Part II : Asset Building Through Equity
CHAPTER 11: MARKET MOVERS
THE FORCE FROM BEHIND
Our deeds determine us,
As much as we determine our deeds.
– George Eliot
Introduction:
As we have discussed earlier there are many persons operating in the market who will qualify the category of Market Movers. But all of them can be classified into three major categories.
1. Classification based on Attitude
2. Classification based on Behavior
3. Classification based on Approach
1. Classification based on Attitude
Two kinds of Investors
A. Herd Instinct
B. Contrarian thinking
A. Herd Instinct
Herd behavior describes how individuals in a group can act together without any reason or planned direction. The term pertains to the behavior of animals in herds. Human conduct during activities such as stock market bubbles and crashes resembles this herd instinct.
Large stock market trends often begin and end with periods of frenzied buying (bubbles) or selling (crashes). Many observers call these episodes as clear examples of herding behavior that is irrational and driven by emotions — greed in the bubbles, fear in the crashes. Individual investors join the crowd of others in a rush to get in or out of the market.
Following the herd, however, is not a correct approach for good investment performance. And yet so many do it. That's why they are called herds.
B. Contrarian Thinking
“No one is thinking if everyone is thinking alike.”
Porter B. Williamson
“Do not follow the herd”
The greatest contrarian thinkers in the evolutionary history of earth are the Amphibians – but for whom we, the humans, might not have existed today. Instead of remaining in an aquatic environment like majority of their counterparts in the Paleozoic Era, they are the one who explored the land in the pre- historic past and became precursors of major land vertebrate groups.
A contrarian thinker is ‘one who takes a contrary view or action, who makes decisions that contradict prevailing wisdom’.
When others are rushing to buy, they are selling. At moments of panic and rushed selling, our contrarian friend is busily buying, and often at greatly reduced bargain prices. While contrarian tendencies are obvious in the financial and investment communities, they are more difficult to discern in the everyday world of entrepreneurship and independent business. Still, the contrarians are out there, and more often than not, their companies are thriving.
It requires a lot of mental strength to be a contrarian. In stock market it will definitely help you to make wise investment decisions in the long run.
2. Classification based on Behavior
BULL
If a person is optimistic and believes that stocks will go up, then that person is called a "bull" and is said to have a "bullish outlook". Bulls are optimistic about the upward movement of stock prices and are primarily buyers. A bull market is when everything in the economy is good, people are finding jobs, gross domestic product (GDP) is growing, and stocks are rising.
BEAR
If a person is pessimistic, believing that stocks are going to drop, then the person is called a "bear" and said to have a "bearish outlook". Bears believe that the stock prices are going to fall and are primarily sellers. A bear market is when the economy is bad, recession is looming and stock prices are falling.
Note:
There are also PIG’s in the market. Pigs are high-risk investors looking for the one big score in a short period of time. Pigs buy on hot tips and invest in companies without putting in the required effort to learn about these investments. They get impatient, greedy, and emotional about their investments, and they are drawn to high-risk securities Professional traders love the pigs, as it is often from their losses that the bulls and bears reap their profits.
Make sure you don't get into the market before you are ready. Be conservative and never invest in anything you do not understand. Before you invest in the market without the right knowledge, think about this old stock market saying:
"Bulls make money, bears make money, but pigs just get slaughtered!"
3. Classification based on Approach
Based on their approach on investments, the market participants can be classified into three categories. They are A. Fundamentalists B. Technical analyst and C. Technimentalist.
A. Fundamentalists
A fundamentalist is the one who makes his investment decisions based on fundamental analysis.
Fundamental analysis is a technique that attempts to determine a security’s value by focusing on underlying factors that affect a company's actual business and its future prospects.
You can perform fundamental analysis on industries or the economy as a whole.
On a broader scope, the term simply refers to the analysis of the economic well-being of a financial entity as opposed to only its price movements.
Fundamental analysis serves to answer the following questions
v Is the company’s revenue growing?
v Is it actually making a profit?
v Is it in a strong-enough position to beat out its
Competitors in the future?
v Is it able to repay its debts?
v Is management trying to "cook the books”?
B. Technical analyst
Technical analysts believe in market forces rather than the intrinsic value of the company.
Technical analysis assumes that market psychology influences trading in a way that enables predicting when a stock will rise or fall. For that reason, many technical analysts are also market timers, who believe that technical analysis can be applied just as easily to the market as a whole as to an individual stock.
Technical analysts believe that they can accurately predict the future price of a stock by looking at its historical prices and other trading variables.
A method of evaluating securities by relying on the assumption that market data, such as price or volume charts and open interest can help predict future (usually short-term) market trends. Unlike fundamental analysis, the intrinsic value of the security is not considered.
One of the main tenets of technical analysis is that stocks move in trends. Another is that a trend will continue until an equal or greater opposing force acts on the stock. An unexpected change in earnings, the loss of a large contract or any number of countless reasons could be a force significant enough to change investor sentiment. Betting on a trend reversal is far riskier than betting that it will continue.
C. Technimentalist
These persons belong to a Hybrid category – a combination of both Fundamentalists and Technical analysts.
The technimentalist, understands that there are fundamentals but that the market's reactions depend on the emotions of fear and greed. The technimentalist also realizes that the individual will never have access to all the facts to react before the market reacts. Nor can he or she predict future market sentiment or the price swings that it causes. For this reason, the technimentalist understands that stock price is the best indicator of all. Covering the bases, fundamental analysis tells this hybrid investor what to buy or sell, and technical analysis tells when to buy or sell.
The Discipline of Technimental Analysis
No one would argue against doing your homework on a company before investing. But technimentalists believe an examination of the trend is more important than getting tied up on past performance numbers.
1. Are corporate revenues declining, stable or increasing?
2. How effectively is the company competing?
3. Is it gaining market share or losing it?
4. Is the company experiencing growth and is that growth from top-line expansion (selling more product on increasing margins) or bottom-line cuts (laying off workers, cutting expenses or selling assets)?
5. Examining the activity of corporate insiders
If insiders such as directors and executives or institutions are selling their stock like there is no tomorrow, it is for a reason:
They may believe that the stock is overpriced or they may be responding to other deep-rooted problems.
Why should you buy stock in the company if those closely associated with it are selling large blocks of it?
On the other hand, if insiders suddenly start to buy or are increasing holdings, it could indicate that corporate fortunes are improving or a promising new technology or product is having a positive effect on the bottom line.
Conclusion:
While investors with any experience would never buy a stock without researching the fundamentals of the company, many will completely ignore the technicals. But relying solely on fundamentals to buy or sell ignores two major market forces: the emotions of fear and greed.
By studying the fundamentals - such as the direction of revenues, margins, insider sales and other key factors-you can determine what stocks to buy or sell. But by following the technicals such as direction and trend of the stock chart to monitor sentiment and by waiting for all to agree, you can determine exactly when to make your move.
Fundamentalists are longer-term investors while technicians are generally short to medium-term traders. In the eyes of each, the other could not be more wrong.
Dr.Felisleo
13.2.2011
