Sigma Wealth

Investment Tips-Understanding the Stock Market

We welcome any questions or comments regarding stock investment.

A finance professor and a student who came across a $100 bill lying on the ground. The student went to pick it up, the professor said, "Don't bother – if it were really a $100 bill, it wouldn't be there." This is the essence of Efficient Market Hypothesis where it says that investors cannot make any exceptional profits through fundamental and technical analysis. Because if there is any, it would be quickly taken by professional market players in the market. However, in Malaysia and the rest of the world, our stock markets are not completely "efficient" yet. We are at the stage of semi-strong form to strong form market efficient. So, fundamental and technical analysis CAN be rewarding to investors if they really do their homework well.

The Stock Market Cycle

Next, we must learn how to look at the big picture of the stock market. Like any other business cycles, the stock market has its own cycles as well. It is not difficult to understand the concept of a stock market cycle. Just remember this: "What goes down must come up; and what goes up must come down!" The stock market cycle has four stages namely:

Stage 1 The Trough, Stage 2 The Expansion Stage 3 The Peak, and Stage 4 The Contraction

Is The Market Cycle Self-Fulfilling?

Many market gurus have used cyclical analysis over the years to predict forthcoming crashes and bull markets. As believers of these prediction gathers momentum, market cycles can become very much self-fulfilling.
For example in the US, the Dow Jones Index often form lows during October. This is the month when some of the historical stock market crashes occurred and so people become more prone to overreact on bad news at this time in the market cycle. They sell in anticipation of history repeating itself, thus causing the market to move downward.
Even Warren Buffett said, "An investor should act as though he had a lifetime decision card with just twenty punches on it." If we have a lifetime of 75 years and we started stock investing at 25, it simply means that we invest in the stock market every two years!
Do not try to "get rich quick". You're bound to make mistakes! We must wait for the best investment opportunity to come. If you think the stocks are too expensive (with high PE ratios), just stay out of it. Look at the big picture: what goes up must come down; and what comes down must go up. Be careful when the market is over bullish, and treat every economic recession as a golden opportunity to accumulate blue chip stocks.