Welcome to the first post of Dividend Dollars! Let me start by saying this blog and the strategy that I will develop through it is an experiment. I have no idea how this experiment will end, but I hope that it stumbles into success so that others can follow suit.
Don’t let that word “experiment” scare you. All of investing is an experiment. Every financial security you have ever bought in your life is an experiment and you the scientific method within that experiment even without you trying to. Step one in the scientific method is to question, as trades our question usually is “what stocks can I make money on?” and we begin to research stocks. Step two, we form a hypothesis that originated from that question. We pick stock A over stock B because our hypothesis is that stock A will be more profitable based on our research and ideas. Step three is the actual experiment and testing of the hypothesis which is actually purchasing the stock. The experiment can succeed or it can fail and a good trader completes the scientific method by observing, analyzing, and reporting on the result.
Whether you have recognized this before or not, as traders we are very familiar with experiments. I personally spent 6 years “experimenting”. I went to college in 2016 for a Bachelor’s in Finance and throughout my studies I traded quite casually. After graduating in the summer of 2020, the COVID-19 pandemic had left me unemployed and I found myself with even more time on my hands to experiment. Soon after, I landed a job and started that fall and still traded throughout the day on the job. I have traded for over 5 years and throughout that time I had subscribed to every Twitter furu’s alerts, chatrooms, watchlists, etc. You name it, I did it. And not just with day trading, but I tried all the other popular methods as well like options trading, swing trading, momentum trading, etc. Not only did I try to find success through subscribing to and following the plays of popular traders on the internet, I also amassed a fairly large collection of trading books and have read them all.
“I failed! And that’s ok.”
All of my experimenting, and reading, and formal studies in finance has led me to become a well-educated trader. However, regardless of my knowledge and experience, in my prior 5 years of trading a never found consistent success. My account value started small, I ran into some beginner’s luck and some good plays and had nearly quadrupled my account and every trade since then has been a slow and steady decline to my balance.
I failed! And that’s ok. Here’s why. A study done in 2010 showed that pigeons understand probabilities better than humans. This experiment was ran using the Monty Hall problem which originated from the original host of “Let’s Make a Deal”. The contestants are presented with three doors and only one has a prize. After a contestant makes a guess on which door the prize is behind, Monty Hall would always open one of the remaining doors that did not conceal the prize. The player would then be given the option of staying with their guess or switching to the other door that remained. Most people stayed with their guess despite the fact that switching increased their chances of winner. The contestant is first poised with a choice where they have a 1 in 3 chance of being right. That probability does not change after Monty Hall opens one door, therefore their door remains with the 1/3 chance while the only other door left must now have a 2/3 chance of being right.
The scientists of this study tested six pigeons under the same circumstance. Pigeons were present with 3 small light bulbs. When the bulbs would light up, it indicated that a prize was available. A pigeon would then peck at one of the bulbs and it would turn off showing that it was the wrong choice, the other two bulbs lit up green. The pigeons were then rewarded when they made the right choice with the remaining two bulbs. In this experiment, the pigeons learned the best strategy, 36 percent of them switched answers on day one and 96 percent switched on day two. 12 undergraduate volunteers, however, failed to catch on to the best strategy.
Why am I spewing on about pigeons you may be wondering. Because this is a probability problem. Trading is a probability problem. If we can get outsmarted by pigeons in a Monty Hall experiment, what makes you think we can fare any better in the market where the odd of being profitable are arguably lower than a 2/3 chance of being right? Some traders may argue that you can study fundamentals or technical charting or different set ups to better put the odds of success in your favor. While that argument holds some truth, you also need to realize that every trade is entirely 100% unique. If you were to buy an Amazon stock right now, the current chart set up, price, volume, market conditions, news headlines, company fundamentals and any other stock trait you can think of is wholly unique in this moment and never again will be and never was in the past identical to what it is in this moment. In the Monty Hall experiment, this was not the case, the scenario was the same every time and humans still lost to pigeons!
Correctly predicting and positioning on price movements for consistent and reliable gains in day trading, swing trading, scalping, etc. is extremely difficult. If you can do that, you are smarter than me, most other traders, and the pigeons from the Monty Hall experiment. If you can’t do that, you are in the majority with me. It is due time for me to stop trying predict short to medium term stock movements and instead focus on a strategy where the probabilities aren’t nearly as important.
That is where dividends come in. Dividend Dollars will focus on finding and investing in companies that offer stable and growing dividends while also utilizing some aspects of the trading methods I had experimented with in my last 5 years of trading in order to build towards a portfolio that provides a steady and reliable stream of income while also position the portfolio for capital gains through studying fundamentals, evaluation, and a small amount of technical analysis.