|
PureBytes Links
Trading Reference Links
|
Good stuff!
JW
-----------------------------
February 12, 2001
Barron's Features
15 Truisms to Trust
Separating market flash from market facts
By DICK DAVIS
URL for this Article:
http://interactive.wsj.com/archive/retrieve.cgi?
id=SB981768513127304421.djm
The perverse nature of the stock market precludes hard-and-fast
rules. Yet hard-and-fast rules are just what many Wall Street whizzes
peddle. Investors should beware. One day's market truth is often the
next day's market myth -- and tomorrow is when you'll want to cash in
your chips. So what should wisdom-seeking investors do? Trust the
truisms that have stood the test of time, a good, solid chunk of
time, not a one- or two-year span. Fifteen years ago, when I was
writing the Dick Davis Digest newsletter, I compiled for a speech
15 observations about the market that still provide solid guideposts,
despite the changes on the Street since then. None work all the time -
- but all work most of the time.
1. A big loss is unacceptable. Taking losses in the stock market
isn't a probability, it's a certainty -- an integral part of the
investment process. However, with stop-loss protection keeping
losses moderate, you can be wrong more often than right and still
come out a winner. (The baseball player who fails to get a hit seven
in 10 times is considered a "star" and earns millions.). What's not
acceptable is taking a big loss. Open stop-loss orders should be
entered preferably at the same time the buy order is given. A big
loss is a crippler. You can't play if you lose your chips.
2. It'll always go lower. Forget about buying a stock at the bottom
or selling it at the top. Yes, somebody does, but that elusive
somebody will not be you. The truth is that after you buy a stock,
it will go lower, not sometimes, but always. It is unrealistic to
think that you're smart or lucky enough to buy at the very bottom
tick or sell at the very top.
3. It's when, not what. If you are short-term-oriented, when you buy
is far more important than what you buy. You can make money on the
most marginal company if you buy at the right time. You can lose
money in the bluest of blue chips if you buy at the wrong time. When
purchasing for the long term, timing is also important, but less so.
4. Stocks need room. Long-term investors should avoid becoming
hyper-informed about a stock; this may force emotional decisions,
which will likely be wrong. There is always going to be some negative
news on a stock, and it can initially cause doubt and a lower price.
But most such news doesn't involve fundamental change or carry long-
term significance. The stock will likely recover, and the sell off
will turn out to be a wiggle in a long uptrend. Just as your spouse
needs space, stocks need room to perform. If you're building long-
term positions in industry leaders bought at reasonable prices, the
best thing is to take lots of vacations and stay healthy.
5. There's always another stock. The hype employed to promote market
letters can be irresponsible; cut through the bluster by asking for a
free sample. Flamboyant prose with a liberal use of superlatives can
sound like compelling recommendations. But, as I always said in the
Dick Davis Digest, "No one stock has to be bought. There's always
another stock and there's always another day."
6. Face it, it's history. If a highly speculative stock has collapsed
from 50 to 5, people often ask: "Should I hold or take my loss?" The
answer is: "You've already taken your loss. Write it off mentally, if
not actually, and move on. If you hold, and the stock beats the odds
and comes back, that's gravy, but don't count on it."
7. Rebound? Blue chips, yes; speculations, maybe. Bull markets follow
bear markets. The basic difference between a quality stock and a
speculative stock is this: With few exceptions, a blue-chipper will
recover from a major downtrend; a speculation might or might not.
That's a big difference in risk. But when you're talking about groups
of stocks, the question is not if they'll recover, but when. In most
cases, with patience, you'll see every depressed group return to have
its day in the sun.
8. Investigate, then invest? A popular slogan on Wall Street has
been "Investigate, then invest." That's okay for some but it's not
realistic advice for most of us who have neither the time, the
inclination nor the academic skills to totally understand balance
sheets, profit margins, book-to-bill ratios or chart formations.
Instead, check the track record of the broker, market letter, mutual
fund or money manager you're considering. After you choose, let the
professional do the investigating for you.
9. Market advice: Paid vs. free. Investment advice you pay for may or
may not be better than free counsel. A lot depends on what you're
getting for your money in addition to stock recommendations. "Added
value" might include experience, market savvy and perspective,
guidance on strategies, acknowledgment of the downside and protection
against it, the manner in which mistakes are handled (including
follow-up), hand-holding ability and a track record. These
considerations may be worth much more than just stock picks. Also of
value, wherever found, would be a touch of humility. In the eternal
search for performance, we're attracted by confident, no-hedge
opinions. Yet, there is no place where understatement is more apropos
and less visible than Wall Street. An occasional "I don't know" or "I
was wrong" would score big-time with me.
10. Rarity of inside information. In these days of instant
communication, you're not likely to get advance or inside
information; few do. What's more, a stock may not respond to news the
way you think it will. The only advance news that's likely to be of
trading value is that which is a complete surprise when it's
released. But if you know about it, chances are you're not the only
one. You definitely are not alone if the stock has made a sharp move
up or down with volume in the days just prior to your being informed.
11. Trust entrenched trends. Well-entrenched trends are exceedingly
difficult to reverse. There are always false countermoves that
trigger doubt, but the odds favor the resumption of the longer-term,
underlying trend. This applies to the overall market, stocks (though
it is less consistent with speculative issues), interest rates,
inflation, the dollar, etc. It applies to both uptrends and
downtrends, but more so to uptrends simply because the underlying
bias of the stock market has been up for the past 100 years and
because bull markets on average last longer than bear markets.
Trusting the durability of a lengthy, primary trend (the longer a
trend is in force, the greater the odds it will remain in force) can
be severely tested during periods of high volatility and long-lasting
trading ranges.
12. No monopoly on right answers. Brokerage firms have lists of
recommended stocks at all times. To increase your odds of success,
focus on the stock that an experienced, informed broker feels most
strongly about; i.e., the issue he feels compelled to buy tomorrow
with his own money. Your broker's knowledge shouldn't be limited to
his own research department. No single source or single firm has a
monopoly on being right about the stock market. Be sure when
receiving a stock "buy" recommendation, you also know how the firm
feels about the likely direction of the overall market. If it's
likely to head lower, say, you might want to take that into
consideration. Stocks don't act in a vacuum. Be aware of the big
picture.
13. The ultimate contrary indicator. Some investors, by virtue of a
complete lack of discipline, are born losers. Everything they buy
goes down; everything they sell rises. If you know someone who is
consistently wrong, you can do the exact opposite of what he does and
be consistently right.
14. Tread lightly with advice to relatives. Use restraint in giving
stock recommendations to family -- and friends. Invariably, the loved
ones you want to help most are the ones you cause to lose money.
Resist trying to be a hero, and you'll avoid feeling like a bum.
15. Keep your priorities. As we get older and benefit more from
hindsight, most of us gain perspective. If you can do this before you
get old, you'll be the richer for it. Some people let numbers control
their lives -- they've got to save the extra $25, buy for a quarter-
point less, earn another eighth of a percent. Making money is
important, but becoming consumed by it is dangerous. Looking back
over the course of a life, the pursuit of numbers is likely to prove
less important than the quest for such values as love, health and
service. Maybe a lesser return on your investments makes sense, in
exchange for a higher return on your life.
DICK DAVIS, who edited the Dick Davis Digest letter until he retired,
watches the market from Boca Raton, Florida.
E-mail comments to editors@xxxxxxxxxxxx
Copyright © 2001 Dow Jones & Company, Inc. All Rights Reserved.
------------------------ Yahoo! Groups Sponsor ---------------------~-~>
eGroups is now Yahoo! Groups
Click here for more details
http://click.egroups.com/1/11231/0/_/152424/_/982055544/
---------------------------------------------------------------------_->
To unsubscribe from this group, send an email to:
realtraders-unsubscribe@xxxxxxxxxxx
|