Updated: Mar 27, 2021
No, I'm not selling you any religious ideology, or new age mumbo-jumbo. I am talking about nature of things such as the law of the universe.
What does the law of the universe have anything to do with the stock market?
Let's look at simple law of thermodynamics. When we put a cup of ice water in a room, there is imbalance between the ice water and the room. The temperature difference of it. However, over a period of time, the temperature of the ice water will eventually even out with the room, and become room temperature water.
In a sense, the stock market is behaving in the same manner!
When a stock is undervalued, it is like a cup of ice water in a room temperature environment. It is unbalanced, and it is not matching its market value to its intrinsic value. Just like the temperatures that wants to equalize, the market value is, by natural law must become equal to it's intrinsic value.
When unbalance of a stock happens, all we needed to do is to invest our money in the unbalanced stock, and wait for it to become balanced with nature again.
As a value investor, we don't need to rely on technical indicators, 200 day or 100 day simple moving average. All we need to know is the fundamentals of knowing "when" a stock is unbalanced, and wait for it to become balanced again!
When it comes to investment, you want to ride the trend. You don't want to fight against the force of nature, because you'll always lose. (imagine when was the last time you've won against nature?) Hurricane, Tsunami, Volcano, Tornado, and Earth Quake are examples of nature's forces that you can never fight and win against.
Instead of fighting with nature, use nature, and flow with nature. Don't swim against the current, flow with it.
Wait! so when does a stock becomes unbalanced?
A stock is unbalanced when it is an excellent company, that is in a blooming industry, yet it is trading at a really low price. The meaning of low price is really of comparative value, and it deserves a post of its own. so... be patient!
Ok, so when do we sell the stock?
Let me put it in a metaphorical way, and you tell me. It'll be more fun this way...
Since the stock market is very similar to energy level of an object, so the best time to sell is when the energy level is equal to the environment we're in.
In the previous example, our cup of ice water is cold, so we should sell when it reaches room temperature; If, we put it in a warm room.
On the other hand, if we put a cup of ice water in the sauna room, when do we sell it? That is for you to ponder...
Now that we have understood the energy side of it, let's look at another important factor.
Duration, is the medium for the change in energy. Without proper amount of time, nothing can happen. Therefore, the best strategy to ride the force of nature is to allow ample time for it to happen.
When we're talking about time, we're talking about the necessary duration to allow the energy to equalize. Therefore, we need to be able to wait "Long enough".
I don't know when it is "Long enough", but I do know it will come eventually. Just like ice water in a sauna room, it will turn into warm or even hot water eventually.
In order to wait "Long enough", we must always put ourselves in a undefeatable position. What I really mean is that we can wait "Forever" if we have to.
Therefore, I would advice my reader to never take on any leverage.
When you have leverage, your waiting time is limited. It can be limited by the interest rate your leverage has, or it can be your margin collateral, that your leverage requires. Either way, any leverage is not your friend due to the nature of its time limit.
Leverage put you in a situation where you cannot wait forever. It corrode your inner peace of mind, and ultimately lead to poor decisions that would lead to loss of capital or even entire portfolio.
For more information on how to put yourself in a undefeatable position, please check out my other posts!