Changing it up a bit, I wanted to write a little about the math of falling stocks. To many investors, if a stock is down 30% or 50% or whatever, it’s considered cheap. After all, if a stock is off a huge 50%, how much further can it fall? That is where the math comes in. Ask most people how many 20% drops are in a 50% decline, and the answer is two and a half. Right? 50 divided by 20 equals 2.5. Simple … but also wrong. In actuality, for a stock to fall 50%, it has to...
If you ask some professionals why it’s difficult to consistently make money in the market, you’ll get a variety of answers, ranging from complexity to emotions to the relatively recent advent of high frequency trading, which can push stocks around in the blink of an eye. But I think one of the biggest reasons it’s tough to make (and keep!) money in stocks is because the market itself teaches bad behavior. The best explanation of this comes from William Eckhardt, who was interviewed two decades ago in the book New Market Wizards (written by Jack Schwager and available at...
As for the current market environment, it’s still not quite there yet. Of course, the major indexes have bounced nicely, but most of the action has been in the off-the-bottom crowd … the stocks that fell 40% to 50% during the past three to six months like the financials, the transports, the oils, the commodities, the industrials and the semiconductors. Please don’t get me wrong–there is nothing wrong with the rally’s strength initially being led by these off-the bottom stocks and sectors. But, in my experience, these names almost always slow down as all the unhappy shareholders who own...
As for the current market, I am growing more encouraged that the October 4 panic low represents a sustainable bottom. Now, that doesn’t mean it’s time to load up the truck; in fact, one of the things that few investors grasp is that a new bull move doesn’t start the day a bear move ends. Instead, there’s usually a transition phase of sorts when the market gets ready to make its move. Call it a bottoming out phase if you like. I think there’s a good chance that is happening now as, just on the face of it, most...
I want to write today about something we mention often but never really explain fully: The fact that the company is not the stock. Most people confuse the two—they see a firm with a new product that’s beating earnings estimates and assume it’s a good growth stock. No! It might be a good company, but that doesn’t mean it is (or will be) a good growth stock. The same thing goes in the other direction; just because a firm is losing money or has had troubles in the past doesn’t mean the stock can’t be a leader or at...
