Every day I hear from the "experts" on CNBC-TV and the radio gurus that the way to buy stocks is find value. One man's Rembrandt is another man's connect-the-dots and fill in the spaces. Valuation is like beauty. It is in the mind of the beholder.
If valuation is the key to buying stocks then there should be some kind of a formula to determine what is undervalued and over-valued. In every industry there are formulas for standards of performance. For cars we want to know the zero to 60 miles per hour in how many seconds. For soap we want it to be 99 and 44/100 percent pure. For alcoholic beverages it could be how long it has been aged. And on and on.
Yet in the stock market we have no hard and fast set of rules by which to judge a company performance. Ah, and there's the rub! No matter how good a company performance might be it may have no bearing on the price performance of the stock. You can find good companies that are within a sector that is doing poorly and yet one company can be making huge profits and sales, but the stock price is going nowhere. There need not be any correlation.
When you are in a bull market almost every stock goes up ? even the dogs. When you are in a bear market almost every stock goes down ? even the best ones. We ended an 18 year bull market in 2000 and almost without exception every stock headed for the exit.
Bull and bear markets follow relatively standard patterns of about 16 to 18 years up and 16 to 18 years down and the valuations go right along with them. If you own stocks or especially index funds during the bear periods you will be lucky to have broken even at the end of the 16-year cycle. Cash in your mattress will outperform market returns while the bear is in charge.
During these bear times there will be periods when the market will have a nice advance such as the one we saw start in 2003. These intermediate rises can ultimately bring many investors back into the market only to lose it when the rally is over and true valuation returns.
One valuation measurement for the overall market is the Price/Earnings ratio of the S&P500 Index. The median number for the historic purposes has been around 14. Today it is running about 21 which is considered high. When bear markets end the P/E can be about 6 or 8. There are other factors to be considered when buying any stock or fund, but the one thing that is most important is to have an exit strategy. Without one you will give back your profits.
No one knows exactly where the top or bottom of a market move will be. Knowing conventional valuations is one tool to help your buying and selling decisions.
Al Thomas' book, "If It Doesn't Go Up, Don't Buy It!" has helped thousands of people make money and keep their profits with his simple 2-step method. Read the first chapter at http://www.mutualfundmagic.com and discover why he's the man that Wall Street does not want you to know.
Copyright 2005
executive chauffeured services Bradford .. Madison to Airport carStock trading remains a very competitive field and the stock... Read More
I was recently interviewed for a press release through a... Read More
Have you seen all those big full page ads for... Read More
There are many important things you need to know to... Read More
As the man said, "I've got some good news and... Read More
When it comes to stock market trading it PAYS to... Read More
Hello Inflation, it has been awhile, I see you on... Read More
I am hearing predictions by brokers, financial planners, talk show... Read More
With over 6,000 mutual funds available, it may be tempting... Read More
Mutual funds by definition are a mixed bag of stocks,... Read More
Mutual fund investing is a lot like Thai cooking. Everyone... Read More
Whenever I see mutual fund comparisons in the trade publications... Read More
Sidney felt sick as she looked at her latest OptionsXpress... Read More
The Shadow knows. Remember him? It seems a shadow has... Read More
There are major differences between trading stocks and trading futures.... Read More
Every day on CNBC-TV they show a 200-day moving average... Read More
Question: How does it get better when it gets worse?Last... Read More
Sometimes the best way of lowering exposure to risk is... Read More
One of the great "secrets" of successful people is discipline... Read More
Since I can remember, and that's a long time ago,... Read More
We are already in it, but you can't see it.... Read More
In 1960 an engineer working for a watch company in... Read More
Having lived aboard a sailboat for 2 years I was... Read More
Stocks breakout from properly formed bases everyday but many investors... Read More
In my opinion, due to the volatility of stock market... Read More
O'Hare Chicago prom limo ..Exchange Traded Funds (ETFs) are growing. Investors are choosing low... Read More
04/28/2005NASDAQ dropped -12.5% year to date in 2005. S&P500 index... Read More
I love roller coasters. The steeper the better. High and... Read More
An investor can find and research the best stock on... Read More
I continually hear from economists, talking heads, other market letter... Read More
I receive emails from Morningstar. This company provides statistics and... Read More
Everything you invest in has risk so you want to... Read More
The big bad bear is stirring again. So far he... Read More
Humpty Dumpty had a great fall and all the King's... Read More
No, this is not a symbol for some Latin number.... Read More
Right now there doesn't seem to be any "gold fever".... Read More
What! Me worry?Many of you remember the cover of MAD... Read More
As one of my regular readers you know I have... Read More
Since I can remember, and that's a long time ago,... Read More
Forget making a profit; instead focus on the income provided... Read More
Stock trading remains a very competitive field and the stock... Read More
Invest in the stock market for the RIGHT reason, using... Read More
The ABC's of Stock Trading SuccessStock trading success...why is it... Read More
How do you make money without picking tops and bottoms?I... Read More
Now that you have some money burning a hole in... Read More
Why? Because I am going to shatter your conventional wisdom... Read More
Stock investment advice is easy to find. Do you get... Read More
Wouldn't it be nice if you were only in the... Read More
Most stock market traders have a favorite technical indicator.The one... Read More
Robert Rodriguez likes to buy stocks at their lows. When... Read More
Stocks & Mutual Fund |