Full transcript of independent trader Alessio Rastani’s TEDx Talk: The Psychology of Trading @ TEDxManchester conference.
Listen to the MP3 Audio: The psychology of trading by Alessio Rastani @ TEDxManchester
Alessio Rastani – Independent trader
Great, fantastic. Before I start, I want to ask you a favor.
I’m going to do a little quiz – just had that on – Who likes a little quiz? Yeah. Come on, we can try without.
Everyone up for a quiz? All right. Let’s go back – those slides up guys –
So the first slide is – let’s get that up – Ah, I’ve got to press forward.
Ah, there we go. So, who said this? If you guys know this, just say it out loud OK? Not Gordon Gekko, no.
“Be fearful when others are greedy, and be greedy when others are fearful.”
Who said that? Warren Buffett.
Well done! Who is Warren Buffett? Yes, he is the world’s richest share investor. Remember his name, I’ll be coming back to him shortly.
So, what we’re going to talk about today, we’re going to talk about how to profit from a crisis. All right, so that’s what we’re talking about. OK, who said this? OK, second question.
Who said, “The way to make money is to buy when blood is running in the streets”?
By the way, the last time came to Manchester, I asked this question, about a few months ago, someone said in the audience it was Dracula. It wasn’t Dracula!
Now, what d’you guys think? I’ll give you a clue. It’s supposedly one of the guys, one of the families, the big families in the world, who controls the world. It’s not the Rothschilds. Whom do you think it is? (Audience shouts a name) Not quite! It’s Rockefeller.
Oops! Er, sorry about that. I think the way this presentation is done is a little bit – skews up the screen.
Yes, “the way to make money” is Rockefeller. He’s an American oil tycoon, supposedly one of the guys who built America.
And who said this, “I go to bed every night dreaming of another recession, governments don’t rule the world, Goldman Sachs rules the world”? (Audience) You did.
By the way, this is back in 2011, I’d been in a live television program on the BBC, it was the afternoon, so a lot of financial things were happening at the time, markets were going down, there was a talk of the eurozone’s splitting up, and the lady over there, Martine Croxall, asked me on live television how I was going to fix it.
I said, “Well, I’m not looking to fix it,” and I just said, “Well, it came to me honestly.” And I’m going to explain to you exactly why.
One thing happened was, by the way, that within 24 hours I had every television network around the world, from Washington, from CNBC Bloomberg, to Israel, to Australia, calling me and basically, wanting to do an interview with me. Even Piers Morgan and David Frost were calling me up to do an interview.
And I got a call from Forbes magazine the same day, – because they videoed, this went viral, you can find it on YouTube anyway – and this reporter from Forbes magazine said, “Hey, listen Aless, we want to do a positive report on you. Don’t worry, nothing negative, positive news story on you, give us some information.”
So next day the article was published, everybody saw this, and here it is, “Stock Traders Are Psychopaths.” I thought wench, she sounded so nice on the phone.
So, she says today, “Unless you’re a stunny blah, blah, blah, admit it honestly – all I can say is -,” I think what really shocked people most about this interview wasn’t just what I said but the fact that it was, well, they said it was an honest interview – and that’s what I wanted to do.
People said I did it for effect. Not true at all. I genuinely did not believe the video would go viral, anybody would pay attention to it.
So next day a few other papers called me a psychopath, and even the BBC trying to protect – But the bottom line is folks, that picture of me where I did the majority of my research, you know, I’m sure most of you are probably thinking, “Well, surely what you said was immoral. It wasn’t morally right to say you’re dreaming of another recession,” even if most of you probably agree that governments don’t rule the world; it’s the big corporations, the big banks, JP Morgan Chase, Goldman Sachs.
But why did I say that I’m looking forward to the next recession? And by that, so you guys understand, I did not mean what the paper said, which was that I was happy about people losing their jobs. Not true at all.
I want to explain to you what I actually meant. And you might be thinking, “Is it even moral? Is it a moral thing to profit from a next crisis?” I think of it like a hurricane, you know, coming towards you. Famous one in 1987 came to this country, plenty of hurricanes come to America all the time.
And what do you do if a hurricane’s coming to your destination, where you live? Well, first thing, I’m sure you agree, is that you protect yourself, protect family, right? It’s about being prepared.
If a financial storm is going to come – there will be another by the way – I’m going to show you why I believe the next financial storm will be this year 2014. I’ll show you why.
But the next financial storm that comes, most people, I’ll say 90% of people, are unprepared. Would you agree with that? Yeah.
In 2008 so many people lost money in stocks and property because simply they got stuck in a bubble phase; they thought they’d never be, they were in denial, there would be a crash; anyway.
So I want to share with you a big major lie. This is a lie which I can tell you almost every person that you know believes in. You might believe in it too. I used to believe in it.
It’s not your fault if you believe it, because let me say this. This lie is perpetrated by the media. Remember this by the way guys: there are two types of information, there are two kinds of information; information for the masses, and information for the classes.
What you want to know is information for the classes, not what the media are saying to you. Because the majority of the stuff the media tells you is completely wrong and useless. Here’s the lie.
If the economy is doing better, so the stock market should do better too. Well, if you ever hear any person, any economist, saying those words on television, you know he doesn’t have a clue what he’s talking about. It’s actually the opposite. You might think that’s a little bit strange. Why would that not be true? OK, let’s talk about that.
The fact is guys, there’s no correlation between the economy and the stock market, none whatsoever. Let me show you.
Warren Buffett again, world-renowned share investor, he doesn’t even care about what the economy is doing when he buys stocks. He doesn’t pay attention to unemployment, reports, interest rates, housing, etc.
Peter Lynch, one of the most famous top money managers in the world. He says “If you spent 13 minutes thinking about economic forecast, you’ve wasted 10 minutes.” Right, let’s take a look at the crash, the 2008 crash.
Take a look at this, see the market going down. In the year 2009 – you guys worked in 2009? Yeah? What kind of news were you hearing on the radio? On the radio or television, what did you hear? Was it positive or negative news? Negative, right? Exactly.
All you’d hear on the news and television was: fear, recession, depression, negative GDP, unemployment, low earnings. Guess what? Everybody hated stocks in 2009, everybody.
Almost everyone who was afraid were dumping their stocks and shares. Blood was on the streets. But at that time, insiders – insiders, remember guys, are the people, not the masses, but the classes – the classes, the insiders, were buying. Take a look at this.
At the peak of unemployment in 2009, stocks went up 60%. That’s a bit strange 60% up, and unemployment is at the peak. And from 2011 to 2014 stocks went up, 63%, even though we had a European crisis, Greece debt, and the USA lost the AAA rating. So folks remember, most people – here’s why, by the way, the news and media is completely pointless. Sorry about that.
You guys can fix that? Sorry. Ha, ha Sorry. Here’s why news and media is completely pointless, guys. Because what they’re telling you, when things are good all you hear is, “Oh, good news.” When things are bad, all you hear is negative news.
And again when things are good, all you hear is good news. Well, how is that useful? How can you possibly take investment decisions with that? Hang on a second. Can you guys hear me? Yeah, all right. It’s got a spare microphone here.
OK. So what’s really going on guys? Why is it that a good economy doesn’t necessarily mean you’ll have good stock prices? Why is a bad economy or a crisis the best time to start buying stocks? So, here’s what’s going on.
There are about 25 – Of all the slides I’m going to show you today, this is probably the most important one so pay attention – What’s really going on guys is there are about 20 funds that can basically do 80% of the world’s trading. These are the funds, the big guys, who control the world: like Goldman Sachs, JP Morgan Chase, these guys make the big decisions, what happens.
It’s not President Obama, and it’s not whoever party we vote for. I’ve never voted. And here’s the thing: they have between $50B to $100B under management. Now just remember that. These guys employ the smartest people in the world to do all the number crunching.
These guys are more smart than the government. These guys know, based on their statistics, based on their number crunching, what will happen next.
So if they think that the reports that they have, the data they got – remember guys these are insiders – if they believe all the facts and the data show that markets will go up and it’s a good time to buy, they will start buying. The question for you is: how do we know when these guys will start buying?
So what I’m going to show you today is an objective and scientific way to find out when the insiders start buying. Would that be useful to you? OK, fantastic, I’ll show that to you.
Pay attention to this part. And I want to make sure you understand this, that when you buy, when we buy, we’re not buying junk, we’re buying quality stocks, not junk stocks. Most people, people you know, friends you know, they buy mostly junk, like penny stocks, of which most of them are garbage as well. We want quality, so I’ll use an example. I don’t know if you guys are car enthusiasts.
I’m a big car fan. Let me ask you: If you had the choice between a Bentley Continental and a Kia Cee’d, which one would you choose? Who’d go for the Kia Cee’d? Out of curiosity. All right. Bentley? Yep I know what you’re probably thinking, the most common objection I get here is, “Well, hang on a second, Aless, it’s not even realistic. A Bentley costs over 100,000 pounds.”
True but imagine this, imagine if tomorrow, Bentley Motors, which used to be a British car, owned by Rolls-Royce, imagine tomorrow they say to you, “You know what? Tomorrow we’re going to have a 75% sale.” Who’d be interested? Out of curiosity. Yep, I would, absolutely. Same with Mercedes, you know, whatever car you like.
“Tomorrow,” they say, “we’re having a 75% discount.” Great, I’ll buy at discount. But what is a quality business? A quality business is like a solid earnings growth, undervalued, they’re cash rich, got low debts, and they’ve got growing sales.
Companies like these, whether you like them or hate them, bottom line is all these companies like Apple, Microsoft, Intel, Coca-Cola, Caterpillar, all of these qualify for quality companies. They all have these kind of values.
What I’m showing to you here. And there’s plenty more. Plenty more stocks people have not heard about, which we buy as well.
Now, so the next point is: when do we buy them? We buy them when nobody else wants them. Remember that.
We buy these stocks when they’re hated, when people are afraid, and when stocks are unpopular. May I ask you all a question: so when do you think is the most important time, when people would be hating stocks? Yes, a recession or a financial crisis, absolutely.
And I do believe, based on all the facts we have, there’ll be another one this year after May, after May 2014. Again here’s a thing I want you to understand: when that happens there’ll be blood in the streets. Remember what Rockefeller said, “The way to make money is to -” Repeat after me, The way to make money is – to buy when blood is running in the streets.
All that means is when people are afraid. But here’s a warning. Even though this sounds simple, the hardest part is the psychological part, because – Why’s this so? – here’s the thing: to invest successfully you’ve got to do the psychologically impossible.
That means buy when everyone is afraid, sell when others are excited with greed. I want to show you two tools, very simple tools, – even a 12-year-old could do this; the children, by the way, that Anthony was talking about, they could do this.
So if they can do it, so can you. All right? – This is so simple. I want to show you this. There is a method where you can find out the best time to buy stocks, and it’s like a thermometer. Basically, just remember these two words “overbought” and “oversold.” And remember these two indexes: one is called the Market Sentiment Index, the other one’s called the Bullish Percent Index.
It’s like a thermometer. When this thermometer goes below a certain level, below 25, say after me: oversold (Audience) Oversold. Louder Say oversold. (Audience) Oversold
OK, that means that the thermometers come to a point, where everybody who was afraid, everybody who could have sold, has sold. There’s nobody else left to sell. All right? You guys have heard of a saturated market? Yeah? It’s the opposite OK.
But keep it simple. All right. How many of you hate looking at charts and graphs? I’ve got good news for you. Don’t worry. So do I.
But bottom line is this is so simple you don’t have to know anything about charts, graphs. I’ll show you a simple way you can do this. You can get this information for free too. There’s a website called stockcharts.com, and you can just plug in the symbols of this index.
The symbols, I should’ve shown you earlier. Don’t worry if you missed the symbols: you can download all this information. Will that be useful to you? Yeah? OK. So here’s what you do. On this index, on this chart, pay attention to the right-hand side, it goes from – let me show you. This goes from 0 to 100.
What you want to pay attention to is when that chart, when that graph, goes below 25%, or just 25 or below. Are you all with me? If you’re with me, say “Aye” (Audience) Aye.
Good. Remember guys, the 25% level on this first index is important. So here’s what you do. When you go on that, just print this out, go ahead, just print this out, and then draw a line at 25% level. Whenever this index – guys, this measures market sentiment, it shows you how ordinary people, the public, view the markets. The more negative it goes, and when it goes below 25%, it’s not overbought, what is it? Oversold. That’s when we buy.
Take a look. It happened three times at least, at least a few times in the last few years. In 2011, 2012, 2012 again, and just one recently as well, although it didn’t come all the way to 25. I’m now going to superimpose this on the stock market. Look at what happened every single time.
Every single time this index comes below 25%, look what happened. The market bottomed, and then, what happened afterward? It rallied – Oops – It rallied. Every single one of those occasions, which are superimposed, they were buy opportunities.
Do you see that? Yeah? By the way, here’s the interesting part: Every time people were afraid to buy. Why? Look at the first one. The first one happened at 2011, and when I went on television and said, “I’m looking to invest in this crisis.” European Union crisis, the second one Greece debt. Who remembers all these things? Just out of curiosity.
Yeah. You remember the news some years ago: there was a fear that Greece was going to leave the euro. The fact is: every single time this index went below 25%, it produced a buy signal. Insiders were buying when everybody else was doing what? They’re selling, or they’re not interested. Most people stayed out.
When do you think most people do get interested then? Yep. When they hear what kind of news on television? Exactly. Last year when finally the Bank of England and some other people came out and said, “Oh, the UK economy is back on track.” That’s when the mom-and-pop investors, you know, older folks out there, that’s when – I’m not just saying this – because it’s what I believe, it’s true. The majority of the mutual fund money that’s been going into hedge funds happened last year.
Huge migrations of stocks. But notice they missed out all the good opportunities. Let me show you. You’re probably wondering: Does it apply to the FTSE UK 100? Absolutely. Every single time that index goes below 25% – look at this.
– Oops! – Look at that over there. In 2011, 2012, right there, every single time: Buy, buy, buy opportunities. Here’s a different one. It’s the last slide I’m going to show before I finish. It’s called the Bullish Percent Index.
Now, with the Bullish Percent Index what you want to do – Remember this number, remember 15%, not 25% with this one. This one is 15%. Whenever this index goes below 15, or just at 15, what do you do? Let me hear you. What do you do? (Audience) No. It’s oversold.
If it’s oversold, are you buying or selling? You buy. Let’s do this together. I want to do this little thing together. So what I’m going to do is I’m going to move this laser, if I can, I’m going to move this laser from the left to right, and I want you to shout “buy” when you see the signal. Are you guys ready? Are we ready guys, yes or no? (Audience) Yes.
All right. Let’s go. From – now! Buy. But look what happened next guys. What year was that? It was ’98. That was the beginning of a major bubble. What was it? Dot-com bubble. You guys remember that? Right. That was a buy signal right there. Then – there was a next one – let me zoom this laser here.
Ah, OK, here we go. And in 2003 I think that was. What do you guys do? (Audience) Buy.
You buy. Guys, notice it goes below 15%, right there. That was a buy signal in 2000 and 2003. And the next one occurred in 2009, look at this. This goes over here, and what do you do? (Audience) Buy.
You buy. Absolutely. Guess what? Most people who stayed away from stocks in 2009 because they were afraid, they missed out on a 130% gain on stocks. But the insiders at that point, what were they doing? They’re buying, when everybody else is selling.
Now, here’s the interesting part. Notice that we haven’t had a major financial crash or crisis since 2009. Statistics show that after about 6 to 7 years, you’ve left 5, 6, 7 years, usually you’re going to have a major correction and crash.
Based on a lot of information I don’t have time to discuss here today, I actually expect another major crisis to occur not as big as the one in 2008. But next thing a 20-30% drop to occur this year, like it was reported when I said this was reported by The Huffington Post.
Now, obviously, I don’t have time to discuss that, but the bottom line is guys, a major buying opportunity will happen this year. I believe it’s going to happen between May and September so pay attention to it. What you want to do is go on that chart I just showed you and plug in those indexes, and keep an eye on this.
Was this useful to you, by the way? Yeah? Most of you probably missed the parts about a symbol, so. You can download all of this, by the way, from my website, this: www.LeadingTrader.com/TED. So just put forward slash TED after LeadingTrader.com.
By the way, I haven’t talked about when to sell; did I? Did I? No. You need to know when to sell too; it’s no good just knowing when to buy, but also when to sell.
On this download, which is for free, just download it, I’ve also put some sell strategies too, very simple sell strategies. All right, guys? Thank you very much for having me, appreciate it.