Thursday, January 21, 2010

Chapter 8: The Investor and Market Fluctuations

Short term bonds have less fluctuations than long term bonds. Stocks are certainly no exception. Investors should be aware of such possible fluctuations and be ready to profit from it. This can
be achieved either by time or pricing.

Timing involves a forecast of the stock market's direction. Pricing involves comparison of a stock's price to its fair value. Due to the very nature of timing, it is possible to be become a speculator instead of an investor. A few people can indeed make money via timing, but for the majority, timing is generally not a money-making option.

Buy low, sell high: In theory, it is possible to buy stocks after a market correction has occurred and sell after a market has advanced. On practical terms though, it is not possible to expect an investor to wait for a correction just so that he/she could buy stocks.

Every investor must expect to experience fluctuations in the stock market. Stocks of smaller companies fluctuate more than of big companies. But this does not mean small companies will fare poorly over a long period of time. As the market advances, it is recommended that an investor sell stocks and move into bonds and do the opposite as the market declines.

Business and stock market valuations: An investor can consider business valuation as a fractional owner of the underlying business. On the other hand, market valuation is dictated by the daily quotes. In general, good quality stocks can lead to increased speculation on market valuations. An investor who thinks as a fractional owner can consider the stock market as a business partner, "Mr. Market". Mr. Market provides quotes everyday and it is up to the investor to act accordingly.