Picking stocks at their bottoms, and selling at high prices is the ambition, or should we state dream, of every investor. More so, even those who do not have money in the stock market dream of making ‘easy’ money by picking winners. Whether that is with the lottery, horse races or sports events.
This conjures up a perception that the stock market is an arena for gamblers. Buy shares, get it right with an upwards price, and you make money. Buy shares, get it wrong with a downwards price, and you lose money. 50/50 right?
Investing in the stock market couldn’t be more further from the truth
Yes, there is an element of uncertainty. No-one knows what a stock price will do on any given day. It could go up, down or sideways. But over the long-term, the stock market progressively gains in value. Even despite the earth shattering crashes such as Black Monday 1987 or the more recent Global Financial Crisis.
Time in Market
Stock market investment is a “Time in the market” situation. Stock prices will rise, fall and rise & fall again. Economic cycles influence investor behaviour, and all things being equal, with economic inflation a stock price will rise over time. The Risk is that mis-management of a company or changes in societal influences triggers a decline in profitability resulting in bankruptcy or failure. The stock price will decline and potentially be removed from the stock exchange.
More time invested in stocks results in more opportunity for capital gain. And for Australian stock investors, many of the Large to medium capitalized companies also pay a dividend. When contracting economic periods occur, holding these stocks through their downward movement will only take time before they recover. In the meantime, you continue to collect dividends.
On the flip side, there are many investors who believe they can “Time the markets”. That is, choose more efficient entry and exit points, buying stocks at low prices and selling them at higher prices. This is usually a shorter-term approach to market investment, with the investor not as concerned about company fundamentals or dividend payments.
Timing the markets is an approach taken by those who are looking for ‘quicker returns’. That is, they don’t want to slowly make a profit from stocks that pay dividends, and don’t want to ride through those downward cycles. They want to make their money work for them, getting in an out frequently, potentially making a greater return over a shorter period of time.
Time In versus Timing
So what is the best approach to putting your money in the stock market?
There is no right or wrong answer to this (much to the dismay of many beginner investors). You might be a long-term investor who decides to put all their capital into one stock. That company might rise in value over time, or it might fail to achieve any growth and the stock price slumps. Alternatively, you might attempt to choose entry and exit points, resulting in a good rate of success, or you might be absolutely hopeless and get it wrong every time.
Long-term investors are the ‘head in the sand’ mentality. Typically they are quite vocal on how well they have done when they make a profit. But never admit when they get it wrong, using statements such as “the stock price will come back … they are a strong company”. Some investors attempt to buy “the next best thing“, looking for the next Apple Computers, or Microsoft that will make them millionaires. This results in portfolio’s laden with unproductive stocks and long-term held losses.
Reality is for the short-term trader that majority of people who attempt this will fail. They have no understanding of how the markets work, no plan on how to Time the markets, no strategy, and no portfolio management. They approach trading like a gambler, taking a ‘punt’ on what might work next. And will always blame many other factors for their failures.
No matter whether you are a long-term investor or short-term trader, you need to have a define approach to how you manage your portfolio.
A game of probabilities
I started in this industry as a stock Technical Analyst. That is, a chartist who evaluated share price movement to define strength of buyers or sellers, providing analysis and recommendations. Over the 15 years that I have been involved in the stock market, I have studied and implemented many different techniques and approaches. Testing different theories and implementing those that I perceive to provide a ‘statistical edge’.
And it is this postulation that should be the driving factor for whether you Time the markets or spend Time In the markets.
How we can help you
Here at Australian Investment Education (AIE), we teach our clients how to understand the stock market, the methods of Timing the markets, strategies to approach different market conditions, but more importantly Portfolio Management techniques.
There are some key absolutes about the stock market that I can identify: Time will pass each day; and that no-one knows what direction the stock market will move in on any given day – it is a statistical probability of either going up, down or sideways.
Numerous influences cause stock prices to move. Economic data, company announcements, global politics, commodity prices, weather, algorithmic trading (computer influence), and human sentiment. More than can be discussed in a single article.
To define whether or not you should adopt Time In the markets or approach a Timing strategy, you should seek the services of a market professional. Here are AIE, we use Halifax Investment Services for all our trade recommendations. Our education provides a knowledge base for long-term investors, short-term traders, and strategy approaches for stocks, options, CFD’s and Futures contracts.
If you would like to know more about what services we have to help you with your investment strategies, you can contact us.