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
A winning investor should understand how a normal stock market
cycle operates over the time. Particular attention should be paid to
recent cycles. Usually, a bull trend (the uptrend from stage 1 to
stage 3) would last for about 9 to 18 months. A bear trend (the
down trend from stage 3 to stage 1) would last approximately 6 to
12 months.
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.
"Wide diversification is only required when investors do not understand what they are doing." Warren Buffett |
"Wall Street people learn nothing and forget everything." Benjamin Graham |
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| Tip #1 - Understanding The Stock Market |
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