#69 Three Kinds Of Wisdoms — Stock Investment
Three Kinds Of Wisdoms – Stock Investment (#69)
The stock market is treacherous territory. You need plenty of wisdoms to survive and prosper as a player. The following are three kinds of wisdoms. Hope you know which kind you need.
Conventional Wisdoms
Conventional wisdoms are those generally held as true until being proven wrong. Some good examples are:
The earth is flat. This had been held as true since day one until 500 years ago when some ocean explorers proved it wrong.
Heavier-than-air cannot fly. This had been true until the invention of the airplane some 100 years ago.
What you don’t see does not exist. This had been true until the invention of the microscope that reveals a complex world of microorganisms.
The Internet is just a fad. Many experts said so 20 years ago.
The capitalist market can solve all problems. Really? The devil is in the word competition. A market without competition only results in the rich getting richer, and the poor getting poorer.
The stock market resembles perfect competition because the government regulates it. Really? Government officials can be bribed to look the other way. The fact is, most big players win and most small players lose.
New Wisdoms
New wisdoms emerge everyday. Most fade away, only to be recycled with a new marketing touch. Some of them gain traction, even being wrong, and will become the reigning conventional wisdoms. The following are some examples:
Certain food and vitamins are good for this and that. Really? We never seem to get tired of this kind of stuff being pushed everyday.
Drill, drill, drill! This sounds like an addict demanding for more. You may find some oil underneath your house if you do that. The fact is, the world demand for oil now outstrips supply resulting in ever-increasing gasoline prices. The other fact is that oil pumped out from the ground requires large-scale refining and distribution infrastructure near a large oil field. The oil beneath your house won’t work. Sorry, all the big oil fields are located in the Middle East and some other less friendly countries where huge infrastructure has been put in place.
The greater details you study about the stock market, the more profits you will make. If so, why don’t we see a doctor’s program in stock trading? The winning big guys don’t study the market like you do. Why should they? They have connections to insider information. Besides, they can buy and sell in large quantities to affect the price. Money and power is name of the game.
The so-called stochastic methods will help you win in the stock market. Really? All the statistical methods are based on the past, which is used to project the future. If future prices can be predicted accurately from the past, there would not have existed such things as bottom or peak, where things suddenly turn the other way. Most small players miss the bottom and fall from the peak.
If a company comes out with a new product, its stock price must rise. Really? Again, the devil is in the competition. What will the competition respond? How will the consumers embrace the new product?
True Wisdoms
What are the true wisdoms? You possess the true wisdoms if you are willing to question what you see and hear everyday. True wisdom means you use your mind to think and reason without accepting what is out there and without being herded like sheep. It also means you accept that the world is a dynamic place where things are changing faster and faster. Thus the more you know, the more you find you will need to learn. True wisdom means that you are vigilant, flexible, and adaptable to changing circumstances.
There always exist some major forces that shape and move the stock market. The forces that impact you most originate from the big players whose intention to buy or sell remains a mystery. They determine the peak and bottom of a stock. The small guys can only play within the range of bottom and peak. When you play near the bottom, the chances are good. Near the peak, your chances of getting toast are much bigger. So make sure you know where you are playing.
There is no need to immerse in great details about companies and products. You only need to see the big picture about the economy and general business conditions. You also need to understand the characteristics of different industries, and the price histories of the stocks of interest.
For any stock you buy, you must find out where and when were the previous peaks and bottoms, and preferably why. Then make an intelligent guess as to where and when are the next peak and bottom.
If possible, position yourself in such a way that at any given time, you have some money to buy, and some stocks to sell. This will help you make some profit, replenish your cash, and play the new opportunities again.
We small players may think that we are investors. We are not, we’re just free riders. What’s wrong with that?
Besides reaping long-term profits, we small investors should be looking for short-term gains to take advantage of frequent ups and downs. Consider making an average of $500 per week, it will add up to a significant amount for the whole year. This is what I call, play short term in order to build long term.
Playing short term does not mean day trading. Day traders are despised and discriminated by brokerage companies. To overcome this hurdle, simply keep your stocks overnight or for a few days before you sell. Remember to buy them back when the prices have come back down once more, given the stocks are still worth buying.
www.stockfessor.com
April 2010
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