But if we’re all being honest with themselves, there’s a lot of Charlestons in the financial industry and that also includes financial advisors because I think so many of them are more interested in getting that next account.

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And that’s why you see them on the golf course during the middle of the day when the stock markets open.

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And believe it or not, Charles Dow had something to say about short selling. Yeah, short selling was around back then, reminisces of a stock operator.

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It was around when that book was written as well, But the role of short selling comes with its own set of limitations and risks that, Dow would argue still makes it a valid strategy for profiting in bear markets.

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Stocks that are trading significantly above their fair value make attractive candidates for short sellers.

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However, it’s important to be aware of the potential short squeezes which can occur if the supply of shares available to borrow dries up, driving prices even higher and so to manage risk.

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That would suggest selling on rallies and buying back when the stock was selling off, but maintaining your core position through secondary moves and not fighting the primary trend excessively.

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Also, monitoring whether a stock is easy or hard to borrow could provide insight until the level of short selling pressure in a particular stock.

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Also, before I forget, make sure you’re checking out swingtradingthestockmarket.com. That is my service that goes alongside of this podcast.

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If you subscribe to it, you’re going to be getting all of my stock market research that I provide each and every day.

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That’s going to include regular updates on the S&P 500, the NASDAQ, the Russell 2000. Plus you’re going to be getting updates on all of the big tech stocks like Apple, Amazon, Netflix,

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NVIDIA, Google, Microsoft, Tesla, Meta, all of those guys. Also, you’re gonna be getting my daily watch list of stocks that I’m following for potential trade setups, plus my weekly bullish and bearish master watch list and watch list reviews, so it’s really all-encompassing.

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It’s really a cool feature that I would highly recommend you check out, and in the process you’re supporting this podcast.

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Dow also wrote about the cyclicality of crises and stock market panics, observing that market crises have historically tended to occur in a roughly 10 year cycle, although with significant variation.

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He attributes the cyclicality to the ebb and flow of fear and greed within the business community. While not a precise science, understanding these broader patterns can help investors maintain a long term perspective and avoid getting caught up in the emotional swings of the market.

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So let’s think about that a second.

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You had a significant sell off in 1987, then you had another big one in 2000. That’s about 13 year difference there.

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Then you had 2008 about an 8 year difference, 2018 another 10 year difference between the two major market sell offs.

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But what gets more interesting is that we get into these two year intervals. We go from 2018 to 2020 to 2020 to 2022 two years.

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And why is that? Why do we go from 13 to 8 to 10 and then all of a sudden 222.

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And I would say that it likely is because of the Fed intervention. Fed is trying so hard these days not to allow any kind of recession ever.

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They’re like, heck no, not on our watch. We got to be involved in these markets on a daily basis.

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That’s why you see in 2018 when they were trying to do some tapering, you had the market give a taper tantrum and they was like, fine, we’re not gonna do this.

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And then in 2020, when the whole economy shut down because of COVID, they cut the interest rates down to zero and they flooded the market with tons of money.

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And then in 2022 started feeling the pressure and eventually they stopped raising rates as much as they should have in order to create what they call a soft landing.

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In the process, inflation’s still pushing higher. We haven’t tamed it yet and prices are more unaffordable than they’ve ever been.

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So I was surmised that from 87 to 2018, you actually had business cycles where there was advances and there was declines.

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Yes, some significant declines, but that’s part of the economy that’s going to happen. But then we started getting to where we are manipulating the market a little bit too much with

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20/18/2020 and 2022. So now we’re getting a a greater frequency of these events because we’re not letting it play out without trying to force it to bottom And wrapping up his book, he also got into the scientific approach to speculation.

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And this is central to Dow’s philosophy that the idea of speculation can be approached scientifically.

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By understanding market movements, comparing price to underlying value, controlling risk, and aligning with the primary trend.

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Rather than trying to predict short term fluctuations, he emphasizes the importance of patience, discipline, and continuous learning and improving results over time.

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However, he cautions that easy profits are elusive and losses are inevitable. Part of the process.

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Success in the market requires A realistic mindset and a commitment to long term growth.

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And I think one of the things that’s so important, and I think that so many traders lose sight of, is the fact that losses are an inevitable part of the process.

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But it’s about how you manage the risk that’s going to make the difference. Taking small losses instead of letting them go out of control, avoiding some stocks because you know

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you can’t manage the risk in the tight manner. Yes, there’s plenty of stocks out there that I would like to trade on a regular basis, but I can’t because I can’t control the risk.

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And if I can’t control the risk, it’s not worth the trade.

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Don’t take my word for it. Charles H Dow.

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He said the same thing. Success isn’t formed over 1 trade, it’s formed over many, many, many trades.

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So don’t get married to your stocks. Have a realistic mindset and a commitment to long term growth in your portfolio.

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So I love this book. Charles Dow, Scientific Stock Speculation, offered a timeless framework for navigating the complexities of the stock market.

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He focused on the relationship between price and value, controlling risk and patiently aligning with the primary trend, which is something that I’m very big on about with my top down trading strategy.

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And while the specific tactics will have evolved over the past century like we’ve seen and like what we’ve talked about here over these two podcast episodes, the core principles of discipline and patience and continuous learning remain as relevant today as they were in Dallas time.

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And studying these insights and applying them to our trading journey can help us develop the skills and mindset that’s needed to thrive in an ever changing world that is presented to us with the stock market.

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I hope you enjoyed this podcast episode.

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If you did, please don’t forget to leave a five star review. Those things do mean the world to me.

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And make sure to keep sending me your questions. ryan@shareplanner.com and check out swingtradingthestockmarket.com.

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Thank you guys and God bless. Thanks for listening to my podcast Swing Trading the Stock Market.

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So go ahead, sign up by going to shareplanner.com/trading Block, that’s www.shareplanner.com/trading-block and follow me on SharePlanner’s Twitter, Instagram and Facebook where I provide unique market and trading information every day.

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If you have any questions, please feel free to e-mail me at ryan@shareplanner.com.

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All the best to you and I look forward to trading with you soon.