[Introduction to Value Investing] VALUE INVESTING 101 Part. 1
How to make profit on the stock market?
The answer is to buy stock when the price is low and sell it when the price goes higher.
Even 7-year-old child can know this.
However, if you watch the stock market closely, people act completely opposites.
Most of people buy stock when the price is high and sell it when the price is low.
The basic rule is to buy when the price is high and sell when it’s low but in reality, they buy when it’s high-priced and sell when it’s low-priced.
You say don’t lie to me?
Seriously, No kidding.
Let us think when people buy some stocks on the stock market.
Most investors buy stocks when they hear is good and also when they hear somebody had some fun with this stocks. They are easily taken in by these sweet rumors and overwhelmed with excitement, they decide to make purchase.
When the financial expert appears on the TV show and comment that ‘This stock is the one that will spark a new wave in the industry.’, people start to think that it is very tempting.
So they do some research and read the report from the analyst, and guess what. it says it’s ‘Buy’.
Now, they become impatient and feel like they will fail when they miss this opportunity and think that it’s one and only big chance of their lifetime.
Wait! let me give you a basic tip when reading the analysts' reports.
Analysts shout out ‘BUY’ when the stock is going higher.
They have to put among ‘Buy’, ‘Hold’, ‘Sell’ on every stock report.
When the stock price goes lower, they change to ‘Hold’.
However, ‘hold’ actually means nothing different from ‘sell’ in reality.
That’s because the word ‘sell’ regards as a rude expression toward the company so they rarely use this expression except in the case that is in extremely bad situation. Also, they should consider their market impact.
So, they rarely use the word ‘sell’.
Naturally, the word ‘Hold’ can be thought as to sell stocks.
Let’s go back to the track.
Investors wish to buy stocks that everyone goes crazy only by talking about that stocks. The most hottest stock.
That’s what they want.
They also can get the feeling of relief by copying others and think ‘Many people made the same decisions with me so it’ll be safe.’.
Even when the stock is going lower, they will relatively comfortable because they think that other people will also suffer a loss just like me.
Not all these scapegoats are the ordinary individual investors.
So-called expert, fund manager, also hard to escape from the comfort of this mob psychology.
As they suffer from a great weight of P/E(price-earnings) ratio, they have lots of interest toward other managers’ reports.
Also they tend to copy others a lot.
The reason is that suppose they don’t buy the stock that others already bought and the stock price is going higher, this can lead them to a big trouble that will bring the huge drop in their P/E(price-earnings) ratio.
The stocks that most of the fund managers possess is relatively safe as they don’t want to be blamed even if the stock price is going low because they can be justified as other fund managers also have the same stocks and their P/E(price-earings) ratio has dropped as well.
Therefore, not only individual investors but fund managers also make purchase of stocks that going higher. That means, they buy when the stocks are highly-priced.
Now, let’s take a look when people sell stocks.
The reason for selling stocks can be a political, economic, or even an international issue.
In case of a single stock, the stock can go down with a thud because of the bad sales or unexpected bad news.
Hearing the crash, people thought of all kinds of bad stuff and start to sell their stocks for the safety. Actually the expert like fund managers or analysts act more seriously than the individual investors and they act faster. After their huge disposal, the private investors sell their shares. Normally, when the stock price is going down, most of the investors fear of the stock investment and think that there’s some reasonable reasons for this huge disposal and they sell their shares along with them. All convert into cash.
See. People sell when stock is going down. One word. They sell when the stock is cheap.
The basic rule was buy when the price is low and sell when the price is high
but, that’s how it goes.
Let me tell you one example.
There was a legendary fund manager named Peter Lynch. As the manager of the Magellan Fund at Fidelity Investments, Lynch averaged a 29.2% annual return, consistently more than doubling the S&P 500 market index and making it the best performing mutual fund in the world.
How lucky it was to be his members at that time? All should have made a fortune.
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