Technical analysis, balance sheets and income statements, research reports, CNBC and BNN and the latest news. For many, these are the ingredients for managing money in the stock market. But how does it all come together to find great stocks?
Looks like these are all good ingredients to building a portfolio in stocks, bonds, commodity and currency markets. But is it working? You'd think with the amount of information on the internet alone everybody would be doing great.
There are literally thousands of books on how to invest in the stock market. However, most books are designed to sell by giving people what they want, not what they need. They inherently make people feel better about the shortcomings in their approach. The analysis some authors suggest is either over simplified or misses the mark on what works.
In our investment workshops we typically arrive at a point in the session(s) when something happens. As the participants dig into the content with an increasing amount of energy and openness, questioning and resistance to what is being presented starts to come out. It's important that it does as without it learning isn't empowered. Here's what happens next.
A hypothetical scenario is presented to the group with the following questions. "What if you were presenting your investment decisions to Warren Buffet? How would you back up your reasoning?"
Now we arrive at the ultimate question underpinning everything in the investment process. "How do you know"?
What is the evidence that supports a methodology, a strategy and ultimately the transaction or trade?
The stock market can be analyzed with science creating analytics or metrics that translate into a decision making matrix for every situation. But there's more.
The stock market is driven by people, not machines, not earnings, the news or some other variable. All of these factors may be part of what somebody uses to make a decision but ultimately the market is about investor behavior. Accordingly, there are patterns and recognizing the patterns is the key to superior strategy and trade execution. It works.
Here are some keys to investment success that we'd like to see everybody work with.
Timing matters. If it didn't everybody would be rich already.
It's all about math. It's not subjective, it's not personal.
Risk management is the most important strategy at all times. Our observation is many retail investors (individuals) are taking far too much unnecessary risk and often don't realize it.