Sunday, February 05, 2012

Stock Market Wisdom

Stock prices move in trends.
A trend in motion is assumed to continue.
Buying in a downtrend is unwise.
Selling in an uptrend is not advised.

To be intelligently involved in the stock market you need to have stock market wisdom.
What is stock market wisdom? It is simply the knowledge to apply knowledge for beneficial returns.

What is the best way to approach the market?

The best way to approach the market is to invest in the market. In the words of Benjamin Graham, the mentor of Warren Buffett, "An investment operation is one which, upon through analysis, promises safety of principal and satisfactory return. Operations not meeting these requirements are speculative." Most people approach the market wrongly. They like to trade and speculate. No doubt, trading is much more interesting than investing. Trading provides you with the thrills and excitement. It is one of the most exciting things anyone can do with his clothes on.
But in trading, few have the ability to win. Many end up with disastrous losses. If you are about to speculate in the stock market, it behooves you to ask yourself whether you have the mental power and ability to cope with the ablest money getters in the world. If you do not, then perhaps it's better for you to restrict yourself to investing only.

How do I invest intelligently in the market?

Insist on value when you buy stocks. A stock has three values. They are the market value, the net tangible value and the intrinsic value. The first two values are easy to understand. The intrinsic value needs some explanation.
Intrinsic value includes the tangible and intangible factors as well. Brand names, patents, copyrights, the business moral, and the competency and integrity of the management must all be factored into the calculation. It all boils down to earnings power. The more a company earns, the higher its intrinsic value. There are times when these three values are at different levels. When the market value is much lower than the intrinsic value, the stock is undervalued. This does not mean that you should rush in and start your buying. An intelligent investor will have a look at its chart first before he does anything. If the stock is in a downtrend, he will wait until the trend shows some sign of a reversal. Timing the stock is not easy but you should do it nonetheless. Upgrade yourself; study technical analysis, and over time your skill will improve and you will save a lot of money.

What is a good stock to buy?

A good stock must have good prospect. Present earnings are important but it's the prospective or future earnings that count. A company with a gearing of more than 0.5 has a greater risk than one that has less borrowings. All companies that folded had high borrowings. Therefore, companies with high borrowings should be avoided. Earnings are the lifeblood of a company. Without earnings, a company cannot survive. When you look at earnings, look at earnings per share (EPS).

The most important aspect of a company is its management. Not only must its management be smart, capable and competent, it must have integrity. Without integrity, no matter how capable it is, the money will not come to you. Some of the attributes of a good company are: Consistent higher EPS year after year; good cash flow; good dividend payout and growth, low borrowings or no borrowings.

Investing in a stock takes a lot of research. Fundamental analysis is a must. What is fundamental analysis? Simply put, it means that you must know what the company has and what it owes others. A look at the balance sheet will show you the information.

There are always two sides to a gamble. On one side ,we have the winners and on the other side we have the losers. If you are in the side of the winners, it is difficult for you to lose. If you are in the side of the losers, it is difficult for you to win.
Look at the lottery operators, and the casinos. They always win because you play the games according to their rules which they set up to favor them.

In the stock market, to ensure success and make money, you can also set up your rules to favor you so that you will win.
As with everything, planning is paramount. To develop a piece of land, you must have a plan. To go into business, you must have a plan. And if you want your children to be well-educated, you must have a plan as well. Thus, you should plan out your strategy if success is what you want.