Timing the market and other bits and pieces
In this post I will write about the time to enter a (stock-) position, how you can partake in the profit-making of big companies and a little bit about TA.
Timing the market vs. Time in the market
When is the time to invest? When will the next crash come? Stocks are too expensive nowadays because we had a big runup the last few years so investing right now is way too risky.
These are statements and questions you will always hear whenever there is a bull market. Many people think they know how to time the market. They think that certain stocks or indices are overpriced and try to hoard cash to buy if there is a crash. However, if somebody would be able to time the market, he could make a limitless amount of money. There is a saying “Time in the market beats timing the market”. As no investor can time the market accurately that makes sense. If you stay out of the market you also lose out on potential gains. To be fair you also eliminate the chance to make loses on your account, however, in a bull market the indices go up most of the time.
Additionally, if you are in for the long haul, you can outlast a recession or even a crisis and therefore reduce the risk.
The share price went up too much way too fast – overvalued
If a share price went up 10% or even 20% in one day you often hear that the stock is currently too pricey and will pullback. While this can be true the sentiment that a strong increase in the share price equals an overvalued company is wrong. Something fundamental in the underlying could have changed or the future outlook is just especially good which was underlined by recent news. Take amazon for example. It trades currently at a 185.22 PE, a PB of 28.32 and a PS ratio of 4.03. From these metrics amazon should be overvalued. This statement could have been made this year, last year or two years ago. Amazon rose steadily and for a good reason. What I am trying to say is this. Just because a stock went up quickly in a short time doesn’t mean that it isn’t a good play anymore. To know more about this one needs to delve into the company’s financials, news and outlooks.
Taking part in the Growth of a company
By investing you will be able to profit from the actual value growth of a company. If you own apple you will profit from every iPhone sold down the line. As always, you will not only share the value growth but also the value loss. Be that as it may, taking part in the actual value growth of a company can be a great way to improve your financial position.
By working in a company of your country of origin you help to create value for your company and country. If a foreigner would invest in your company he will also profit from the value growth of you company. By doing so, people are able to move actual money away from the respective country. To counter that you could start to invest in stock from your country to try to take part in the value growth. While this is not per se a reason to invest especially in your country of origin it is good to know what investing in a foreign economy actually can do.
Technical Analysis – Basics
As I wrote in the Risk of Investing it is not possible to extrapolate share prices from historic data. The Technical Analysis, short TA, claims exactly it can do that. The theory is that share prices often follow similar patterns and those patterns are signs. Technical Analysis looks only at the price movement and neglects the company’s financial position, hell even the name does not matter.
The reason why they do that is that one of TA’s principles says that
- every information is priced into the share price
- Price changes are not random but follow repeating patterns/trends
People use TA based on their on beliefs. I personally do not like TA in general however I still use some TA basics sometimes like support and resistance.
In the upper picture you can see a stock (I edited out the ticker). You can draw (any) lines, however there are also lines with pre defined definitions. The lines should symbolize a trend, e.g. like the channel on the right side. If the stock price moves outside this channel or crosses a trend line the trend is broken. If the share price bounces of a trend line, depending on which side, it symbolizes support or resistance. There are heaps of websites out there if you want to learn more about TA.
So basically it comes down to your own beliefs if and what you use from the TA skillbook. I hope you could take something away from this post. If you liked it feel free to subscribe or comment.