WORDS OF WISDOM FOR THE DAY : Markets Are Like Women - Always Commanding, Mysterious, Unpredictable & Volatile...!

 

Plunge! Rebound! Crash! Rally! Plunge again! That's been the depressing story line of the stock market the past few trading days, a gut-wrenching, confidence-testing, wealth-destroying bout of volatility that has put investors on edge. To the outsider, the stock market appears random and erratic. What makes a stock go up or down? Experts can't seem to predict the market, so why should I even try? This uncertainty scares many potential investors away from the market and its high rate of returns. People are missing out on good money! This is sad, because the stock market is more predictable than it appears. While they may look similar, stocks are not gambling.

 

First, I have to concede one thing. The stock market is very unpredictable in the short-term. The market severely overreacts to news, whether it's company earnings, economic factors or something silly like which team won the quarter-final of the Champion League soccer match between Real Madrid & Manchester United. Nobody can predict all the news, which makes the stock market unpredictable in the short-term. But in the long-term (6-months to a few years or more), the stock market is very predictable. If the company makes a lot of money, the stock's price will go up. If the company doesn't make money, the stock price will go down.

 

Be fearful when others are greedy, and be greedy when others are fearful. Although sounding very elementary, I quickly realized that this statement is deeper than what many human beings can comprehend without a second or third look. In my opinion, what Mr. Buffett is saying closely correlates to a statement made by Sun Tzu in The Art of War, that states when the enemy attacks; retreat and when the enemy retreat; attack.

 

Generally when the stock market is having a great year (or week for that matter), many amateur investors become greedy and are lured by the possibilities of great gains, then of course come to the conclusion that it is now the perfect time to invest. When the rest of the world starts investing at this high point in the market, the seasoned investors generally retreat, as it can be said that the amateurs are now attacking. Although they attack with no real substance and can be defeated at any time, it is always better (easier) to destroy the enemy once they are in your territory, and thus out of their element. Whenever there is a massive sell-off in the market one will see the smart investors begin to gobble up as many of these undervalued shares as possible.  

 

Believe it or not, this happens all the time and is one of the many reasons why the rich get richer and the poor get poorer. This is one of the main reasons for the need for education in the fields of business and investing. In Proverbs 4:7, the Word of God states " Wisdom is the principle thing; Therefore get wisdom. And in all your getting, get understanding". The sad part is that amateur investors often have neither and think that God is speaking for his own health; But He's not. He's speaking for ours. Stock trading has its own specialized vocabulary but once you have the basics under your belt you can understand better how the market works - more importantly you can work the market to your advantage.