(Last of two parts)
In the attempt to find practical strategies to timing the market when to buy, sell or hold a stock, I said last time that outright guessing has no place in the investing process even if the odds or chances of winning or losing in the market are even at 50 percent. The object of stock investing is to make a profit, thus, there is a need to tilt the odds in your favor.
Moreover, if you may have heard or read of the story about a chimp to have beaten Wall Street experts in an actual stock trading play during the nineties by throwing a dart in selecting winners, the market is not random. Far from being one, the market is found to be more rational than imagined that winning your game certainly requires the use of intelligent foresight.
Today, the four methods that are largely used to help investors in their market timing are growth, value, momentum and technical. There are additional investing styles that are also used but these four methods are the preferred methods to “capture stock value and predict market price movements” better.
Growth and value investing are appreciated for their ability to capture a stock’s price direction and the general magnitude of its movement. Momentum and technical investing, on the other hand, are held as better tools in timing the market. Users of the technical methods, however, are warned not to become purist that they become “pickers or followers” as they are called in market parlance.
The pickers are all those that try to pick a bottom or pick a top of a stock’s price, falling prey on the fallacy of the technical tools’ ability to show the market’s next turn and “help them get in before the market really makes its move and get out just before it heads back in the different direction.” These type of investors more often than not “get picked off like flies,” as they are reported in many accounts. As, pickers, they also commit the mistake of claiming “it’s now the time to buy (or sell)” at the slightest market rally or correction. While they get lucky at times, pickers also get stymied by the so-called ICGAL syndrome, which stands for the expression “It Can’t Go Any Lower” when the price of a stock has dropped so low compared to its previous history.
Opposite the “pickers” are the “followers.” They are known for not trying to catch the entire move, from top to bottom. Instead, they “wait for confirmation the market is indeed trending in one direction or another.” Only then will they buy or sell. This explains why they are called “followers or trend-followers.”
The approach makes sense. But as also found out, by the time they get in, the market may have already moved substantially that it could be near reversal. The losses of “followers” become unbearable most of the time because they have the tendency to stick it out for a while. Moreover, the market could be on the opposite move, again, just when they bail out. The cycle repeats with the “follower” suffering a double whiplash. This is the problem and weakness of followers and pickers. It is therefore, recommended to avoid falling into becoming a “picker or follower.” They often share a sad fate and mutual burial ground.
Bottom line spin
Actually, market timing is largely a function of your financial goal and state of the market’s prevailing psychology. A clear idea of your profit objectives in every investment play and a good grasp on the state of the market through a good read on its prevailing psychology can lead you to good market timing—thus, successful investment plays.
For instance, a successful market punter suggested the following quantitative method when selling: “When I get 30-percent profit, I take a third. When I get a 50 percent profit, I take another third. When I get a pattern to the reverse, I’ll take the rest of the profit.” A more qualitative method is observed by another seasoned investor: “He sells his stock position when the reason behind his decision to buy has changed.”
Since the profitability or future prospects of the business of the company serves as the major consideration for buying a stock, this makes the timing to buying it to be as good as anytime—as corroborated by most successful investors around the world. Some, however, still insist that the timing to buy must be reconfirmed by technical methods, which goes without saying that the market’s prevailing psychology takes precedence over any consideration when to buy.
The same criteria is recommended when to hold a stock or not. Hold on to your stock position if your financial goal have not yet been met. However, this must be corroborated by the market’s state of psychology if it still continues to support the stock’s prospects to advance.
Lastly, the principle behind the market adage to “Win your game even before you start” will surely help hone your skill of timing the market when to buy, sell or hold.
You may reach the Market Rider at marketrider@inquirer.com.ph, densomera@msn.com or at www.kapitaltek.com