The more appropriate question should be...
"How to spot the unchanging law of the stock market!"
"This hot stock pick has gone up in price by 50%! we should invest in it..."
"This stock has loss 25% of its value, this looks like a loss cause, let's cut loss and pick another stock."
You hear this kind of analysis all the time...
From friends or family, from so called expert, and analysts.
What is wrong with this kind of thinking?
Well, nothing wrong with it...
In fact, it is the way most people think about investments and stocks...
However, the problem is...
"Most people don't make money from the market"
If you want to be normal, and be like most people who contributes all your hard earned money to wall street. Be my guest~
But if you want to be serious, and make some real money... Listen!
Day traders, and technical traders have 1 very common strategy...
It is called "Riding the Trend"...
Among the trading field, we call this "chasing the bull, and crushing the bear"...
Go after the direction the stock is already heading...
In the short run, this might work... but if you're in it for the long run... (trading for many years)
The probability is against you...
One simple reason is that you are chasing something that is elusive... trying to predict the unpredictable...
That is why most technical traders and day traders aren't making any money...
My mentor used to say:
"Find the unchanging in a changing environment. There is no use chasing the changing factors."
"What does that mean?" I inquired...
"You tell me, what are changing factors in the market?" He counters...
"Price, news, predictions, forecasts, economic situations, CEOs, products, government policies, and in fact, everything that is relevant." I said...
"Good, what about the un-change?" He asks again.
"I don't know...seems difficult to say." I spoke. Thinking that almost everything seems like it is changing around a company.
"What about the factors that makes the company worth buying?" He asks
"You mean... the company's value?" I got a little more clarity.
He continues... "What makes ABC company worth it's current stock price?"
"is it the news about it's upcoming project?"
"is it the new policies that benefits it?"
"or is it the fact that 10 out 10 analyst are saying it is a MUST BUY?"
I thought for a while and answered...
"no, these are changing factors. I think it should be the company's ability to bring in cash, to make a profit."
He said it with a calm but somewhat exciting voice...
"Precisely!"
You can tell me a thousand news article or what the consensus is saying about this stock, as long as the company loss its ability to make a profit, it is no longer a good company. And it should be treated as one.
The fact that a company is no longer bringing in cash, any other factors is just smoke screen to mask the fact that the company is not making money.
"Unless it is a non-profit organization, a company's function is to make a profit. If at any point, a company loss this fundamental ability... It is no longer a good company..."
"It should be out of our portfolio without mercy!" I finished his sentence for him.
Every time I think about wither I should invest in a company, I always keep 1 thing in mind...
"Can this company continue to make money for the amount of years I invest in?"
If the answer is yes, and if the price is good, then it is a "no brainer"...
The fact that most investors made investing such a complicated process is the lack of full understanding of the investing of stocks...
As the great Einstein used to say...
"If you can't explain it to a six years old, you don't understand it yourself."
for your reference only...