Monday, January 5, 2009

Fundamental Analysis?

Fundamental Analysis is the traditional way of looking at the stock market. It consists of looking at a company’s financial statements, P/E ratios and so on.

This method is based on one simple idea that strong companies will tend to make a profit and grow, in turn that profit and growth will make money for the shareholders of the business. In other words by investing in strength your portfolio will grow faster.

What most fundamental investors try to do is wait for the market to crash. When it does they sweep in and buy strong companies that will not go out of business. Companies like McDonalds, Microsoft, Coke a Cola, are all big companies that are very big and the odds of them failing are very small.

Fundamental analysis assumes that the market is inherently bullish. By buying strong companies at a low price you are pretty much guaranteeing that over a long period of time you will make money in the market.

There are two types of investment styles, growth and value.

Value investing is buying companies that as of today are very strong, have a solid cash flow, and a solid business plans. An example of this would be if Coke drops to $30. The stock would be well off its highs and we all know it is not going to run out of customers anytime soon.

Growth stocks are stocks that need a little help, but they have a strong promise to get it. An example of this is US steel. The recent market crash and lack of demand for steel has brought this stock from its highs in the $190s to around $40. However President Obama’s plain to build roads will increase the need for steel and therefore increase the profit of US steel.

In general Value investing seems to outperform growth investing.

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Saturday, January 3, 2009

Poker is really a miniature stock market on so many levels. You can apply much of what you learn from one to the other.

One of the biggest similarities is how little your profits matter. If you make $1,000 in anything it is a big deal, but if you make $1,000 in the stock market or in a single pot it doesn’t matter. That money can come and go, anyone can make money in the markets or playing poker.

That is why I don’t look at it the same way, one great trade or one good hand can help you out, but it is about the long term. One big win does not make you the king, but rather it is about making consistent money over a longer term time frame.

Paying too much attention to 1 good trade can make you arrogant and paying too much attention to 1 bad trade can make you feel like you can’t make money. Kenny Rogers was right on the money when he said “You never count your money when you’re sitting at the table.”

Poker also teaches you a good lesson about risk management. The best poker players in the world are the ones that manage their risk; you’ll see them folding two pair if they think their beat. In fact if blinds didn’t raise so fast at the world series of poker, the game would last a lot longer because no one wants to get rid of their chips.

It is the same in the stock market, you want to go after big profits, but at the same time your capital is the lifeblood of your business. “You need money to make money”, so manage your capital very carefully. Never risk more than 2% of your portfolio on any 1 trade.

Everyone who plays poker tries to milk out as much money as they can when they know they will win. They check, trying to get other players to try to bluff them out, or they try to act like they are bluffing. They do this out of necessity. A poker player may lose 5, 10, or more hands in a row so they need to win big when they finally do win.

The same rule applies to the stock market; a stock trader may lose several trades in a row. You need to let your winners ride, so they can not only make up for your losses, but also put you in positive territory. The more you make when you are right the less often you need to be right to make a profit.

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Friday, January 2, 2009

Technical analysis is a non-traditional way of picking stocks to buy and sell. It is based off of human emotions and patterns in those emotions.

A technical trader realizes that stocks do not move up and down because a company is making or losing money. A stock goes up and down based off of supply and demand.

If there are more buyers than sellers a stock will normally go up until it reaches a point where sellers start to come in.

This can be flipped around. If a stock has more sellers than buyers it can push the stock down until the stock gets to a low enough point and buyers start to come back in.

Technical analysis tries to play off of this. They notice human emotions create patterns and trends that occur over and over again. So playing off of these trends and patterns rather than looking at a company’s financials can be a smart way to approach the market.

This simplified approach to the market disregards all fundamental factors such as dividends, cash flow statements, P/E rations, and so on.

There are a variety of instruments a technical trader can use to determine if a stock is a good buy or a good sell. Oscillators, chart patterns, stock trend, and candlestick patterns are all used to determine if a company makes a good trade or not.

So does it work? Technical analysis has proven to be a great way to approach the stock market. Combing Technical analysis with risk management may be the best way to approach the stock market for a short term trader.

Technical Analysis is built for short term trading. If you have a time frame longer than a couple months it may not be for you. Instead fundamental analysis can be used for longer term time frames.

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