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Buy On The Upside
Chapter 6: The Wizard of Oz
Dorothy learned to rely on her own perceptions. You as an investor must
learn from your own decisions, both good and bad. Once you are an independent
investor you are not in Kansas anymore. Look behind the screen; see the
wizard as he really is. Here, in simple and summary form, are the principles
you need to follow to insure that you are a confident, focused investor.
Have a Plan
Before you start to invest money in the stock market, you need
to develop a long-term savings plan and a long-term investment plan. The
plans have different objectives. Your savings are the difference between
your income and expenses. A savings plan sets aside money for different
purposes, one of which is long-term investing. The savings plan determines
how much money you have to invest—all or part of your savings is
the input to your investment plan. The investment plan makes the savings
grow over time.
The Overlap of Your Investing Experience and the Ups and Downs
of the Market
If your investing career coincides with an up trend in stock
prices, you have a good chance to make money. You make money simply because
more stocks are going up than going down, so you catch the money-making
wave when many stocks move up together. In sustained up markets, investors
of all stripes make money because buying and selling on the upside is
a winner’s game. On the other hand if you invest when the market
is in a long-term down trend, you probably will have small gains or lose
money. No amount of investing skill and experience can fully counteract
the negative effects of a multiyear down market. Losing stocks overwhelm
winning stocks, so it’s very difficult to make money. Buying and
selling on the downside is a loser’s game.
Reminders:
• If your investing career overlaps an up market, you have a good
chance of making money.
• If your investing career overlaps a down market, you have a poor
chance of making money.
Make Projections about the Future Direction of Prices
History confirms that stock prices move in up and down. For cyclical
stocks the up and down moves occur with some regularity. Broad market
averages like the DJIA, S&P 500 and NASDAQ have patterns of multiyear
up moves followed by multiyear down moves. You need to know where you
are in these cycles because some investing strategies work well in an
up trend but do not work in a down trend. Study price patterns of many
individual stocks and stock market indices to learn to spot up and down
moves.
Price charts are visual records of the price action for a stock. A price
chart is to an investor what an x-ray is to a physician. With charts,
you can make educated guesses where prices are likely to go in the future.
Obviously, predicting future prices is a very difficult task but at a
minimum you want to be able to say that you think prices are going up,
staying flat, or going down. You don’t have to know how high or
low but you need to estimate the general direction of price movement.
Reminders:
• Know long-term price patterns of market, sector, and individual
stocks.
• Look for price bubbles.
• Know how to identify up trends and top formations.
• Know how to identify down trends and bottom formations.
• Estimate the direction of future prices before you make investment
decisions.
| More
in this chapter:
Understand What Can Go Wrong and Limit Losses
You Have the Final Say
Avoid the Compulsion to Buy
Carefully Select Buy-and-sell Prices
Diversification Does Not Always Protect You from Losses
Dollar-cost Averaging Does Not Always Lead to Profits
Holding Stocks for a Long Time Does Not Always Ensure Gains
Dividend Reinvestment Is an Easy Way to Increase Your Returns
Buy Index Funds If You Do Not Want to Own Individual Stocks
Appreciate the Power of Cash |
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TOC Chapter
1 Chapter 2 Chapter
3 Chapter 4 Chapter
5 Chapter 7
Posted May 16, 2008.
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