Thursday 22 October 2009

The Professionals' Trade Secrets or What Methods do They Use?

In order to make a profit in the stock market, an investor must have some ideas regarding how the prices of stocks behave.  If he knows the behaviour patterns of stock prices, he may be able to forecast correctly what the price of a stock will be in the future. 

If his forecasted price is higher than the present market price of a particular stock, he ought to buy and reap the profit when the price rises to his forecasted level.  The reverse also applies in that if he thinks the price of a stock he is holding will decline in the future, he ought to sell it now and buy it back later on when the price will be lower. 

Stock market investment has become a very sophisticated, very scientific pursuit in the West and several schools of thought, that is, ways of thinking regarding how the stock prices behave, have been developed.  Each school is different from the other and may even be totally opposite; each attracting different supporters. 

There are what may be termed THREE 'legitimate ' schools of thought and AN 'unofficial' one. 

The unofficial school of thought is generally called
  • 'The Greater Fool Theory' or'Buy from a Sucker and Sell to a Sucker' 

while the three legitimate schools are as follows:

  • (1)  Random Walk / Efficient Market Theory (Hypothesis)
  • (2)  Technical/Chartist School; and
  • (3)  Fundamentalist School.
The stock market behaviour knows no boundary in place and time.  These various stock market theories developed in the West can be applied here too and a serious investor has to be familiar with these theories. 

Which of these four schools of thought is/are applicable to the local Malaysian market?  I am of the bias opinion that the fundamentalist school of thought is the one most applicable here.  It is most likely that many do not agree.

No expert agrees exactly with another regarding stock values. 

"There is no such thing as a final answer to stock values.  A dozen experts will arrive at twelve different conclusions" - Gerald Loeb


Ref:  Stock Market Investment in Malaysia and Singapore by Neoh Soon Kean

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