BASED on the e-mails I receive on a daily basis, stock-market investors generally fall into two major camps. There are those who are confused about stock-price movement and know it. There are those who are confused and do not admit it.
For the small group of professional traders and investors, they know that they know just enough to be dangerous and always assume that they are going to be wrong about the market.
Finally there is another small group—experts—that are sure that they know most everything. It is their overwhelming self-confidence that leads the majority of investors, particularly the new participants, into thinking “knowledge is power.” Further, they preach that total knowledge is almost achievable—if you read their books enough times.
A proverb through many cultures reads something like this: “He who knows not and knows not that he knows not is a fool.” A better proverb would be “He who knows not and knows he knows not is the person you want to listen to. He is always learning.”
Many of the e-mails start with something similar to this. “I read in one book that I should do this. Yet, another says my investing should be based on this strategy.”
Maybe the easiest thing to do is buy all the Top 100 ‘Best Sellers in Stock Market Investing’ on Amazon. Unfortunately, you will not find the one you need. The title is “Ultimate Stock Market Investing From The Stock Market Gods On Mt. Olympus.” It has never been written.
Most of those Top 100 have some very good ideas, but too many investors believe that if they read enough experts, they can put it all together in one unified theory of the stock market.
“But why can’t I combine the ‘best’ of fundamental analysis with the ‘best’ of technical analysis?” Of course you can, in the same way you can combine two religions. But then, is the gods’ sacred animal the cow or the elephant in your new religion?
Fundamental Analysis (FA) is the concept that price reflects “corporate value.’” Technical Analysis (TA) is the methodology for forecasting the future of prices through the study of past price movement and volume.
If you choose FA, you must also choose between the Efficient Market Theory that says prices always reflect value, or the Inefficient Market Theory that price does not always reflect value. If efficient, then buy revenue and profit trends. If not efficient, then you must devise a formula for determining when prices are too low or too high to value. Which is correct? As in many religions, “It’s a mystery.”
I am a professional Technical Analyst (TA) with four decades of experience. But, you know what? Ninety percent of TA is one step removed from astrology or feeling the bumps on a person’s head to predict their future. Put all the books on the shelf until they are covered with dust and start over. There are only two universal truths. Water flows downhill and money flows to profitable opportunities, often creating those opportunities in the same way flowing water creates a river.
The most underrated market strategy is “follow the money” as smart capital moves in anticipation of events. That is why, usually, the highest volume comes at the price tops and bottoms as that is when the “dumb” money is most active.
So how do you follow the money? Watch for a volume spike first and then second, a price spike. Volume cannot be hidden any more than water from a torrential rain can somehow secretly move down the mountainside. The price spike is that rainwater rather quickly cutting a stream into the face of the hill.
There is not any “daang matuwid” for the stock market and the sooner you accept that as a fact, the sooner you will improve your performance. Trust your own judgment for a while and see what happens. The key is to run away as fast as you can when you realize you are wrong.
Are you smart and confident enough to leave a job, relationship, or even a house if you know it is not good for you? The same applies to buying stocks.
As for buying, go into companies that you like and want to be an owner. Good—in the broadest sense of the word—companies see stock-price increases over time. Do you choose your relationships based on some sort of analysis?
If you want to be a stock “trader,” you will not become good at it from any book. The best traders always had a reliable mentor. But the best teacher is learning from your own mistakes.
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E-mail me at mangun@gmail.com. Visit my web site at www.mangunonmarkets.com. Follow me on Twitter
@mangunonmarkets. PSE stock-market information and technical analysis tools provided by the COL Financial Group Inc.