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Saturday, January 17, 2015
Learning how to live with volatility
Volatility has become a popular word lately. Some love it, some hate it. While I do think the recent endless batch of volatility has been a bit much, the right amount is a beautiful thing. Why you ask? It's common sense.
To understand we go back to the basics: Buy Low, Sell High.
When the market gets slaughtered it allows traders to move in when stocks are low and make a quick exit on good days of the market when stocks are high. Most people think you have to wait for a market crash to turn a good profit off the stock market. This is simply not true. If you want to own the stocks the media pumps up, sure you probably would have to wait for them to crash. But smart investors will realize they don't have that advantage so they move on to the next trade.
It takes time and research, but there is always a profitable company trading below its moving average and that's where you make a killing off volatility.
I don't claim to be a market expert like everyone on Twitter, but by now I've learned a thing or two in my time on the Stock Market. The one thing that has become crystal clear to me is avoiding the noise. You see when traders watch CNBC and hear them pump up over inflated, non profitable stocks like Twitter and Tesla and then drool as they listen to analysts declare sky high price targets, justifying it with this weak statistic or chart analysis things start to get ugly and investors lose money. Why? Because now traders are making fundamental mistakes.
#1 They're buying the stock when its high, hoping that the stock will get them that shiny $30 dollar price gain. Good luck with that one. Warren Buffet would be ashamed.
#2 They're doing this based off inflated fundamentals. Looking at strictly revenue or annual EPS growth does not tell a stock's full story. This now sets the investor up for huge losses when the stocks misses analyst estimates or doesn't live up to the hype.
Even traders with the intention of making a quick trade lose out when following these guide lines. I remember something I read when I first got into stocks from Warren Buffet, "If you wouldn't own a stock for ten years don't own it for ten minutes"
Technical traders would argue that's not always true and they have a point as you can profit from using chart analysis, assuming you're good enough. however sometimes numbers/charts DO lie and that's where the fundamentals come in. Sure it's nice to buy a stock below its 200 day moving average. But is it profitable? Can it make it back up? Why are investors dumping the stock? Looking at the fundamentals along with the chart will tell you what you need to know.
Inside information is illegal, and depending on your broker or the media to help you make the right moves is a recipe for disaster. The greatest defense you have is your knowledge of the markets.
Speaking of defense, You hear people say buy gold, buy bonds, etc. to protect yourself in stocks. If that's your strategy your better off putting your money in a savings account as you'll get about the same rate of return without the hassle.
In my opinion the only real way to defend yourself is by buying high and selling low. For most of the big name stocks you constantly hear about, this is almost impossible to get a stock for good value because they're so over inflated. So you have to ignore the noise and go hunting for true value deals.
To illustrate this for you, say I buy stock X at 17.00 the following year it rises to 67! woohoo! but wait, now it just fell down to 27 from a sudden, devastating move to investors. So while all the sheep that bought the stock when it was trading more then 10 times book value get slaughtered while the hunters who bought it when it was low and hidden away from the hype are still standing with a profit.
Is this a perfect scenario? Of course not, but it shows you how in the event of the stock crashing you can not only prevent losses but also still turn a profit. This is due from buying the stock at the right time.
We as human beings tend to complicate things, and the stock market is a fine example of that. While it's not easy, it's more difficult then it appears because people make it more complicated then it needs to be. My suggestion? stick to the fundamentals and rules of analysis.
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