A speculative look at a non-speculative art
by Ashton S
Yes I consider Investing to be an “art”, like an art of todays society investing captures the true personalities of the people who take part in it. Of the many ways to invest not one person can call one investment strategy the right one. So then why are we so quick to call some “The Wrong Way”, isn't there more to investing than observing a track record, and isn't it true what has not worked in the past will not necessarily NOT work again today. Today our market is is more of a game then it has ever been, with the up tick rule disbanded corporations are back in control of stock prices, or are they? There seems to be a lot of struggle in todays market between the bulls and the bears, some may call this volatility but if that were so the S & P 500's spider index of volatility would tell us, it is not volatility it is the new norm of the market. I am referring to of course the new behavior of Hedge funds and other investment vehicles. With the up tick rule gone companies are free to drive a stock price down as far as they want, but there is a defense for this, if the company who's stock is being shorted finds out on time they can flood the shares with capital driving the price up and very possibly financially ruining the shorting companies, so hedge funds are a little less eager to short in such a strategy any longer, but it doesn't stop the new comers.
I was reading a book on Ghram the other day and I realized how similar his writings are to Jim Cramer, and in one particular believe they both seem to hold I cannot seem to hold my self, and this is the idea that long term investing (6 months a year) is some how safer and less speculative than day trading or medium term investing. If you really go back to the real reasons people do the “buy low sell high” it isn't because there is such distance in between its because of cycular growth. Cycular growth is found in most businesses, except for companies like pharmaceuticals and food, but all others can be considered cycular. Cycular growth means that the companies have a sort of cycle to them, they do great profits soar expansion heats up and the prices jump then things slow down the expansion's momentum takes it farther and father but the company's breaks cant slow it down fast enough, it slows down slower and slower, but while its slowing down it gets to a point where the company can not handle to be as big as the stock price says it is, it has over expanded and this shows in the P/E ratio. Finlay the company puts the breaks on and works to unexpand to get the price down to where it can accurately show the size of the company but this takes on momentum and before the company can stop it the price goes too low (also showing in the P/E) and the company begins right back at the beginning of the cycle. This cycle can take anywhere from a few days to happen to a few months. This change in stock prices is important to follow but by no means should it be your only or most important guide to analysis. But while this cycle is happening other things within the whole market cause much different and fairly predictable corrections in the stock price, such as upgrades, down grades, shorts, management, news of lawsuits or anything that may cause the wallstreet boys to panic and bail out. And as you know when a large amount of stocks are sold at once the value of each share diminishes (because it's scarcity diminishes) and so the price diminishes. There are many things that can trigger a panic or down grade. There are even times when investors look at the Dow Jones's Industrial average or the S & P 500 Industrial average and decide to sell because the average fell due to a fall in an unrelated industry within the index and your industry could be doing great but will be brought down by the people selling based on the index average, this of course is fairly rare but is more common when an index takes a massive loss such as 30 points or so. And some banks may decide that X company doesn't have enough growth for them so they decide to down grade the stock, and of course wallstreet thinks “ oh shit their must be something wrong with the stock!” but there isn't anything wrong with the company so the intrinsic value of the company becomes way under priced due to one downgrade. Its reasons like this that make my investment strategies make sense.
My investment strategy is called reverse investing, because instead of trying to find stocks to buy your trying to find stocks to by but then figuring out reasons not to by them hence narrowing down the list of possibles buys into a few stocks in which the risks are so low that the benefits out weigh them several times over, you may only end up with 2 or three stocks but those stocks will out perform any other stock that you might have bought on an impulse. What you do is you look for a category of stocks weather it be small cap stocks to medium cap stocks to blue chip stocks then you look at the average 52 week low for the index of the stocks and you have a price range to look for. Pick one industry you know about, I mean one you understand everything about , don't go out looking for mortgage stocks if you don't know how an ARM works. Then you look for stocks within the price range within the industry. Once you find them eliminate them systematically based on risk until you come to one stock, then buy that stock and do the process over again for 3 other industries you understand. So then you got your self a nice little diversified portfolio. Well people like Jim Cramer and Grahm would tell you to watch it but don't sell for a year or so. What I say is look every day for a reason to buy more or to sell. How do you know which one to do? Well if the price drops dramatically and you know the reason it dropped was because of some panic made by the aforementioned causes that cause wallstreet to panic and you KNOW for a fact threw your research that the stock is undervalued and does not reflect the intrinsic value of the stock BUY MORE. On the other hand if you foresee threw your research any possible long term internal complications the business may have that will cause the company's intrinsic value to drop or slow down growing (and im not talking about the stock price I am referring to the actually company's out look performance and earnings) such as a corporate skandle or an upcoming law suit, or if you realize the company is over valued and will not return to that price again (you thing this is going to be the 52 week high) SELL THE STOCK. I don't care if the stock is at $0.01 per share if you foresee long term intrinsic damage get the hell out of there, take the money and run. This is why I stress so much that investors learn to tell the difference between a panic and a loss of intrinsic value of the company it self, the difference between a stock's shortfall and the actual company's shortfall. If you can do this and you can also quickly spot when a company's intrinsic value is overpriced by it's stock price you will have become a better investor.
Volatility Volatility can be the worst the you can run into in the stock market. It is usually in a time of panic when volatile markets occur and keeping your head during that time takes skill. Things become very unstable because of the rapid buying and selling and corrections from CFO's to save the stocks its like a battle between the two but at such a speed that it is hard to put any general strategy into effect. Basically it can take some big hits off the stock price for you which may seem like a great time to buy and it may be but it is very risky, because a stock in a volatile market can go from an undervalued stock to an overvalued stock in minutes but don't forget because if its overvalued it doesn't necessarily nor does it ever really mean that the stock has reached it's highest long/medium term potential. Generally it is not a good idea to sell in a volatile market unless news surfaces coincidently about the future profitability of the company. But its not a good idea to sell in a volatile market because if you sell the stock price could fall before your broker gets a chance to sell the stock in which case he will sell it and it will be at a low price, and also if the stock keeps falling for a while this doesn't mean that it wont spring right back up even after the volatility drops, and it is doing great its going to come right back up eventually, usually in a couple days after the volatile market is over.