What a ride it’s been for the past couple of weeks. There have been a number of measures taken by the Fed, the Treasury, the Administration, and Congress to prop up our nation’s economy. There has been even more criticism from all angles. I myself am even skeptical of many of the recent moves made by our Government in response to this crisis. Despite that, the big picture for investors is this: more money being pumped into this market to stabilize it, along with a few “better-than-expected” economic indicators showing that at the very least the decline is subsiding, certainly creates a nice environment for making some solid profits!
Here are the numbers:
On Monday March 9th, the low on the Dow Jones was 6440 according to yahoo.finance.
A little over two weeks later, on Thursday March 26th, the Dow hit a high of 7969.
That’s a move of 23.7% from trough to peak, in just over a payment cycle!
Hypothetically, if you invested $100 in a stock that moved directly in-line with the market, that $100 was worth $123.70…on Thursday, March 26th…at the peak of the day.
Of course, unless you sold at that very moment, it would now be worth less, but still roughly $116 today, with the market around 7500. Not bad.
Now, here’s the kicker. I bet there are a lot of investors that were sitting on some nice profits this past Friday, when a slew of reports hit the news regarding negative sentiment for upcoming earnings and economic indicators for the first quarter of ’09, along with some very public “infighting” at AIG, all stirred the pot of selling pressure. I took profits on some of my investments, but I bet there is an extremely large number of investors out there that didn’t. Even with today’s blood-letting of 254 points on the Dow, there are still a ton of investors that are still up 16% on investments made within the last few weeks, but still will not sell anytime soon. They would rather let those profits disappear in the hope or belief that given time, the investment will give them another opportunity to net an even higher return.
My philosophy is, if you believe the stock will not only go up again (after it moves lower from where it is now), but that it will rise higher than this previous peak on the next go round, why not book the profits you have, (16%) and then buy back in when you think this current downward move is coming to an end? Following my philosophy and still using the $100 hypothetical from earlier, you would have $116 after selling your investment today. If over the next 2 weeks, the market went back to 6500-6440 (to test the “bottom”) and you got back into your hypothetical investment (which in our example moves directly in-line with the market), now you’d be reinvesting $116 instead of just holding the original $100. If, following that re-investment, the market and your stock proceeded to make the same move upward, (another 23.7%,) back to these past highs, well then at that point, your original $100 that you booked profits on and reinvested at $116, is now worth about $143…so far! The guy that held on the whole time and never sold for the re-buy on the dip, he’s back to his original $100 being worth $123.70…if he sells tomorrow.
Some might say that this philosophy would be akin to trying to “time the market” and “no one can accurately time the market over the short term.” This is a statement I wholeheartedly disagree with. On a very basic level, if this were true, then a logical conclusion might also be that no one could accurately make money in the market since doing so directly involves timing. No matter what direction the general market is moving, all good situations have bad times. If you get in at a bad time, you’re done. Therefore, timing is the most important thing when it comes to making any investment. The intent behind any and all research done and reports read about investments is to determine whether or not it is the right time to buy, sell, or continuing holding the asset. To say you can’t “time” the market accurately demonstrates a defeatist attitude, which typically leads to the self-fulfilling prophecy of most investors not making money with their market ventures despite their best efforts, but if it were true, it would also mean that any and all research done on investments is all for naught since it won’t help anyone “time the market accurately.” Obviously, this is not true, so the former must not be true either.
In order to be a successful investor, especially now, you need to know, understand, and believe that not only is it possible to “time the market” over the short-term, it is fairly easy. Let me say that again, because it goes against everything that the perceived “Wall Street wizards” want you to believe and have told you since the markets were created. It is easy to time the market over the short-term! Money managers have lied to us from the beginning of finance and commerce about this fact for a simple reason. If society and therefore the investment community actually knew how easy it was to track, follow, and predict the movements of your investments, they wouldn’t need investment advisors and those guys wouldn’t make any money. They wouldn’t even have jobs. We need to believe that it is hard to make money in the markets in order for us to believe that we will not be able to do it without their help. That way, they can charge us just for talking to them, no matter how good or bad their advice!
What do you actually pay your investment advisor for? Being a former registered representative, I know exactly what it is, and what your advisor wants you to believe it is, and let me tell you, those are two very different things. He wants you to believe you pay him mainly for his speed and availability of financial information, and for the resources his organization may boast having access to, such as analysis, which he wants you to believe you certainly cannot do on your own without the “training,” “experience,” and “expertise” he or his colleagues may possess. Well, if the current state of our economy is the result of their “training, experience, and expertise,” I think it’s fairly safe to say we certainly could have lost our own money – and probably would have had a lot more fun doing it our way at that.
No, what you actually pay a broker for is simply to gain access to the markets. Your broker is in direct competition with TD Ameritrade (my personal choice,) Etrade, and all the other onlinebrokerage companies, because with online firms, you pay a low flat-rate commission per transaction, and have general access to the same information your broker holds over your head as “unattainable, unless you’re on Wall Street.” There are also extra informational services offered through most online trading firms that can be earned through consistent trading, or you can pay for it. Regardless, the only real way for you to get your money from your bank account and into shares of a company that trades on the market is by going through an investment or brokerage firm. Either you make your own trades, or you pay someone else at the firm to manage your portfolio, and do all the work that goes along with it, for you. It should be obvious now that since brokers get paid by charging you a commission, whether you make money or not, they have an inherent incentive in not doing all the work that goes along with managing your money.
First, let me preface this by stating that in order to be confident on your own ability to do anything, you must educate yourself as much as humanly possible in the intricacies of that arena. In order to be confident in your own ability to time the market and make investment decisions without the direct, commission-generating assistance of a broker, you first need to know what makes the market move. Economic indicators, like GDP or monthly unemployment stats, legislative action from the Government, such as Healthcare reform, or tax changes, Interest rate changes from the Federal Reserve, all of these events can have a serious impact on the market. If the news is, or the numbers are in line with what most investors are expecting, the impact is usually positive, and if things happen unexpectedly, the move usually goes whichever way the unexpected news favors. Over time, watching and observing the markets, and watching closely during these times and around these events -among many, many others – you should notice certain patterns begin to emerge. Once you are able to recognize a pattern, making a prediction becomes a lot easier.
The next thing you need to know is how the overall moves in the market can affect the moves experienced in your investments. Do your investments tend to move with the market or against it? Once you know if your assets move with or against the market, you need to determine if they move more, less, or as dramatic as the market moves. (In stocks and finance, this relationship is quantified as the “beta value,” and measures a stock’s volatility in relation to the overall market. A thorough understanding of the underlying information that lies within this single number is essential to being able to accurately predict the short-term or long-term direction of your investments.)
Now once you know what moves the market, and how those moves in the overall market will impact the moves of your investments, you need to know what events that are not specific to the overall market will also have the affect of moving your stocks in any one direction. Earnings announcements, contracts, buyouts, law suits and litigation, all of these and more are big events that are stock-specific, and can have a dramatic impact on where your investments are headed. Not only that, there is an inherent pattern of movement within each stock that is directly linked to the frequency of these events. That pattern can be seen by looking at the stocks chart. Each reversal in movement, every time the stock turns upward after moving down, and vice versa, can pretty much be attributed to either a single occurrence of some event, or a cumulative result from the combination of a few. Good earnings send a flat or down stock upward. Law suits tend to be like cinder blocks wrapped around the ankles of previously rising stocks. A company receives a large unexpected contract, the stock is going up, especially during the next earnings announcement, because that’s when that large unexpected income should hit the balance sheets.
These are just a few small examples of events that occur within stocks, (stock -specific events) that will either send the price significantly higher or lower. Since the legitimacy of that statement for each individual will depend on their definition of the phrase “significantly higher or lower,” I would consider it to be $1 or 2.5% or more in any direction, whichever is greater. A move of $1 is equal to 100% to 2.5% on anything trading between $1 and $40 per share. It’s exactly 2% or less on investments of $50 or more. (That’s the power of a dollar!)
Now that you know what moves the market, what moves your stocks, and you’ve been watching for patterns of how deep the impact on your investments can be based on the occurrence of these events, you need to know how predictions about the market are made in the first place. Tracking various indicators on the chart of a particular investment – volume, moving averages, relative strength, etc. – is the science known as Technical Analysis, and is one way financial “professionals” try to make predictions about the overall markets as well as specific investments. Looking at a company’s balance sheet and analyzing their debt situation, growth numbers over the past and projections for the future, operating and profit margins, etc. and using this company finance data to predict how a company will perform in the overall market is known as Fundamental Analysis. Many people think that these two disciplines clash, and choose to utilize mainly one or the other. I think that’s the hugest, most costly mistake many investors and investment managers make.
In order to successfully make money with your investments, you must maintain excellent awareness of both the technicals and fundamentals, and the changes that occur therein, of any and all investments you make. Why dismiss an entire discipline of information that may certainly prove itself to be valuable when it comes to making money? Knowing and tracking the events that give you an indication of the fundamentals of our economy, combined with the knowledge of those same events and indicators within the specific company’s you are looking at for investments, you will be much more confident and able to analyze information quickly and accurately as it is received, and much more confident in your ability to fire your broker and do this on your own, if you haven’t already. Stay on top of the news, watch the charts, you can even utilize virtual stock trading websites online to test your predictions and trade with fake money to see what would happen without actually risking your own liquidity. Keep learning about the various events and occurrences that can significantly move the markets and your stocks. There are millions of them, so discern which are most important and why. Constantly seek out information that will help you find out how this behemoth system of market finance operates, and always keep building your financial knowledge database. It may sound like a lot of information and may seem daunting to digest it all, but really, how hard is reading and watching? If investors were much more involved in informing themselves, and took more control of their own market-education, a crisis like this, (perhaps even Bernie Madoff), might have been avoided, or at least could have been more mild. Information is Power.
*This post is aimed at investors and anyone that already has funds committed to market investments. Investing in financial products should not be done without thorough research of the markets and products in which you are interested in investing, and at least the consultation of a true professional that you know and trust. As a rule of thumb, take everything you hear or read about the markets or investing with a grain of salt, as most statements about making money in finance will be material conditionals.