My Strategy

  

In my experience, the best indicator of the market is the market itself – not the pundit, not the analysts, not the media, not the Federal Reserve Board, not hemlines or astrology.

It’s vitally important that investors follow stock prices. In most instances big moves don’t happen overnight, but develop over time. Meaningful trends take weeks or months to unfold. Frankly I don’t really care about companies. The only thing that matters to me is the price action.

I watch where the stock opens and how it closes. I watch where it trades intraday and in relation to its respective index. I watch the volume and its relationship to other markets like interest rates and commodities. And when I’m long, more than anything, what I’m looking for is a tendency towards higher prices. Not an unnatural gap upward or a big point pop, but the subtle yet steady emergence of a trend. How do I know when I’m right? The market tells me.

If you pick a stock or an ETF you have got at least an even chance that it will appreciate. In fact, you have got better than an even chance because the market has historically demonstrated an upward bias. So then, why do so many people lose money buying individual stocks?

The answer is that investing is a matter of technique, not simply prognostication. What has been missing from this seemingly endless and often mind-numbing dialogue about the market’s next move is a frank discussion about the craft of investing.

Most investors and columnists focus on security selection and analysis. There are millions of investors who have been sold on the idea that making money is simply the process of buying solid, quality companies and holding on t o them for long periods of time. We would like to think that good companies have good stocks, but in reality it’s difficult to demonstrate a direct cause and effect relationship between a company’s fundamentals and its stock price. No matter how much research we do, the future is, by definition, unknowable. Stocks are just going to move as they please.

That’s why the question most investors should focus on isn’t what to buy, but how to buy it. Cultivating a sound technique will have a bigger impact on your bottom line than any stock pick ever could.

As an investor I approach all markets with indifference and cynicism. I have no allegiance to any particular asset class or investing style. My faith isn’t in stocks, but the bottom line.

There is nothing more central to my goal of making money than the price action of a particular security. If you are going to attempt to profit from buying low and selling high, studying the price action itself seems like a logical place to start.

In the late 60s, the value approach to investing as espoused by the Graham and Todd became the dominant method of buying and selling stocks. The vicious bear market of 1973 and 1990, coupled with devastating corrections in 1987, 1998 and 2000 and 2001, and 2008 and 2009 shows fundamental analysis has an Achilles heel. Fundamental analysis shows how rational investors should behave while technical analysis tells us how actual investors do behave. In the 60’s and 70’s no one ever talked about stock charts, and they remained hidden in drawers collecting dust. That’s all changed now.

A stock’s price reflects and discounts everything that is known about the company, and as such, represents the view of all active stock market participants. Most academics believe, and rightly so, that you cannot use information that is factored into the price of the stock to forecast its future direction. Technicians believe that while all relevant information has been assimilated, one can use other factors to assist in forecasting future trends.

The stock markets move in trends, which are determined by the changing attitudes of investors to a variety of economic, monetary, political and psychological forces. It is imperative to identify changes in such trends at an early stage and to maintain an investment posture until a reversal of the trend is indicated. Value in a portfolio is built by not trying to take short term gains. The idea is to hold a stock for as long as possible.

Click here to see some of the indicators I use to gain stock market profits.