There are two basic types of stock market investment strategies: momentum strategy and value strategy. Momentum investing often focuses on the short term and uses sophisticated technical charts, trend lines, charts, and computer simulation models to project short-term stock price movements in days (or even minutes) to capture quick profits. Value investing focuses on a long-term period of time lasting at least six months by studying trend charts and financial statements. For a non-professional investor, who cannot control the daily volatile movements of stock market fluctuations, it would be wise to become a long-term value-oriented market player. There are a few rules of thumb worth keeping in mind that may seem simple, but difficult to master: (1) recognize that the market is efficient, (2) recognize that the market is irrational, and (3) buy cheap and sell low. expensive.
(1) All publicly traded companies have to file required financial statements with the SEC (Securities Exchange Commission). Basic financial statements, such as balance sheets, income statements, cash flow statements, and owner’s equity statements, are public records available online. Since this data is closely monitored and scrutinized by numerous analysts and investors on Wall Street, the share price is considered a collective wisdom consensus opinion. Today’s use of technology and the Internet allows information to spread online at lightning speed. This greatly improved the efficiency of the stock market pricing process.
(2) Market psychology is an equally important factor affecting stock prices. The sentiment may be due to non-economic events, such as political, environmental or other sensational headlines. Due to the inherent fear in human nature of total loss, stock prices can easily and frequently fall at a rapid and steep rate. This can sometimes create an oversold buying opportunity on the initial sharp drop following bad news. A prudent investor will ask if the incident would be fatal in bankrupting the company or as an entry point to invest. Some well-known cases making the headlines on CNN are best exemplified by the Toyota Prius breakdown problem, the BP oil spill in the Gulf, and the Walmart bribery scandal in Mexico. Although those well-respected brands in their industries suffered major setbacks in recent memory, investors eventually forgave their stock value and were able to fully recover within a year.
(3) One has to buy low and sell high to make a profit. There are many theories in the art of investing on how to identify a “cheap” stock. An example is the Dow Dog Theory by investing in the second worst Dow Jones stock from the previous year. It takes courage and insight to find a diamond in the rough. All market sectors are known to have their up and down cycles in about seven years. After considering the market fundamentals as to why a particular sector or stock is temporarily out of favor in the market, one can rest assured and be patient, the fallen angel will have his bullish days ahead. My basic approach is to look for the best-run company in the depressed industry that can survive downturn cycles and benefit the most when the recovery comes later.
A qualitative approach to value investing in the stock market is discussed here. For anyone interested in investing as a do-it-yourself project, there is a wealth of information available online or in publications. Education cannot guarantee getting rich on the stock market, but it will reduce the risk of ignorance. An educated investor, who is familiar with different concepts and strategies in both short and long term investing, will enjoy stock investing as a fun and profitable hobby.