When I was in 6th grade, Etnies shoes were the most popular shoes out there. More and more kids were coming to school with them every day and I felt like I was missing out! I didn’t skateboard but it didn’t matter, I still wanted to be cool. I finally saved up enough money to buy these expensive pair of shoes. I strutted into school that day with my head held high, thinking all the kids would accept me as one of their equals. What actually happened was that the etnie fad had already passed. Kids had moved on to puma shoes and I now had bought shoes that everyone was getting rid of. So much for being cool!
This same sort of thinking is actually one of the biggest mistakes people make in the stock market. In today’s article, I’m going to be showing you how you can find true value in stocks rather than chasing the next hot tip.
The Biggest Mistake
Investors constantly think like I did in the 6th grade over those Etnies. Stocks will be trending. Everyone is talking about them, their price is soaring, and the news is slamming them in your face every day to make you think that you are missing out. So finally after all this time you decide to buy into this overbought stock at the peak of it positive price trend. Then it reveres its path, you panic, and you sell out taking on a big loss. This happens over and over again till you are out of money.
Investors will spend more time doing research on a car than a stock they are about to put money into which is totally insane! The car is a depreciating asset while your stocks should be making you money. People will blindly pick a stock that they personally like with no logically explanation and hope that it will just go up over time. That’s gambling! I don’t consider stock trading to be a gamble if you do it the right way.
Take a Top-Down Approach
Before we look at any individual stocks we need to look at the different industries first and see which ones are trending in a positive direction. For instance, when Trump got elected recently, the financial industry started to take off. Combined with the rise we saw in interest rates, all stocks within that industry were killing it. Higher interest rates equals more profit for banks and brokerage companies. If you had then looked into that industry and found a stock that was a little oversold, like Bank of America, then you would have made a killing in the past month.
I have said this before, but everything in the economy is cyclical. Industries are going to have periods where they are rising and periods where they are falling. Let’s say the price of oil was cut drastically because there is way to0 much supply in the market. Companies within the oil and energy industry are going to take a hit because of this since that is their main source of revenue. Always ask yourself how a company makes most of its money and how changes in the industry could affect it.
Trust Price Charts
Once you found industries that are trending, we need to narrow our search by looking for stocks that are oversold. Oversold stocks with good fundamentals in a trending industry are going to be your BIGGEST winners. When I say good fundamentals, I mean that their company has experience positive grow and there is no negative news behind their recent decline in price. Lets look at the chart below.
If Marathon Oil had no negative PR about its recent decline in price and the energy sector was starting to trend up from a rise in oil prices then it may be a good time to invest in MRO!
We also want to see a breakout in a downward price channel BEFORE we invest. If a stock has been trending down, we can draw trendlines on its chart and buy when it breaks our upper trendline.
Another method would be to buy into a stock when it finds support in its price and starts a reversal.
Don’t follow the Next Hot Stock Tip
Be a smarter investor and take the time to do some homework on stocks. Look at industries that are starting to gain some traction and THEN look at stocks within that industry to see which one can provide value. These will be stocks with positive fundamentals and price charts that are oversold. This will allow you to make trades with less emotion and greatly enhance your success rate.
Homework: Looking through different industries and research which ones are starting to trend into a positive direction? Find oversold stocks within that industry and see if it would be a good investment.