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How To Be An Investor and Not Stock Market Speculator

TimmyBoy

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The speculator in the stock market is concerned about the overall downward or upward trend of the stock market. Psychology and speculation is what drives stock market prices on individual stocks rather than what a stock is truly worth. At times, the speculator will sell when the price of stock goes down and will buy when the price of a stock goes up.

The investor, on the other hand, will examine the business and do extensive research on the business to determine the fair market value of a stock. The only reason for the investor to look at stock market fluctuations is if the market goes down to see if he can buy more shares of a stock that is determined to be priced lower than it's fair market value. In any case, whether the stock market is up or down, their will always be stocks that are priced lower than their fair market value. By buying stock that is lower than it's fair market value, the investor remains largely unconcerned about whether the stock market is up or down or whether the price of his stock goes up or down. So long as he understands the true worth of his stock, even if it goes down further, the investor should remain unconcerned or to buy up more shares at the undervalued, cheaper price.

By buying a stock that is lower than it's fair market value, eventually, the price of that stock must correct itself at least to it's fair market value, thus enabling the investor to make money, and also to establish himself a margin of safety. Likely, when such correction does happen, the price of the stock sells above the fair market value thus enabling the investor to sell higher than what it is truly worth. On the same token, while the price of the stock is depressed, the investor can collect divedends at the stock's fair market value rather than the stocks going stock market price. This is the secret of the investor and this is why, ultimately, why most people speculate rather than investing and end up losing money in the end when putting money in the stock market. Dollar cost averageing and diversification among several value stocks is also a wise move by the investor. This is the method that has enabled investors to profit in the face of stock market crashes (including the 1929 Stock Market Crash that started the Great Depression). Those that lost money from the 1929 stock market crash were the speculators and not the investors.
 

TimmyBoy

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galenrox said:
Warren Buffet is the best example of an investor.
Ohh yeah, Warren Buffet is ****ing awesome man. But his teacher, Benjam Graham, is also awesome. I am reading his book "The Intelligent Investor" right now and have learned to recognize some mistakes I made in the past while attempting to invest. I still made money, but it was because I lucked out. I was actually speculating. Like during the downward trend of the stock market just before and during the September 11 attacks, I had invested in a mutual fund that sold short. You can make money by selling short when the stock market is in an overall long term decline, thus a bear market. However, nobody can predict when the bear market will end and thus can lose his gains from selling short when the stock market goes back up. It's very risky move. An investor doesn't think like this. I made money and then sold the mutual fund that was selling short, but even so, it is a good example of how not to invest, because it's not investing, it's speculating. The stock market prices are determined by pure psychology. Greed causes a price of a company stock to go up far beyond it's fair market value, this is what happenned in the technology boom. Their was alot of speculation and greed was driving tech prices up higher than what they were really worth. This caused tech stocks to have sky high PE ratios because no earnings were backing up their stock prices (Price of an individual share of stock divided by earnings) and sky high price to sale ratios. So, because no earnings were backing up the sky high prices of these tech stocks, they eventually came crashing down with alot of people losing money. Fear, also causes the price of a stock to plumett below that stock's fair market value as well. This is the prime time for a true investor to buy the stock. You are basically buying up the business for much less than what it's worth and eventually, the market must correct the price of that stock back to it's fair market value thus giving you a margin of safety. It could also go much higher because greed can cause the price of the stock to go higher than what the fair market value is. So, when you buy a stock for much less than what it's really worth, their is no need to sweat the ups and downs of the stock market and their is no need to sweat a bear market either, because you still paid for a business at a price much less than what it's really worth and it will correct itself back to it's fair market value.
 

oldreliable67

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TimmyBoy said:
At times, the speculator will sell when the price of stock goes down and will buy when the price of a stock goes up.
Well, maybe, maybe not...

If your speculator is an active speculator taking positions in the hope of numerous but small gains over short-term holding periods (an hour, a day, a week), then your speculator will more likely sell when the price of a stock goes up and buy when the price of a stock goes down. Buy low, sell high, right? This tends to work ok as long as the stock being traded continues to fluctuate in a range. Should the stock begin to trend, all bets are off.

There is though, a group that adheres to the 'momentum' school of trading. This group identifies some significant change in the recent rate of change of a stock that suggests that is entering a new up or down trend. This view holds that when you observe such a statistically significant event say, upwards, then you buy even though you are most likely buying at a relatively high price compared to recent history. Of course, a downwards momentum change produces a sell. Often referred to as a 'breakout' of a trading range or a reversal of a previous trend.
 

TimmyBoy

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oldreliable67 said:
Well, maybe, maybe not...

If your speculator is an active speculator taking positions in the hope of numerous but small gains over short-term holding periods (an hour, a day, a week), then your speculator will more likely sell when the price of a stock goes up and buy when the price of a stock goes down. Buy low, sell high, right? This tends to work ok as long as the stock being traded continues to fluctuate in a range. Should the stock begin to trend, all bets are off.

There is though, a group that adheres to the 'momentum' school of trading. This group identifies some significant change in the recent rate of change of a stock that suggests that is entering a new up or down trend. This view holds that when you observe such a statistically significant event say, upwards, then you buy even though you are most likely buying at a relatively high price compared to recent history. Of course, a downwards momentum change produces a sell. Often referred to as a 'breakout' of a trading range or a reversal of a previous trend.
The problem with speculator in the manner in which you desribe is that he is attempting to forecast what the market will do in the essence of timing. It is rather foolish to try to forecast what the market will do and no method or person can accurately do that. Not to mention, if no attempt is made to value what business is worth and is simply betting on the rise in price of the stock after a stock market decline, the stock could continue to go down and not come back up because the business is worth less than the price he overpaid on it. We don't have crystal balls to predict what the market will do. Rather, I think it is wiser and smarter to use the stock market fluctuations in the essence of pricing rather than timing. So long as the investor knows the true intrinsic value of a business, he can get a discounted price on that business and eventually profit despite stock market ups and downs because the price of that business in the stock market will eventually have to come back up. You can use the essence of pricing to be sure in the very least you don't pay too much for stock. Google is a prime example of a stock that is way overpriced. Their company executives have wisely sold their stock and it is going over $440 dollars a share. Yet the stock itself is has a fair market value of about 250 bucks a share. Speculation and psychology has driven the price of Google stock almost to over 200 bucks a share above it's fair market value. So, if one were to buy and hold onto shares of Google stock, it would be a terrible mistake because he overpaid by $200 dollars on each share of stock because it is not worth the going $440 rather it is only worth $250 dollars a share. It will eventually come crashing down and some people will lose money. I think that it is better to think of stock market fluctuations in terms of pricing rather than timing because then you can buy businesses selling on the stock market below their fair market value and avoid overpaying on any other business. This in the long term will assure you a profit.
 

oldreliable67

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The problem with speculator in the manner in which you desribe is that he is attempting to forecast what the market will do in the essence of timing. It is rather foolish to try to forecast what the market will do and no method or person can accurately do that.
Again, yes and no. Yes, the speculator trading in the manner that I've described is making one over-riding assumption: the price of the stock in question will continue to trade in the same price range recently observed. For many stocks, that is a pretty decent way to trade - in the very short run, hence, only active traders and specs need apply here.

You are indeed correct. Timing the market has been demonstrated to be a losing proposition over the longer run in study after study. However, as you correctly noted in a previous post, fear and greed are the very strong influences in the stock market. There will always be those who will attempt to do so regardless of the number of empirical studies demonstrating the odds against success.

Of course, feeding the greed and lust of those that do so are the ever-present stories of those who did time the market successfully and got rich in the process. But what role did luck rather than skill play in their success? An excellent book on how these supposedly astute investors succeeded is Nassim Taleb's "Fooled by Randomness".
(Fortune Magazine selected it as one of "The Smartest Books of All Time".)

While Taleb's book is recent and explores trading mainly from a mathematical perspective, at the other end of the spectrum is "Reminiscences of a Stock Operator", which first came out in the 1920s. Every hopeful stock trader should start with this one. It is a classic.
 
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