The Case for Value Stock Investing...What If?
Wall Street Institutions pay billions of dollars annually to
convince the investing public that their Economists, Investment
Managers, and Analysts can predict future price movements in
specific company shares and trends in the overall Stock Market.
Such predictions (often presented as "Wethinkisms" or Model
Asset Allocation adjustments) make self-deprecating investors
everywhere scurry about transacting with each new revelation.
"Thou must heed the oracle of Wall Street"... not to be confused
with the one from Omaha, who really does know something about
investing. "These guys know this stuff so much better than we
do" is the rationale of the fools in the street, and on the hill
(sic).
What if its true, and these pinstriped super humans can
actually predict the future, why do you transact the way you do
in response? Why would financial professionals of every shape
and size holler "sell" when prices move lower, and vice versa?
Would this pitch work at the mall? Of course not. Now lets bring
this phenomenon into focus. Hmmm, not one of these Institutional
Gurus ever doubts the basic truth that both the Market Indices
and individual issue prices will continue to move up and down,
forever. So, if we were to slowly construct a diversified
portfolio of value stocks (My short definition: profitable,
dividend paying, NYSE companies.) as they fall in price, we
would be able to take profits during the following upward
cycle... also forever. Hmmm.
Let's pretend for a (foolish) moment that broad market
movements are somewhat predictable. Regardless of the direction,
professional advice will always fuel the perceived operative
emotion: greed or fear! Wall Street's retail representatives
(stock brokers), and the new, internet expert, self-directors,
rarely go against the grain of the consensus
opinion...particularly the one projected to them by their
immediate superior/spouse. You cannot obtain independent
thinking from a Wall Street salesperson; it just doesn't fill up
the Beemer. Sorry, but you have to be able to think for yourself
to stay in balance while pedaling on the Market Cycle. Here's
some global advice that you will not hear on the street of
dreams (and don't get all huffy until you understand what to buy
or to sell as well as when to do so): Sell into rallies. Buy on
bad news. Buy slowly; sell quickly. Always sell too soon. Always
buy too soon, incrementally. Always have a plan. A plan without
buying guidelines and selling targets is not a plan. Predicting
the performance of individual issues is a totally different ball
game that requires an even more powerful crystal ball and a
whole array of semi-legal and completely illegal relationships
that are mostly self serving and useless to average investors.
But, again, let's pretend that a mega million-dollar salary and
industry recognition as a superstar creates Master of the
Universe quality prediction capabilities...I'm sorry. I just
can't even pretend that it's true! The evidence against it is
just too great, and the dangers of relying on analytical
opinions too real. No one can predict individual issue price
movements legally, consistently, or in a timely manner. Face up
to this: the risk of loss is real; it can be minimized but not
eliminated.
Investing in individual issues has to be done differently, with
rules, guidelines, and judgment. It has to be done unemotionally
and rationally, monitored regularly, and analyzed with
performance evaluation tools that are portfolio specific and
without calendar time restrictions. This is not nearly as
difficult as it sounds, and if you are a "shopper" looking for
bargains elsewhere in your life, you should have no trouble
understanding how it works. Not a rocket scientist? Good, and if
you are at all familiar with the retailing business, even
better. You don't need any special education evidentiary
acronyms or software programs for stock market success... just
common sense and emotion control.
Wall Street sells products, and spins reality in whatever manner
they feel will produce the best results for those products. The
direction of the market doesn't matter to them and it wouldn't
to you either if you had a properly constructed portfolio. If
you learn how to deal unemotionally with Wall Street events, and
shun the herd mentality, you will find yourself in the proper
cyclical mode much more often: buying at lower prices and, as a
result, taking profits instead of losses. Just what if...
Coming next: Developing a Value Stock Watch List and Profit
Taking Targets.