For the majority of individuals involved in the markets, there is a never ending search for the perfect stock. In today's world of constant technological assault on the senses, even our stream of consciousness has become a recognized for of communication. (Instant Messaging) So is it any wonder that we are always looking for the hot new stock?
What if the hot new stock is the same stock as the one from yesterday, last week, and the month (or even year) before? How do you know if a hot tip that comes along is any better than what you already have? I suspect this same quandary in a personal context is responsible for most of the failed relationships that have become common. The January 2001 American Psychological Association journal published the results of a study on happiness (here) that found that freedom of choice is a significant contributor to lack of happiness. In your portfolio, it can also be a significant contributor to a lack of returns. As you look longingly at a hot new tip that crosses you desk - whether from your brother-in-law or from this morning's WSJ, take heart in the fact that picking the right stock has very little to do with making money in the market.
Far more important than how or what stock you choose is the when and why. The market is ultimately a measure of human emotion. This understanding serves as the elixir to soothe you when a perfectly good company's stock continues to go down. We are talking about perception here - not reality. At least until the quote comes across the ticker - then the perception becomes reality.
If you've been reading for any time at all, you have likely gathered that I am a technician. And while I am a true believer in the ability of a chart to communicate the emotion and opinions of a mass of people, I also believe that Graham & Dodd had something as well. More information always helps, so if you have the time I encourage you to dig into the fundamentals. Given the amount of information available (and not), it is hard to imagine that I would have access to all of it as a lowly individual investor.
My time is very valuable, and I am not interested in spending a significant amount of it to compile all of the information relevant to a given stock. Instead, I rely on others to tell me what I want to know - by looking at what they have done with their money. If enough of them follow a given course of action, they even have the power to overwhelm the fundamentals of a company - making "cheap" stocks go down and "expensive" stocks go higher.
Today a particularly smart friend of mine made the observation that in illiquid markets, you make money when you buy. Much of the system development advice that you will read will tell you that in the (very liquid) markets you make money when you sell. It would seem to follow that in real estate, then, you would want to concentrate a great deal of your research on information gathering about the appropriate entry point, while the converse would be true in the much more liquid commercial markets.
I have taken much too long to arrive at my point: Don't worry too much
about picking the right stock. Worry more about what you will do after you buy it. Where will you set your stop? When will you add to your position if you are right? And most importantly: When and how will you get out?
Happy Trading!
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