What is value investing and why do I insist that it is the best strategy to use when investing in the stock market?

The principles of modern value investing were conceived by a Benjamin Graham, known today as the Dean of Wall Street and the father of value investing. Although Graham did not have a name for his stock market investing strategy, it was later on called as “value investing” by his disciples. The core principles of value investing is embodied in Benjamin Graham and David Dodd’s book “Security Analysis” and Graham’s book “The Intelligent Investor.” Both books are widely recognized by stock market experts and regarded as sacred text by value investors worldwide.

I say that the above mentioned quote summarizes the value investing theory in a nutshell, because it the simplest explanation of the value investing concept. Value investing is nothing more but intelligent investing and investing is most intelligent when it is most businesslike. Once a stock market investor approaches stock market investing from a business perspective he will surely make rational and intelligent decisions.

Value investing has taken many forms since its inception and flavors of different types of value investing vary depending on each value investor. However the core concept of buying shares of stock whose shares appear under priced by using some form fundamental analysis remains a key concept regardless of what flavor of value investing is being used. Buying shares below their intrinsic value with a sufficient margin of safety also remains to be a key concept in value investing.

I believe that value investing is the best investing strategy when investing in stocks. Using a value investing strategy will help you survive in the roller coaster ride of the stock market and will help you avoid getting uncessary a Best Offset Mortgage. Let me give you five reasons why I use value investing in stock market investing and why you should become a value investor yourself.

1.) Logical, no-nonsense approach

The value investing approach is the most logical, no nonsense approach in stock market investing and uses a lot of common sense. When you start learning about value investing the first thing that you notice is that it makes lots of sense. No fancy gimmicks and computation and no unnecessary unreasonable risk. I mean think of it, if something you want is worth a dollar and somebody offers to sell it to you for 50 cents wouldn’t you buy it, this as simple as it gets. The value investing concept is similar, find companies that sell for less than how much it is worth and buy tons of shares! This makes a lot of sense right? This is what every businessman would do.

Value investing is simply investing from a business perspective. Benjamin Graham captures the essence of this point in his very own words.” Investment is most intelligent when it is most businesslike. It is amazing to see how many capable businessmen try to operate on Wall Street with complete disregard of all the sound principles through which they have gained success in their own undertakings. Yet every corporate security may best be viewed, in the first instance, as an ownership interest in, or a claim against, a specific business enterprise. And if a person sets out to make profits from security purchases and sales, he is embarking on a business venture of his own, which must be run in accordance with accepted business principles if it is to have a chance of success.”

See you next post on Part 2 of the “Reasons why you should use value investing when investing in the stock market”

As far as possible without surrender be on good terms with all market participants. Speak your truth quietly and clearly and do not spread false rumors about stock prices nor immediately buy and sell based on rumors. As a wise stock market investor used to say “With enough inside information and a million dollars, you can go broke in a year:” Always remember a fundamental law in stock market investing, “Returns decrease as motion (actively-managed trading) increases”

Listen most especially to the value investors and fundamental analyst. However learn lessons from the pure technical analyst even the seemingly dull and the ignorant, for they too have their story and you can certainly avoid their mistakes. Avoid loud and aggressive traders especially those who use pure technical analysis for they are vexations to your portfolio.

If you constantly compare your portfolio with others, you may become vain or bitter; for always there will be those who have greater gains in their portfolio than yourself. Enjoy the gains that you have and stick to your game plan. Keep close monitor of the stocks of the companies with durable competitive advantage that you are holding, for they produce real wealth in the changing fortunes of time.

Exercise caution in your investing, for the world of stock market investing is full of trickery. Avoid getting excess Offset Mortgage and over-leveraging your portfolio. But let not this blind you to the potentials of making money in stocks. The stock market is the greatest money making machine invented by man and if done properly will most certainly let you achieve great returns.

Be yourself. You may learn all you can from books, seminars and from mentors and gurus but in the end it is you who will do the actual buying and selling. Take kindly the counsel of the years for as you learn more about stock market investing especially if you read and learn about investing from a business perspective you become a much wiser investor.

Nurture strength of spirit to shield you during volatile market down turns especially during bear market. For as long as you are investing from a business perspective you can be assured that you are making the right decisions. Do not distress yourself with what the market participants are doing. Many who get burned in the market are those who follow blindly what others are doing. While knowledge of stock market investing is crucial to investing success of equal or even utmost importance is the emotional stability amidst market noise.

You are an intelligent investor and if you have done your homework well, your buy and sell decisions are correct, no less than the decisions made by the famous value and intelligent investors of the past and present. And whether or not it is clear to you, there is no doubt that you have made the right decision.

Therefore, be at peace with how your portfolio is doing no matter how seemingly small your gains are in the present because in the long run as the father of value investing says “the stock market behaves like a voting machine, but in the long term it acts like a weighing machine.” True value will in the long run be reflected in its stock price. And whatever your labors and aspirations in the noisy confusion of the stock market, keep peace in your soul. With all its sham, drudgery and broken dreams; it is still a beautiful place to grow your money. Be cheerful.

Strive to be happy and contented with your portfolio. Above all, strive to always be an intelligent investor.

(Adapted from Max Ehrmann’s Desiderata written in 1927 and revised for stock market investing by Zigfred Diaz, D’ Intelligent investor)

Before I go on writing new articles about stock market investing, let me answer a question from one of our readers named Ben. This is long been overdue. Here is his original question.

“Halimbawa po bumili ako ng stocks sa isang company, kailangan ko pa po bang isama sa income tax return ko ang tungkol dito, i mean, do i have to pay taxes pa for my income from stock market.”

(Translated in English: For example I buy stocks of a certain company, do I have to include it in my income tax return, do I have to pay taxes for my income in the stock market ?)

Now I’m sure there are lots of people that are also asking this question. I hope I will be of help to Ben as well as to other readers of this blog and to those of you seeking answers in the internet.

Dear Ben,

First of all, let my state clearly that I am no tax expert. True, I am a lawyer and taxation is included in our curriculum. But like most law students I hated, despised, abhorred (throw in all the negative adjectives here) taxation. (That’s why I understand why you probably got conflicting answers:-) ) For one thing also, our taxation laws are so complex (hence the seemingly conflicting answer:-) ), that there has been recent calls to make it simpler.

But nevertheless, since I managed to pass the bar exam subject on taxation (which is ironically my highest grade in the bar, and as of today I am still confused why this is so) let me answer the question the best way I can. Finally I have also found some use for my taxation books which has been gathering dust in my law library hehehehehe

To answer your question the answer is no, not anymore. You do not need to include the income you learn from stock market investing when you pay your income taxes.

My answer to that is based on Sec. 127 (D) of the National Internal Revenue Code (Which is the BIR “bible” of taxes) of the Philippines which states and I quote

“(D) Common Provisions. – Any gain derived from the sale, barter, exchange or other disposition of shares of stock under this Section shall be exempt from the tax imposed in Sections 24(C), 27(D)(2), 28(A)(8)(c), and 28(B)(5)(c) of this Code and from the regular individual or corporate income tax. Tax paid under this Section shall not be deductible for income tax purposes.”

So it is very clear in this section that gains derived from stock market transactions are exempted already from the taxes imposed under the above mentioned sections and the regular individual income tax.

Why is this so? Will the government not be making any money off the profits of stock market investors? Well they are still subject to tax which is called a “stock transaction tax.” This tax is in the nature of a “Final withholding tax”

To understand this further let me quote Revenue Regulation 2-98 issued by the Bureau of Internal Revenue in 1998. According to this revenue regulation a final withholding tax works this way:

“Under the final withholding tax system, the amount of tax withheld by the withholding agent represents the full and final payment of the income tax due from the recipient of income. Thus, the taxpayer is no longer required to file a tax return for the particular income, or to include such income as part of the taxable income that he will be reporting under in his annual income tax return.”

So it is very clear in this revenue regulation, for income subject to final withholding taxes, the tax payer is no longer required to file a tax return. Gains derived from stock transactions are subject to final withholding taxes hence they are not required to be included as part of taxable income when reported under your income tax return.

A similar illustration of this is bank interest. You don’t include bank interest when reporting your income tax return, why? This is because they are subject to final withholding tax.

So how much is this stock transaction tax? Well currently it is at ½ of 1% of the value of the transaction. On the other hand dividends we received from stock we are holding traded in the stock exchange are subject to 10 % final withholding tax. Again since this is a final withholding tax, there is no need to report this in your income tax return.

I hope this answers your question. Let me be clear that I am no tax expert and you can recheck my answer with those who are taxation law experts. But I’m sure my advice to you will certainly aid you as it is clear as reading information on Offset Mortgage Rates.

Sincerely,

D’ Intelligent Investor

“Why using technical analysis in stock market investing does not work – Part 2” discussed reason number 3 and that is using technical analysis in stock market investing does not work because a lot of credible long term studies reveal that it does not work. Getting Offset Mortgages to invest in the stock market while using technical analysis will certainly give you more problems as it will over-leverage your portfolio and as pointed out.

We continue with the last part of this series with reasons number 4 and 5.

Reason #4 – Using technical analysis in stock market investing does not work because it based on a wrong premise

The premise of technical analysis is that you can maximize profit by buying low and selling high. This is achieved going in and out of the market within a short period of time. Technicians think this is possible since you can predict where most the stock price will be headed by using charts. This makes technical analysis very tempting to use. The reasoning seems to be based on logic that is why it has attracted lots of people. If you can buy stocks today for $10.00 and tomorrow it becomes $100.00 why not do it? After all buying low and selling high is the name of the stock market game. The fluctuation of stock prices is based on supply and demand which in turn is based on market sentiment about individual stocks so it is logical to conclude that the charts should reflect where the stock price is headed.

It may sound logical but it isn’t effective because as discussed technical analysis does not work because of its nature. Market sentiment is just so unpredictable and cannot be confined to a chart. The premise that you can maximize profit by going in and out of the market within a short period of time using technical analysis is severely flawed. Investors end up loosing more instead. According to the Wall Street Journal Europe “Whether technical analysis is really useful … is a matter of some dispute on Wall Street. Some investors believe that it is impossible to forecast the market’s ups and downs. Academic studies have shown that when most people, professionals and amateurs alike, try to move money in and out of stocks to beat market fluctuations, they tend to wind up with losses.”

Another reason why the premise is wrong and people using pure technical analysis end up loosing more is because of the transaction fees and taxes. By moving in and out of the market rapidly you get slapped with lots of transaction fees and taxes such that your expected net gain becomes much smaller. This is what Warren Buffet calls as the “4^th law of motion.” He writes “Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac’s talents didn’t extend to investing: He lost a bundle in the South Sea Bubble, explaining later, ‘I can calculate the movement of the stars, but not the madness of men.’ If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increases.”

Reason #5 – Using technical analysis in stock market investing does not work because the real stock market experts who made billions in the stock market says it does not work.

The real stock market gurus who made billions in stocks and had consistent market returns for a long period of time has revealed their disdain for technical analysis.

Famed value investor Peter Lynch who has grown Fidelity’s Magellan fund from a mere $18 million in assets in 1977 to $14 billion in assets in 1990 (An average of averaged a 29.2% return) has this to say about reading charts “Charts are great for predicting the past.”

It is said that the world’s greatest stock market investor, Warren Buffett spent years learning technical analysis during the early part of his career This proved to be a futile effort and an expensive mistake. What was his conclusion on technical analysis and reading charts? Well he has this to say “I realized that technical analysis didn’t work when I turned the chart upside down and didn’t get a different answer.” He added “”If past history was all there was to the game, the richest people would be librarians.” Warren Buffett then decided to turn to what Benjamin Graham taught – Value Investing. This proved to work wonders for him.

Famous investors who were very consistent in getting high rates of returns for a long period time such as John Templeton, Shelby Davis, Philip Fisher, David Dreman, John Neff and many others all succeeded in the stock market by being value investors and relying heavily only on fundamental analysis.

In conclusion technical analysis does not work; those who insist that it does are only deluding themselves. To become an intelligent investor, there’s no other way but to approach stock market investing from a business perspective. To invest in stocks from a business perspective you have to know the business inside out and do a diligent study of its financial statements. An intelligent investor is a good businessman. As Warren Buffett puts it “I am a better investor because I am a businessman, and a better businessman because I am an investor.”

Reason #2 – Using technical analysis in stock market investing does not work because its tools are flawed.

Predicting market sentiment is measured by looking at the “charts.” When technicians look at the charts they seem to see all kinds of weird objects and shapes. They see cups and saucers, heads and shoulders and triangles. The problem is each technician looking at the same chart does not see the same thing. The conflicting opinions on what is the probable track that a stock is suppose to take. This practice is no different from reading the palm of somebody’s hand to determine his or her future or using the “stars” to predict what tomorrow may bring. Using charts to determine where stocks might be headed is plain and simple voodoo. It does not work. There is so much bias in chart reading that you do not get a concrete conclusive result. You might buy a dart board and hire a monkey to throw darts at a list of stocks and prices to determine which to buy and when to sell it. You will probably get the same results.

Technical analysis tools are so flawed that even the expert technical analyst are at conflict with each other on which system actually works. There are more than 500 technical analysis trading systems and tools that have been developed all throughout the years.

Technical analysts might right now be scrambling and buying darts to throw at me. They might accuse me of being wrong as there is no study to back my claims. Well let me go to my third point.

Reason #3 – Using technical analysis in stock market investing does not work because a lot of credible long term studies reveal that it does not work.

A recent study on the effectiveness of technical analysis conducted by Birinyi Associates Inc. released on July of 2010, proves my third point.  This was posted in the Bloomberg website. A part of the news report read as follows:

“. . . Analysts who use patterns in price and volume charts to forecast gains or losses in the stock market fail to make investors money, according to a study of technical analysis by Birinyi Associates Inc.The advance-decline line, which represents the number of daily gains minus declines, is an example of technical analysis that fails to forecast market moves, according to a report yesterday by the Westport, Connecticut-based firm.“Most indicators are descriptive, not indicative,” a group of researchers led by Laszlo Birinyi, the firm’s founder, wrote in the report e-mailed to clients yesterday. “They tell us what is going on, but seldom predict future moves.” They added that “‘experts’ tell us historical trends, antecedents and other characteristics which too often are the convention, the theoretical, the last instance or the logical.”

The cumulative difference between advancing and declining stocks hasn’t shown consistent trends, reaching a peak at the end of some multiyear bull markets and in others during the middle or earlier, Birinyi data from 1966 to 2002 show. That means investors aren’t able to determine how much longer rallies will continue based on the net number of rising shares among New York Stock Exchange-listed companies.

The measure peaked in November 1998 during the bull market that began two months before. It was 17 months before the Standard & Poor’s 500 Index topped out and the bull market ended, according to Bloomberg data. Investors who bet that a peak in the advance-decline line meant the bull market would end missed out on a 34 percent rally.

Despite inconsistencies in predictive value, technical analysis should instead be a tool that’s part of a broader strategy for managing holdings, said Birinyi, a research and money-management firm that oversees about $300 million.“Technical approaches can and should be a useful adjunct to every investor’s — amateur and professional — arsenal, if and only if used properly and with understanding,” Birinyi wrote. “Technicals detail and hopefully illuminate, but do not predict.”

A study released in October 2009 by finance professors at Massey University in New Zealand showed a similar conclusion. They examined more than 5,000 technical trading rules to see if they added value. The authors found “. . . no evidence that the profits to the technical trading rules we consider are greater than those that might be expected due to random data variation . . .”

Stay tuned for the last part of this series “Why using technical analysis in stock market investing does not work” – Part 3.” Only here on D’ Intelligent Investor.

This article is somehow a continuation of the investing school of thoughts article as I will discuss in detail here why technical analysis does not work. I am writing against technical analysis because majority of market players use this strategy. I’d probably be crucified by most stock market players by writing this article as there are lots of them who use technical analysis. Let me make my position clear, I have no qualms about people using a technical analysis together with fundamentals or whether they consult Madame Auring when the pick stocks for as long they give weight to the fundamentals of business of the stock they are trying to buy. What I am against is the use of pure technical analysis alone in making investments decisions.

Let me give you five reasons why using technical analysis in stock market investing does not work and why you should not rely on it to make investments decisions.

Reason #1 – Using technical analysis in stock market investing does not work because of its nature

The nature of Technical analysis is that it is based on market psychology which in turn is anchored on the individual sentiments of each individual investor. Each individual has unique thoughts about the stock he is buying making each individual investor take different courses of action. Investment bank State Street Global Markets describes this rightly when it described the market’s sentiment in the credit crunch of 2007 “Market participants don’t know whether to buy on the rumor and sell on the news, do the opposite, do both, or do nothing, depending on which way the wind is blowing . . . “

I find it very ironic that people say that the pattern that they are searching for using technical analysis eludes them. They reason out that perhaps they need to learn more about technical analysis, or follow this and that system or buy the latest book on the latest technically analysis system. What they don’t realize is that the pattern they seek is created by them! This is akin to a cat chasing his short tail, which he always fails to catch.

If each individual views stocks as investments and buys stocks from a business perspective, we will not have such wide gyrations in the market. True, that there will still be movements in the market much like there are price movements in any kind of market, but such movement will be much more stable. Just like in the fish, meat or poultry market wherein prices don’t move wildly everyday. There may be a difference in price, but it is much more stable. I have never experienced walking into a fish market and buying fish today worth P100.00 while the next day it sells for just P 30.00. Probably this will happen under unique circumstances such as when people do not want to buy fish because of a fish kill. But ordinarily this rarely happens in a fish market and if price changes do happens, the price movements and changes are small. In contrast, the stock market price movements are so erratic that in really big markets, the changes happens almost every second! There is no other market that is as moving wildly as the stock market.

Anchoring stock market investing decisions based on market psychology is very dangerous. It is akin to gambling. There is no pattern to speak of. You can never predict what the market will be thinking. It is all guesswork. You might as well consult Madame Auring rather than rely on technical analysis. When he lost a fortune because of investing in the South Sea Bubble, Isaac Newton lamented “I can calculate the movement of the stars, but not the madness of men.”

The father of value investing, Benjamin Graham once described market sentiment as embodied in an allegorical figure named “Mr. Market” who is portrayed as sort of “manic depressive.” In his classic book “The Intelligent Investor” he writes about Mr. Market and says “Imagine that in some private business you own a small share that cost you $1,000. One of your partners, named Mr. Market, is very obliging indeed. Every day he tells you what he thinks your interest is worth and furthermore offers either to buy you out or to sell you an additional interest on that basis. Sometimes his idea of value appears plausible and justified by business developments and prospects as you know them. Often, on the other hand, Mr. Market lets his enthusiasm or his fears run away with him, and the value he proposes seems to you a little short of silly . . . You may be happy to sell out to him when he quotes you a ridiculously high price, and equally happy to buy from him when his price is low. But the rest of the time you will be wiser to form your own ideas of the value of your holdings…” ” (Emphasis added)

Watch out for the next post “Why using technical analysis in stock market investing does not work – Part 2“

By the way here is a funny youtube video on the stock market works. You might find yourself laughing at this, but this is how market sentiment works. (The first part talks about market sentiment, the second part talks about the U.S subprime mortgage problem)

Real Estate Investment Trust (REIT, pronounced as “reet”) is not a new concept. It has been around since the 1800s in the United States. Today there are more than 193 publicly traded REITs in the US, with assets of more than $500 billion. In Australia, Listed Property Trust assets have reached A$106 billion. In Singapore, Property Trust assets are valued at S$25 billion. REITs have also gained prominence in countries like Canada, Hong Kong, Japan and Malaysia. So you see, REITs has been around in other countries for a long time already, doesn’t surprise me though that it is just introduced recently in the Philippines. But I am glad that we are finally moving with the world albeit at a slower pace. Hopefully it will be much faster in the decade to come.

REITs were introduced into the Philippines to somehow democratize wealth by broadening the participation of Filipinos in the ownership of real estate. Everybody knows that engaging in real estate business (Now I am not talking here about purely selling real estate on a commission basis) requires a lot of capital. Owning REITs in a sense helps you be part of the Real Estate Business without shelling out so much capital since buying a share in an REIT is owning a fractional share or becoming part owner of the Real Estate Investment Trust. REITs may be a great concept but the problem again lies with information dissemination. The Philippine stock exchange has been around for more than 80 years and yet only less than 1 % of the Filipinos invests in stocks. If democratization of wealth is the goal then the Philippine Stock Exchange market education department has to do more in terms of educating the public about stocks and REITs.

Anyway, let me introduce you to REITs and why you should invest in them. This is not a comprehensive guide but just an introductory one. I have not personally invested in REITs as it in process of being introduced to the country. But following developments, I believe it is a very promising alternative vehicle of investment.

A Real Estate Investment Trust is a stock corporation created for the purpose of owning and managing income-generating real estate such as office buildings, residential condominiums, shopping centers, hotels, warehouses, hospitals, airports and tollways.

The reason why you should invest in REITS is because REITs it has both the characteristics of both a fixed income instrument and a variable income instrument. This gives the investor an advantage, especially the investors who are not so aggressive but are also not so conservative.

Fixed income from REITs is gained through regular dividends. The REIT Act of 2009 requires REITs to distribute 90% of its distributable income to investors.

Variable income comes from Market Volatility. This is just like capital appreciation in stocks. Holders of REIT shares may expect an increase in his REIT share price whenever there is increased demand for it. A decrease demand may of course have the negative effect.

Presently Ayala Land, Robinson’s Land and SM Prime Holdings are seriously considering to offer REITs. Other real estate companies listed in the Philippine Stock Exchange such as Belle Corporation, Mega World Corporation and Shang Properties are adopting a wait and see situation and are waiting for the big boys to make their first REIT move before making an REIT offer.

A primer on Real Estate Investment Trust is now available to the public for free download at the Philippine Stock Exchange website at www.pse.org.ph. If you can’t download the file, subscribe to my feeds for free and you can also get a detailed report on major REIT players.

The most famous advocate of this tool is none other than the legendary value investor, Warren Buffett who once said “Our favorite holding period is forever.”

The strategy is so profoundly simple that some people say that its impossible that you will get a good rate of return by implementing this.

Further, a lot of investing gurus has criticized the strategy saying that it does not work because if you don’t take advantage when the market over values your stock, you end up loosing an opportunity. Also there is the possibility that a company might do something stupid in the long run and in the end you will end up loosing your investment.

I will not discuss the nuisances of the buy and hold strategy here as I will be further discussing this in details as one of the tools used in value investing in a series of posts.

But does the strategy work? You might say, it worked for Warren Buffett, but what if you are an ordinary individual investor who knows nothing about the ins and outs of stock market investing.

Well it worked for, Grace Groner, a woman who invested $180.00 in 1935 and held on to the stock until her death in 2010. For 75 years, her rate of return was an astounding 15.13% compounded per annum compounded.

Grace Groner was a simple woman. She is not an investment genius compared to Warren Buffett. She is a simple ordinary woman who lived a simple life.  She lived in small cottage that she received as an inheritance. She never owned a car, bought clothes at rummage sales and was never married.  She worked for Abbott Laboratories as secretary for 43 years. In 1935 she purchased 3 shares of Abbott Laboratories stocks worth $ 60.00 each. Her share split many times and she continued to re-invest the dividends each time.

Grace passed away last January 19, 2010 at the ripe old age of 101 years old. Click here to watch this youtube video and you will be shocked how much her $180.00 is now worth !

]]> http://www.stockmarket-investing.com/does-buy-and-hold-forever-still-work/feed/ 6 http://www.stockmarket-investing.com/stock-market-investing-schools-of-thought/ http://www.stockmarket-investing.com/stock-market-investing-schools-of-thought/#comments Sun, 18 Jul 2010 19:45:15 +0000 zigfred http://www.stockmarket-investing.com/?p=274 Now that you know “How you can make money through stock market investing,” you must be really itching right now to start investing in the stock market and make millions !

Not so fast ! You’ve still got a long way to go. You have to choose your investing style. In order to do that, let me introduce you to the three stock market investing school of thoughts.

FUNDAMENTAL ANALYSIS

Fundamental analysis is a type of security analysis that analyzes a stock from a business perspective. “Fundamentalists” which is the term we will be using here for people adhering to this philosophy often read a lot about the company pouring over it’s financial statements assessing it’s management, competitive advantages, and analyzing competitors and market shares.

For the Fundamentalists, they take the expression that a “stock is a fractional ownership of a business” literally. For them there is no other better way to value a stock but to approach it from a business perspective.

There are different type of approaches and strategies to fundamental analysis. Among those are the “Buy and hold strategy,” “Contrarian investors” and of course the “value investors.”

For adherents of other school of thoughts of investing, using fundamentals to value a stock is a useless exercise as they believe that the current price of a certain stock reflects its true value as all other necessary factors that might affect its real value has already been factored in. Others criticize fundamental analysis as being tedious as it requires a lot of reading, comparison and analysis.

TECHNICAL ANALYSIS

Technical analysis is a type of analysis that studies the movement of stock prices and tries to forecast the price of a stock based on historical market data. Adherants of this school of thought in stock market investing are often called “technicians.”

Technicians try to find “patterns” and “trends” in stock market and often utilize charts to do this. Technicians do not try to value a stock. They merely exploit the movement of the prices and try to profit from them. They believe that the market discounts everything and hence there is no more need for analyzing a stock from a business perspective. One of their mantra is that “history will repeat itself.” Because of their belief that investor behavior repeats often, they believe that the charts will show a certain pattern which they can exploit.

There are more than 500 technical analysis trading systems and tools that have been developed all throughout the years. All of these are intended to find a “pattern” in the market. Some of them have fancy names such as Turtle trading, Elliot Wave etc. Others have disappeared into oblivion (Dogs of the Dow, Foolish four etc. )

Critics say that technical analysis is all pure guess work and that the practice of technical analysis is useless as it is akin to relying on astrology or charting the stars to predict the future. Man is too complex a being. Investor sentiment is hard to predict and nobody really knows where the market is next headed.

QUANTITATIVE ANALYSIS

Quantitative analysis is the use of complex mathematical formula to price stocks. Adherants of this school of thoughts in stock market investing are called “quants.” Quantitative analysis had its roots in the academe. Sometime in the 1950s, academicians started to apply mathematical principles to investment analysis.

Quantitative analysis is highly technical in nature and involves complex mathematical computation. Because of this computers are heavily used and utilized when making decisions as to which stocks to buy or sell, what stocks should be in one portfolio and the ideal strategy for diversification. Advance math such as stochastic calculus is often used in quantitative analysis. The goal of quantitative analysis is to try to replicate reality with the use of mathematics.

Critics of quantitative analysis argue that it is too complex to use for ordinary investors add to this are the blunders committed by academicians when they applied their “sophisticated” mathematical models to the actual world. Such application instead of producing great returns produced exactly the opposite.

So which among the three schools of thoughts should you adhere to? Should you use fundamental analysis, technical analysis or quantitative analysis? Find out more as we continue learn stock market investing and as you slowly go your to becoming an intelligent investor.

]]> http://www.stockmarket-investing.com/stock-market-investing-schools-of-thought/feed/ 2 http://www.stockmarket-investing.com/effect-of-elections-on-the-stock-market/ http://www.stockmarket-investing.com/effect-of-elections-on-the-stock-market/#comments Sat, 08 May 2010 15:35:42 +0000 zigfred http://www.stockmarket-investing.com/?p=246 Elections in any country have a unique effect in the stock market. Generally either the market will barely move or will take a dip as stock market players await the results of an election.

This coming Monday, the Philippines will be having its elections. Just less than 48 hours to go and the Filipino people will decide who their next set of leaders will be. Analyst has been expecting the Philippine stock exchange to go down because of election jitters compounded by the problems that hounds the European Union because of the problems in Greece. However the market has been resilient with the Philippine stock exchange index shedding only about 150+ points so far from its highest since the start of the global financial crisis.

For value investors, the effect of elections is just another chance of buying undervalued stocks or stocks selling at a fair price. This is another chance to be greedy when everybody else is fearful.

We are all praying for a peaceful and generally smooth election this coming Monday as the entire nations tries its first ever automated elections. However let it be noted that whatever the results of the elections will be  it does not matter to us value investors.

If we have peaceful elections and the transition to a new leadership is smooth then stocks are said to kick off and the bull will start raging. This will be very beneficial for the stocks that value investors hold as the market will start to realize the true value of previously undervalued shares, raising their prices. This is in consonance with the famous Benjamin Graham mantra which says that “In the short run, the market is a voting machine. In the long run, it’s a weighing machine.” (Another way of saying, true value will in the long run be reflected in its stock price)

However what is worst for the market (Best for value investors) is the fact that they will start to over value stocks and start buying at prices that does not make business sense. Every Tom, Dick and Harry will then start joining the bandwagon and the index will reach unprecedented new heights. By that time, value investors become fearful because every else has become so greedy.

If we will have a not so peaceful elections and all the predictions of critics and prophecies of doomsday prophets come true (Which I pray will not happen not for stocks sakes but for the country’s sake) then stocks will come tumbling down. This then becomes an opportunity to buy wonderful businesses with durable competitive advantage and not only at fair prices but at fire sale prices! It’s time to be greedy as everybody else is fearful.

Either way whatever the scenario is the value investor always wins and sleeps soundly at night because he invest intelligently and always does it in a way that makes business sense.

Happy voting this Monday and remember to vote wisely !