Substantial rise in the market: Practical questions and psychological problems confronting the investors

A serious investor is not likely to believe that the day-to-day or even month-to-month fluctuations of the stock market make him richer or poorer.


But what about the longer-term and wider changes in the stock market? Here practical questions present themselves, and the psychological problems are likely to grow complicated.

A substantial rise in the market is 

• at once a legitimate reason for satisfaction and 
• a cause for prudent concern, 
• but it may also bring a strong temptation toward imprudent action.

Your shares have advanced, good!  You are richer than you were, good!

• But has the price risen too high, and should you think of selling? 
• Or should you kick yourself for not having bought more shares when the level was lower? 
• Or— worst thought of all—should you now give way to the bull-market atmosphere, become infected with the enthusiasm, the overconfidence and the greed of the great public (of which, after all, you are a part), and make larger and dangerous commitments? 

Presented thus in print, the answer to the last question is a self-evident no, but even the intelligent investor is likely to need considerable will power to keep from following the crowd.

It is for these reasons of human nature, even more than by calculation of financial gain or loss, that we favor some kind of mechanical method for varying the proportion of bonds to stocks in the investor’s portfolio.

• The chief advantage, perhaps, is that such a formula will give him something to do. 
• As the market advances he will from time to time make sales out of his stockholdings, putting the proceeds into bonds; as it declines he will reverse the procedure. 
• These activities will provide some outlet for his otherwise too-pent-up energies. 
• If he is the right kind of investor he will take added satisfaction from the thought that his operations are exactly opposite from those of the crowd.*

* For today’s investor, the ideal strategy for pursuing this “formula” is rebalancing.

Security Prices Move Up and Down for Two Basic Reasons: Business Reality or Supply and Demand

Security prices move up and down for two basic reasons:

• to reflect business reality (or investor perceptions of that reality) or 
• to reflect short-term variations in supply and demand. 

Reality can change in a number of ways,

• some company-specific, 
• others macroeconomic in nature. 

Company-specific factors

• If Coca-Cola's business expands or prospects improve and the stock price increases proportionally, the rise may simply reflect an increase in business value. 
• If Aetna's share price plunges when a hurricane causes billions of dollars in catastrophic losses, a decline in total market value approximately equal to the estimated losses may be appropriate. 
• When the shares of Fund American Companies , Inc., surge as a result of the unexpected announcement of the sale of its major subsidiary, Fireman's Fund Insurance Company, at a very high price, the price increase reflects the sudden and nearly complete realization of underlying value. 

On a macroeconomic level

These factors could each precipitate a general increase in security prices:

• a broad-based decline in interest rates, 
• a drop in corporate tax rates, or 
• a rise in the expected rate of economic growth.

When to Buy and Sell Stocks

Sound stock decisions should be made on the basis of thorough company knowledge, not just on the basis of the price of the stock. A rising price most of the times means that the time to sell the stock is nearing. On the other hand, a falling price may signal that the time to purchase stocks is coming.

http://www.stock-market-investors.com/stock-strategies-and-systems/when-to-buy-and-sell-stocks.html