Wall Street Institutions spend billions of dollars every year trying to convince investors that their Economists, Investment Managers, and Analysts can predict how the prices of specific company shares will change in the future and how the Stock Market as a whole will move. Such predictions, which are often presented as "Wethinkisms" or Model Asset Allocation adjustments, make investors who aren't sure what they're doing rush to make deals with each new piece of information. "Thou must listen to the oracle of Wall Street." Don't confuse this oracle with the one from Omaha, who knows a lot about investing. Fools on the street and on the hill say things like, "These guys know this stuff so much better than we do" (sic).
What if it's true and these super-smart people in pinstriped suits can really see the future? Why do you act the way you do? Why would financial pros of all shapes and sizes shout "sell" when prices go down and "buy" when prices go up? Would this be a good sales pitch at the mall? Of course not. Now, let's look at this thing in more detail. Hmm, not a single one of these Institutional Gurus ever questions the fact that the Market Indices and the prices of individual stocks will always go up and down. So, if we slowly built a diversified portfolio of value stocks (my short definition: profitable, dividend-paying, NYSE companies) as their prices went down, we could make money on the next upswing... and forever. Hmmm.
Let's (stupidly) pretend for a moment that the big moves of the market are mostly predictable. No matter which way you go, professional advice will always feed the dominant emotion, whether it's greed or fear. Wall Street's retail representatives (stock brokers) and the new internet-savvy self-directors rarely go against what the majority thinks, especially if their immediate boss/spouse tells them that's what everyone else thinks. You can't learn to think for yourself from a salesperson on Wall Street; it just doesn't fill up the Beemer. Sorry, but you have to be able to think for yourself if you want to stay in balance while pedalling on the Market Cycle. Here's some advice about the world that you won't hear on the street of dreams (and don't get upset until you know what to buy or sell and when): Sell into rallies. Buy on bad news. Buy slowly and sell fast. Always sell too soon. Always buy too soon and in small amounts. Have a plan at all times. A plan is not a plan if it doesn't have buying rules and selling goals.
Predicting how individual stocks will do is a whole different ball game that requires an even better crystal ball and a wide range of relationships that are sometimes legal and sometimes not, but are mostly self-serving and useless to average investors. But, again, let's pretend that a mega-million-dollar salary and being known as a superstar in the industry makes it possible to predict the quality of Master of the Universe... I apologise. I can't even make believe it's true! There is just too much evidence against it, and the risks of relying on analytical opinions are too real. No one can legally, consistently, or on time predict how the price of a single issue will change. Face it: the risk of losing something is real. It can be reduced, but it can't be eliminated.
Investing in each issue is different and requires rules, guidelines, and good judgement. It needs to be done logically and without emotion, checked on often, and analysed with tools that are specific to the portfolio and don't depend on the calendar. This isn't nearly as hard as it sounds, and if you're used to "shopping" for deals in other parts of your life, you shouldn't have any trouble figuring out how it works. Don't know much about space? Good, and if you know anything about how stores work, that's even better. For success on the stock market, you don't need any special education, software, or acronyms. All you need is common sense and the ability to control your emotions.
Wall Street sells products and changes the truth in whatever way they think will help those products the most. It doesn't matter to them which way the market goes, and it wouldn't matter to you either if you had a well-built portfolio. If you learn how to deal with Wall Street events without getting emotional and avoid following the crowd, you will find yourself in the right cyclical mode much more often: buying when prices are low and making money instead of losing money. Just imagine...
Next, we'll talk about making a watch list of value stocks and setting profit-taking goals.
