Know Exactly What a Stock Market Formula Does, And Profit!
What exactly does a stock market formula do? Stock traders have
been using and developing formulas since the birth of the stock
market. A summary of a formula's usefulness includes two main
functions that it fulfills.
First, over a full stock market cycle, it will improve your
investment profits without the application of any thought
whatever on your part. As is well known, there are many
investors who do not believe that the market will ever go
through a full cycle again -- that the direction of the market
is in a permanently upward movement, except for temporary, minor
dips. It might be worthwhile to point out, without seeming to be
too pessimistic, that there are some good arguments against an
indefinite continuation of bull markets.
The second purpose of a formula -- apart from the question of
profiting from complete market cycles -- is to provide a means
of profiting from more minor fluctuations. It is undeniable that
the market will continue to fluctuate, and a formula allows the
investor to benefit from these fluctuations by specifying
conservative investment policies when the market is relatively
high, and more aggressive policies when it is relatively low.
Since formulas ordinarily appear rather complicated, can the
small investor profitably use them? The answer is definitely
yes.
Some formulas are complicated, it is true, and you will
undoubtedly find some that are so complex as to be unsuitable
for most investors. But most formulas do not fall into this
category. The most widely used formulas today, in fact, are
based on extremely simple principles and can be used by anyone
with a rough knowledge of grade-school arithmetic. Special
measures to adapt formulas to the needs of small investors will
need to be investigated, but it is worth noting that small
investors are just as likely to want to improve their profit
performance in the market as are larger investors, and there is
no particular disadvantage in having a small portfolio when you
use a formula.
All investors -- large, small and medium-size -- are in the same
basic quandary. They would like to be sure of what is going to
happen to their capital, and so are inclined to appreciate the
features of fixed-income investments such as savings accounts,
bonds and commercial paper.
In such investments, their capital is guaranteed, and (except in
the case of savings accounts) so is their interest. On the other
hand, there are few opportunities for appreciable profits in
these areas, and no protection against a decline in the value of
the dollar. Consequently, they are attracted by the
characteristics of common stocks, where neither their capital
nor their return is guaranteed, but which offer substantial
opportunities for profits through capital gain.
How to resolve the dilemma? It is obvious that the great
difficulty with the stock market is its uncertainty. One
workable suggestion of reducing the damage this uncertainty can
do has been often made: don't buy common stocks at all. Most
investors tend to regard this idea as, although practical,
rather extreme, and are reluctant to abandon the possibilities
of profit that exist in common stocks.
The formula idea is simply a form of protection against
uncertainty. Formulas are designed to allow the investor to
profit from the advantages of owning common stocks, while
providing a measure of protection against their handicaps; to
give some of the stability offered by fixed income investments,
while not condemning the investor to a low return on their
money. The whole point of formulas is to make the best of both
these worlds.