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Buy On The Upside
Chapter 5: Brer Rabbit
Brer Rabbit contrived to be thrown into the briar patch as a punishment.
But he liked the briar patch and thus took advantage of what his competitors
saw as adversity. To a committed investor, certain kinds of apparent adversity
can function for you like the briar patch did for Brer Rabbit. You can
make an advantage of knowing what to do when a stock or a market turns
down. For example, don’t sell at market bottoms. But they are notoriously
hard to identify. Also, it is unlikely that you will sell at a stock’s
highest price in any market or cycle. Cole Porter wrote the song “You’re
the Top” about a lover, and you may find it there, but not likely
in the market. So, what can you do?
Technical analysis—the study of the patterns that stock prices
and related quantities make over time—can assist you in knowing
whether the market or an individual stock is going up or down. Technically
based predictions are far from infallible, but are, on the whole, useful
as part of your decision support system. Fundamental analysis—the
study of the specifics of individual stocks, industries, and markets—is
often described as an alternative, and a more realistic one than technical
analysis (Louis Ruykesyer insists on describing technical analysts as
“elves”).
We prefer to use both, and a biological analogy might help. The growth
of an organism over time, say the weight of an elephant from birth to
death, tends to change in generally predictable ways. If you know the
age and the general kind of animal, you can predict something about its
weight growth rate (high when young, slow to none in maturity, and perhaps
negative near the end). Similarly, cyclical stocks tend to follow generally
predictable patterns of price over time. But if you are trying to predict
the growth rate of a specific elephant or herd, you will be greatly aided
by knowing some specifics, for example, how much it or they have to eat.
And it follows that a cyclical stock at the bottom of a cycle won’t
recover and rise in price again (at least, not very soon) if the company
has poor management or unsustainable debt. So the technical/fundamental
dichotomy is a false one in the sense that any rational investor will
include both in her decision support system, but will rely on neither
in isolation to make buy-and-sell decisions.
| More
in this chapter:
Interpreting Stock Price Patterns
- Rising Prices
- Declining Prices
- Sideways Prices
- Repeating Cyclical Prices
- Topping Patterns
- Bottoming Patterns
Conclusions and Recommendations |
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TOC Chapter
1 Chapter 2 Chapter
3 Chapter 4 Chapter
6 Chapter 7
Posted May 16, 2008.
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