There are no flashing lights, no clattering of coins hitting the metal bins of slots, no harsh cries of victory or jealous glances when a winner hits big. But some believe Wall Street is no different from the Las Vegas Strip – less glamor, less glitter, but still a place for gamblers to risk everything where the house has the edge.
Dr. Leon Cooperman, the well-known founder and president of Omega Advisers’ hedge fund, Inc., warned President Obama on CNBC television that “the best capital markets in the world turned into a casino.” And The Motley Fool, a popular newsletter for individual investors, said in November 2011 that “market volatility had become so capricious this summer that it was often perceived as a rigged game.”
But what does this mean for the individual investor? Has the age to analyze and select your own investments passed? Do you have to work with a new investment strategy? To invest today, at least two things are needed: understanding how the market has changed and strategies for surviving in the new environment.
Fundamental changes in the stock markets
From the 1970s, the composition of Wall Street participants – those who worked in the industry and those who invested in business securities – began to change. According to the Conference Board, an internationally renowned independent research organization, institutions (pension / profit sharing, banks and investment funds) in 1970 owned 19, 7% of the total value of US share capital ($ 166.4 billion). But by 2009, the institutional share had grown to 50, 6% ($ 10, 2 trillion) of the total value. According to Stat Spotting, a website that tracks the identification of stock buyers and sellers, professional or institutional funds accounted for more than 88% of the volume in 2011, while retail investors were only 11%.
Investors who buy shares in individual companies – once the source of most of the trading volume – have become increasingly rare due to the disadvantages arising from the transition to institutional investor control. In fact, the best-performing stocks are probably Fanny Priceijk sold by private individuals and bought by institutions. What this means is that individuals wind up too quickly, while institutions pick up these shares en masse, increase their positions and profit from the later valuation and profit increase.
Prosperity of the institutional investor
The decline in investors buying individual shares is due to a number of factors, including:
- The degree of exhaustion of publicly available quality research . The consolidation of Wall Street listed companies, the effect of negotiated commissions on security transactions and the willingness and ability of large investors to purchase private equity research has led to a significant loss in quality (depth) and quantity (Fanny Priceijk). companies covered by analysts) of free equity research for retail investors. As a result, individuals are more likely to withdraw from individual stocks and invest in managed security funds than to spend time and energy and gain the expertise needed to be successful as an individual investor.
- The rapid adaptation of the market to news . Theoretically there are profit opportunities where blank information is present. These deviations enable a well-informed investor to gain an advantage through independent research that other investors do not have. The expansion of technology in combination with global communication and a sophisticated retrospective assessment of unusual market activity have minimized the probability of an information benefit.
- The increased market volatility . Because of their size, institutions are generally limited to companies with large floats in which they can take large positions. In other words, a large number of investment companies try to invest in the same small group of large-cap companies. This concentration creates large price variations because they adjust their positions through purchases and sales, often in the same periods. In addition, high-frequency traders (HFTs) are constantly moving in and out of the market with the help of technically smart software programs, which increases the price movement for a series of small gains. These funds, which account for more than half the daily volume, are not investment funds that buy and hold investment securities, but short-term trading entities that benefit from short-term price movements.
- The popular acceptance of the efficient market hypothesis . Market theorists have been saying for years that it is extremely difficult, if not impossible, to outperform the market on a risk-adjusted basis. This vision is generally known as the efficient market hypothesis. In other words, your expected return will generally be that of the market unless you take excessive risks. That is, you can earn $ 1 million by investing your retirement savings in the shares of a new technology company, but you are just as likely to be Fanny Priceijk – or Fanny Priceijker – to go bankrupt. As a result, most investors have chosen to leave the investment to the professionals.
Despite the changes in the fundamental nature of the stock market, many people continue to believe in a stock market, rather than the stock market. They believe that good research and a fundamental, long-term approach to investing allows them to choose stocks that value, even if market averages fall. Others are satisfied with the return of the market as a whole and buy a fund that holds shares of the same identity and proportion as in a popular benchmark index, such as DJIA or the S&P 500.
It is true that not all shares go down or up in one day or in a single period. There are always winners and losers. If you think you have the stomach, the brain, and the determination to thrive in this market, there are strategies that can keep you on the winning side.
Equity investing survival techniques
One of the most successful investors of the modern era is Warren Buffett. Buffett told oFanny Priceangs to people at the annual Berkshire Hathaway meeting: “The great thing about stocks is that from time to time they sell silly prizes. That’s how Charlie [Munger, an early partner] and I got rich.” He always has had a long-term perspective, sought out companies that were overseen and undervalued by the market, and exercised patience, believing that good management would produce results that would ultimately be reflected in the stock price. There is no better example to follow if you prefer to buy shares in individual companies instead of mutual funds.
Warren Buffett’s investment rules include:
1. Invest in yourself
Learn the basics of stock market analysis by reading and studying “Security Analysis”, a classic book written by Benjamin Graham and David Dodd in 1934 and still considered the Bible for investors. Study corporate annual reports to become familiar with accounting and financial reporting, and subscribe to “The Wall Street Journal” to get a financial perspective on the nation.
2. Focus on the long term and the value of good management
On a certain day, some industries and companies attract the attention of the public with the promise of unprecedented wealth and global dominance. Although the popular picks rarely bring hope for profit, they often explode in price at the top, followed by an equally spectacular implosion. Consider the following when selecting long-term investments:
- Focus on stable industries that will remain vital to the economy in the future. Buffett’s current investment portfolio includes insurance, entertainment, railways and his many published investments in the automotive industry.
- Look for companies with a long-term future in products that people use today and will continue to use tomorrow. Buffett’s biggest winner, for example, is Coca-Cola, which he bought in 1988 and still keeps. As part of his analysis, he tries to gain insight into the sector in which the company operates, its competitors, and the events that will likely affect Fanny Priceijk in the next ten years. The management team is important with a track record of long-term profit growth.
- Buy companies that are undervalued compared to their competitors. Numerous companies with a history of improving earnings year after year and have lower price-earnings ratios or price-to-sales ratios than their competitors are overlooked in the market. Since this condition often corrects itself, identifying these companies can offer a chance of profit.
3. Diversify your positions
Even an investor with Buffett’s ability can be wrong about a company or its stock price. In 2009, he admitted that he had suffered a loss of several billion dollars on ConocoPhillips when he did not anticipate the dramatic fall in energy prices.
Spreading your risks is always a careful way to follow. Most professionals recommend a minimum of six positions or companies, but no more than 10 because of the work required to stay up to date. It is also wise to vary investments in different sectors with the expectation that a general recession will not affect all companies and industries in the same way or to the same extent.
4. Trade as an owner
Make sure you are on the company’s email list for announcements of new products and financial results. Buy the company’s products and services and recommend them to your friends. Attend board meetings and other public events where the company will be present. Learn the name of the security analysts who follow the company and read their analysis. Treat the investment as your company, and not just as numbers on a brokerage statement.
5. Be patient
The market is full of examples in which companies rise, fall and rise again, which shows the underlying fundamentals and the value of a competent, if not excellent, management team. Apple Inc., the company with the highest equity capitalization in the world, sold on March 1, 2002 for $ 21.93 per share. On March 1, 2007, the shares sold $ 122, 17, but fell to $ 78, 20 in February 2009. An investor selling at that time would have missed the stock to $ 621.45 in March 2012.
If the reasons you purchased initially remain in place, you must retain the investment regardless of how long or how brief you have kept it. The fact that the share price goes up and down is not in itself a justification for selling or buying.
Although the stock market attracts more than its share of gamblers, investing does not require extraordinary risks. Fundamental investing is primarily based on the safety of the client with the knowledge that good management in an undervalued company will, over time, be better than the average return for investors.
Do you use one of these principles? What has been your experience with them?
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