Investors are always on the lookout for profitable investment opportunities. And a profitable investment tip may make the difference between a dismal investment portfolio and a stellar one. But, profitable investing tips may require some work before you can put them to use. Do you use a system for investing? You should because that is how you can sort out good tips from bad and pick the best opportunities. Years back we wrote about investing tips.
The best investing tips commonly have to do with how to go about the business of investing. Specific investing tips from your broker, your best friend, investment advisors, or news sources should be investigated by both fundamental analysis and technical analysis before they are acted upon. The problem with second hand investing tips is that they are often yesterday’s news. The market has already acted upon them and driven the stock price up. The best of all investing tips usually come from successful investors and are general in nature. Successful investors like to buy at bargain prices. Successful investors commonly sell stocks and get out of the market when it does not make sense.
Stock investors use fundamental analysis and technical analysis to pick stocks to buy and sell. Long term value investors primarily use fundamental analysis to determine intrinsic stock value and let that be their guide. Short term investors use technical analysis of the market to profit from trends, both up and down. Which system do you use for investing? What are the strong and weak points of each approach?
Value Investing
The first system for investing is to assess the long term value of the investment. There are investors who have used the principles of value investing to become very wealthy. This approach requires patience and the ability to keep your money in an investment for many years. Last year we asked how many years are required to make an investment long term to qualify for true buy and hold investing.
Calculating intrinsic stock value takes into account the long term. If a company shows long term promise its intrinsic value may well exceed its market value and it is a stock to buy and hold. Then, to take advantage of the market you need to hold the stock for a decade or more in order to see the long term benefits of buy and hold investing.
If your system is to calculate intrinsic value you will buy and hold stocks with the promise of a healthy income stream for years to come. You can apply this approach to any given stock tip to pick the winners and ignore the losers.
The down side of long term value investing is that if you need your money for an emergency or an expected expense like a child’s college education you may well end up pulling money out of the investment during a down market and lose money.
Technical Analysis and Short Term Investing
The second system of investing is to use statistical analysis to predict and profit from temporary swing in the market. Short term investment and even day trading both allow you to avoid the problem of having to pull money out of a down investment. This is because you mostly hold cash and only buy and sell when the market presents an opportunity.
There are two things a person may be looking for in a short term investment. One is a place to park their money that is safe and pays better than a bank savings account. The other is a way to profit from the ups and downs of the stock market. The first just has to do with checking out interest rates on T Bills, CD’s, and other short term debt instruments. The second is where technical analysis tools such as Candlestick pattern formations can help a person to trade stocks and make a substantially better profit than the bank offers or even what one can gain from long term investing.
In this case when you are presented with an investing tip you will not look at fundamentals. You will look at market price patterns and buy or sell for the short term in search of profits. The down side of this approach is that no one is perfect at market timing. Thus you will miss out on opportunities and also lose money at times by making poor choices. On the other hand, when you choose correctly you may make the same profit in a couple of days that a long investor will need to wait years for!
In either case, the point is to use a system. Modify your system as needed. And always use your system to avoid falling into the twin traps of greed and fear that torpedo so many investors.