Thursday 18 June 2009

Prices go further than expected

Price Behaviour Strategy: Prices go further than expected

Historically, all the different asset classes have a habit of surprising people by:
  • how far they move, and
  • by how long they keep moving.

While the market also has plenty of periods when it goes nowhere, the small moves do not come as a surprise. The amazing thing is the price reaction when the fundamentals change.

If you can develop the habit of sticking with winning positions, you can obtain a significant comparative advantage. You will find that long after many others have sold out prematurely, you can persist, even if you are amazed by the market's subsequent performance.

Stay invested to make great profits. The big moves provide fantastic opportunities to make money. It is necessary to avoid the temptation to jump on and off a good idea in just a week or a month, and to instead doggedly stay with the winners. Others had the right view on the fundamentals but did not make big profits, because all they did was grab an odd half a per cent here and there.

If you can correctly identify the changes in the fundamentals, you may have plenty of time to take a position and enjoy a favourable move in the price. Over the years, by recognising that prices go further than expected, you can become very good at staying on winning ideas. Long after many others have sold out of winning positions, you have persisted, even though you have been amazed by how far the market subsequently went.

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