Stock investing strategies
Following a strategy of going against the current views of the majority investors is called contrarian investing. Why do such investors take a contrary view? Because, they believe that certain consensus among investors can lead to wide mispricings in securities markets.
For example: A wide spread negative news or rumors about a stock may send the prices of that stock crashing. These investors try to spot such stocks and invest in it resulting in above average returns.
CAN SLIM is a stock investing strategy developed by William O’Neil. O’Neil reportedly has made millions by consistently using this approach. He was the youngest person ever to have a seat on the New York Stock Exchange; he founded the U.S. brokerage firm William O’Neil + Co and he also started the business newspaper Investor’s Business Daily. His strategy is called “CAN SLIM”. Given below is my explanation of the method. I have kept things simple as possible.
What is it?
Simply put, it assumes that prices tend to trend in one direction, even if there is no fundamental reason for it to do so. It works similar to a roller coaster ride, when a roller coaster falls down a steep slope it tends to build up momentum, so it can do things like spinning around in loops without actually having to use any mechanical help. The momentum alone is able to push the cart.
Stocks move in a similar way, some good fundamental news can push the stocks up and start an upward trend. The pure momentum of that trend can push the stock higher and higher, well above what the true value of the stock actually is.
Successful traders such as Nicholas Darvas (who turned $10,000 into $2,000,000 in 18 months), Jessie Livermore and Ed Seykota (Who has made an average of 60% over a 10 year period) all made their amazing gains following this strategy of momentum.
You know what a stock index is. Sensex, Nifty etc are stock indices. Index investing is all about having the same combination of shares in the same ratio as the target index so that it replicates the index itself. A change in holdings happens only when a company enters or leaves the index.
The biggest attraction of this strategy is that it is a humble approach. Thousands of companies are listed in the stock exchange. If you were to start analysing the fundamental aspects of each and every company or even a selected group of companies, it would be a daunting task. Quite difficult even for experienced investors. Research and analysis takes a lot of time and hard work. In such a scenario, Index investing works as a much easier way to invest in stocks. It provides the opportunity to invest in a diversified portfolio which would give you some decent returns. This strategy will not beat the market returns, but makes sure that you do get at least the returns offered by the market. It’s essentially a passive form of investing.
- Category: Stock investing strategies
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- Financial Discipline for all.
- Investing Basics
- Shares & Stock Markets
- Introduction to Financial Statements
- Financial ratios.
- Stock investing strategies
- Technical Analysis I
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- Before Picking up stocks..
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- More ... from stock markets.
- Valuation of shares
- Futures and Options - The basics.
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