Showing posts with label market behaviour. Show all posts
Showing posts with label market behaviour. Show all posts

Thursday 13 October 2011

How to interpret Market Behaviour?


HOW TO INTERPRET MARKET BEHAVIOR
Whether you are an existing investor who holds a portfolio of shares or a beginner trying to enter the market, it is important for you to understand how the market behaves and where it is heading. The overall market health has a direct impact on a company’s profitability and almost all shares are impacted by the market sentiment, to a certain extent. Therefore, in order to be successful in stock investing, you must at least know how to recognise the major market trends.
What is a bull market?
A bull market refers to a stock market that is on the rise. It is considered as a bull market when almost all stocks are appreciating in value for a considerable period of time, usually with a price gain of over 20%. You will know that it is a bull market when everyone seems to be talking about buying shares and nobody seems to want to sell. This is when you observe that the demand for the shares is very strong resulting in limited supply, which in turn, pushes the shares prices even higher as investors are competing for the shares. During a bull market, investors are confident that the uptrend will continue into a longer term and the overall economy outlook is favourable while the employment rate is high. This is the time when everyone is exhilarated about the stock market as their chances of losing money in such market is quite low.
What is a bear market then?
A bear market is the total opposite of a bull market. It is characterised by a market that is downward trending with the stock value being depreciated by more than 20%. During a bear market, the demand for stocks is low while supply is high because everybody is trying to sell and only a few want to buy as the price continues to dip further. In such a market, the chances of losing money are high and therefore, you will see that the market sentiment is very pessimistic. A bear market is usually associated with weak economic outlook and the likelihood of declining company performance.
A typical bull market usually starts at the bottom, when the economy seems to be weak, such as during a recession. Here, you can observe governments trying to take certain measures like lowering interest rates to boost their economic recovery. When the market liquidity eases and company borrowing cost is lower, company profitability will improve and this in turn will indicate a positive sign for a bullish market to start.
On the other hand, when the market seems to be very hot with widespread bullishness, especially when the economic growth rate is high, coupled with high inflation rate, usually these signs signify a market top. This would indicate that there is a potential end of a bull market and the beginning of a bear market. During this period, investors should pay more attention to bad corporate news and warning signs to prepare for the turn in cycle.

How do these markets affect investors? 
Investor would ideally buy when the bull market is just about to start. This is when the stocks are still cheap and riding the bull wave until it reaches the top, before being sold as to maximise profit. Unfortunately, no one can be certain as to when the market is going to reach the top or the bottom. Therefore, by understanding how the market behaves, investors would have an idea on where the market is heading so that they can prepare themselves to take the necessary action. For example, an investor may not catch the stocks at the very bottom of the market, but at least he or she would know that the market is on its way to recovery and as such would start to pick up stocks with sound fundamentals but are still undervalue to invest in. Then, they would wait for the price to come up. Relatively, investing in a bull market is easier as the chances of making losses are low compared to investing in a bear market.
There are a few strategies that investors may take when dealing with a bear market. 
-  The most conservative way adopted would be to move out from stocks and invest in fixed income securities until the market recovers. 
-  Some would turn to the defensive stocks, such as those in the industries that are less affected by economic downturn, for example, food or utilities industries. 
-     The third option that is viable for investors is buying as the market continues to drop further to capitalize on the price reduction. However, investors who adopt this option face the risk of having their cash drying up all before the market reaches the bottom.




What is most important for investors to take note of when making investing decisions is the need  for homework; they need to do their homework properly, be it on the company itself or the overall economic situation. This is to ensure that their investment risk is minimised.

Monday 14 February 2011

Value Investors don't believe stock markets can be predicted.

Value investors don't believe stock markets can be predicted, over short or long periods.

What can be ascertained, with a modest degree of reliability, is the probable performance of underlying businesses over long periods, based on past performance and current information.

Value investors analyse this information to ascertain value and relate this to price.


Thursday 20 January 2011

Market Behaviour: The Least You Need to Know

Warren Buffett mentioned that an intelligent investor will require good knowledge in two subjects.  These are:
  1. having a good understanding of market behaviour and 
  2. mastering the valuation of different assets.
Understanding market behaviour is important as this allows the intelligent investors to take advantage of and not to fall victim to it.
  • What are the types of market behaviour the intelligent investors may encounter?  
  • How should you approach these market conditions?  
  • How can you take advantage of these through your buying and selling of shares?
As a value investor, understanding the market behaviour can be rewarding.  At least you need to know:
  • Bull markets tend to be good times to take profits on stocks you're ready to sell.
  • Bear markets tend to be good times to find great buys because so many stocks are on sale.
  • Get yourself under control and learn to move at your own pace, not the pace of the crowd.

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Market Behaviour: Control Yourself (Patience)

Patience is a virtue you must learn in order to excel as a value investor.  You must think outside the box and move in a direction the crowd likely is not following.

If you want to invest intelligently according to the basics established by value investing master guru Benjamin Graham, you must control the following:

  1. Your brokerage costs
  2. Your ownership costs
  3. Your expectations
  4. Your risk
  5. Your tax bills
  6. Your own behaviour

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1.  Your Brokerage Costs

Find yourself a good broker who doesn't charge too much to handle your stock trades.  If you feel confident that you know how to handle stock trading, do it yourself with an Internet discount broker.

We don't recommend full-service brokers because you don't need their research services and you certainly won't want to follow their advice - unless by some lucky break you find a broker who truly believes in value investing.

Also, don't trade too often and waste your money jumping in and out of stocks.  Most value investing gurus hold on to stocks for four to five years.

Learn to be patient and give a stock you've picked time to recover.  Its price may go down after you buy the stock, so don't get discouraged.  Few people can actually buy at the absolute lowest price.  Most value investors choose a stock on its way down.

But don't be so patient that you end up losing all your money.  Sometimes, you will make a mistake when picking a stock.  Just admit your mistake, accept your losses and move on.

2.  Your Ownership Costs

If you decide to invest using mutual funds, be sure to buy no-load funds with very low management fees.  Few funds are worth the cost if their management fees are more than 1 percent.

Remember, for a mutual fund manager to meet the returns of a stock market index, he or she must beat the index by at least the cost of the mutual fund's management fees.  Management fees are a drain on all mutual funds.  

Unless for some reason you've picked a particular mutual fund manager you want to follow, your best bet is to invest using an index fund.  Fees for many index funds are just 0.15 to 0.35 percent.

3.  Your Expectations

Always be realistic about the returns you want to get out of a stock purchase.  Even if you decide to follow some newsletters that specialise in value investing, don't get caught up in someone else's hype.  You'll never be disappointed if you carefully assess the true value of a stock and are conservative about the cash flows you can expect from the stock purchase.

4.  Your Risk.

Keep a close eye on the amount of risk you can tolerate.  Determine the asset allocation that best manages your risk tolerance.  

Periodically re-balance your portfolio so you know that you're maintaining your portfolio at a risk tolerance level that you can tolerate.

Determine how much of your portfolio you can afford to put at risk.  Stock investing is a risky business.  You can afford to take more risk if you have a longer time frame before you need the money.  

For example, if you won't need the money for 10 years or more, you can take on the greatest amount of risk. If you plan to use the money in two years, put that money in a cash account.

5.  Your Tax Bills

Each time you sell a stock, you may have to pay taxes on the amount of profit you make from the transaction. If you hold a stock for less than 12 months, the taxes you pay are based on your current tax rate.  

If you hold a stock for more than 12 months, your tax bill could be as little as 5 percent for capital gains, if you are in the 10 percent or 15 percent tax brackets.  You'll pay 15 percent capital gains tax if your tax bracket is 25 percent or higher.

Unless you've made a terrible mistake picking a stock, you should always hold it for more than a year, to minimize the tax hit on any gain.  The only exception to this rule is fi you have a significant profit in a stock and you're afraid the stock could take a tumble.

6.  Your Own Behaviour

It's human nature to get excited and follow the crowd in feeling good about a stock.  The crowd shows its enthusiasm when it bids the price up so high that the P/E ratio tops 20.  Learn to resist these feelings.

It;s also human nature to get frightened when everyone is running from the stock market.  Get your emotions under control and start to take a look for good buys when everyone else thinks it's time to escape.


Market Behaviour: Irrational Exuberance

When a bull run goes on for too long, it can morph into irrational exuberance.  People tend to think that the market has changed and that stock will continue to go up forever.  In reality, it won't - instead, a stock market bubble is gradually inflating.

Unfortunately, most people get caught in the hype and continue to buy while the bubble continues to inflate.  Then that bubble bursts without warning, sending shares of stock down 50 percent and more.  Asset bubbles have formed repeatedly over time, but most people can't recognize a bubble until after it bursts.

The most recent stock bubble was the Internet stock bubble, which inflated in the 1990s and burst in the early 2000s.  Many people who got caught up in Internet stocks lost 50% to 70% on their portfolio - and some lost as much as 90%.

Value investors such as Warren Buffett didn't play in that market.  Value investors will not buy a stock that doesn't have a proven cash flow.  Internet stocks were losing money every year.  Most hadn't even figured out how they would make a profit.  Yet analysts recommended them based on future earnings projections.

If you can't figure how a company will generate its cash flow, walk away from it.  Don't ever get caught up in promises of future earnings that have not yet materialized.



Related topics:

Market Behaviour: Pendulum Swings (Volatility)

Your work isn't finished once you own a stock.  You must be psychologically ready to deal with the pendulum swings (volatility) of the market.  Any stock you buy will go up and will go down.  The trick is to not get caught up in these ups and downs, but to stick to the plan you had for the stock when you picked it.

Don't watch CNBC and the other news shows that follow the market as though it's a sports game.  that will just make it harder for you to stick to your plan.  You don't have to know exactly what the price of your stock is each day.  Watching your stocks that closely will just make you nervous and most likely lead you to make the wrong choices.

Your best bet is to not watch the financial news on TV.  Read the respected financial press, such as The Wall Street Journal and the Financial Times, to stay up on the critical news about the companies you follow and get ideas for new possible investments.

You'll find much more serious, in-depth stories in the financial press.  These stories will help you make the best choices in building your portfolio.





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Market Behaviour: Bear Stalls

When you hear commentators say the bears are in control and the market is stalled, it's time for some serious bargain shopping.  

When this mood strikes the market, most investors run for hills and sell stock at whatever price they can get.  That;s why, as an intelligent investor, you can find some great buys.

Be careful, though.  Don't just buy a stock because you think it's cheap.  Make sure:

  1.  you've tested the financial fundamentals and key ratios (sales growth rates, profit margins, market prices of assets, capital expenditure requirements, EPS, P/E, P/B, current ratio,  and operating ratios - inventory turnover, accounts receivable turnover, and accounts payable turnover.); and 
  2. that you've determined it's time to exit the stock based on YOUR time schedule - not the time schedule of the crowd.  

Just because a stock is beaten down doesn't make it a good buy.

Assess the plans the management team (QVM) has for the company, as well as the numbers.



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Market Behaviour: Bull Runs

Sometimes you'll hear commentators say the bulls are running.  When you hear that, be very cautious.  Stocks are likely overpriced.

A bull run is the best time to sell stocks you own and take your profits, but only if you're ready to sell your stake in the company.  If you plan to hold a stock for years, don't feel obligated to sell it just because the bulls are running.

You'll be watching a lot of people just starting to get into a market.  People who are not intelligent investors tend to get caught up in the excitement of the market and think it's safe to get their feet wet.  Unfortunately, these folks buy stocks at the high and, when the bears return, sell stocks at the low when they get scared.

As a value investor, you've likely bought your stock on sale and now you're seeing some great profits.  You may or may not want to sell.  Run a quarterly analysis of the stock you hold, and be sure it still fits with your criteria for holding a stock.   You can design a strategy that works best for your based on your goals, your risk tolerance and your financial resources.





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Market Behaviour: Can You Beat the Market?

The best answer to this question is, sometimes - but don't count on it.

Generally, the market does a pretty good job of pricing stocks, but when the crowd is acting irrationally, you can find your best and worst buys.

Don't try to beat the market.  

Instead, focus on building the best portfolio you can.  

Buy stocks when they're cheap and sell them when they recover.  

Do not worry about missing the highest highs because you rarely can sell at just the right time to avoid the steep drop-off when the price of a stock plummets.

MOST PEOPLE GET CAUGHT UP IN THE EMOTIONAL HIGHS THEY FEEL AS STOCKS CLIMB AND DON'T ACT TO TAKE PROFITS BEFORE IT'S TOO LATE.  DON'T GET CAUGHT UP IN THAT TYPE OF BEHAVIOUR.

Market Behaviour: Unjustifiable Pessimism - Time to Find Your Best Opportunities (Gems in the Rough)

You will find your best buys when the market is unjustifiably pessimistic about a sector.

It is in such situations that one can find incredible buys among the beaten-down stocks in the sector. You do have to be patient and hold on to the stocks for a while until the crowd realized its mistakes.

If you believe the market has beaten down this sector UNJUSTIFIABLY, start looking for good buys in this sector.

Do not look for the cheapest stock; instead find the stock of a company with financial results that meet your criteria and a solid management team (QVM).

Look at the new daily lows in the financial press. Find a stock that has been beaten down for two or three years and has already taken its big fall.

Research the candidates you've found. You'll find a lot of stocks that have been beaten down JUSTIFIABLY - just move on.

But start watching those gems in the rough as you research them further to determine whether they are a good buy for you.



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