Engaging in stock picking often requires a dose of humility. Those who have attempted it will likely tell you that their best ideas have not always yielded favorable results.
One of the most perplexing aspects of stock picking is how deceptively straightforward it appears in retrospect. When examining a stock’s price chart, the fluctuations seem almost predictable, and the optimal moments for buying and selling become glaringly obvious.
However, the real challenge lies in recognizing these pivotal moments ahead of time. Successfully timing the ebbs and flows of the market is a fleeting endeavor. Nevertheless, various theories abound on how to navigate this complexity.
For instance, one popular theory suggests fixating on stock price movements without blinking. After several minutes, you’re meant to zoom in and out until the market’s mass psychology seemingly reveals itself in patterns resembling the golden ratio fractals. If done correctly, these patterns may resemble both the spiral of a snail shell and the Milky Way galaxy.
Additionally, if you close your eyes and listen closely, you might perceive the market movements akin to a guitarist skillfully traversing a fretboard over a minor pentatonic scale. With enough attentiveness, you can detect repetitive sequences – up, up, down, up, down – allowing you to predict the next note played.
Challenges of Buying Low and Selling High
At Economic Prism, we’ve struggled to effectively apply the Fibonacci sequence to market trends. Perhaps our perspective has been too narrow or overly broad. In truth, we remain uncertain about its utility.
For various reasons, we’ve found it difficult to identify a reliable pattern for making forward-looking trading decisions. Instead, we favor investing over trading and consider value investing—rooted in fundamental analysis—to be more aligned with our understanding than deciphering elusive wave patterns.
The mantra “buy low, sell high” is often touted as the golden rule for amassing wealth through stock investments, but it’s not without its challenges.
What happens, for example, when you buy low and the stock price declines further? What steps should you take?
- Should you double down?
- Should you hold on, endure fluctuations, and wait for a potential rebound?
- Is a stop-loss strategy the way to go, enabling you to cut losses and explore better opportunities?
And what if the market conditions shift? Are we in a bull market, or are we experiencing a bear market? How does that influence your decisions?
Absence of Guaranteed Success
These are indeed crucial questions, but what are the answers? Much like evaluating fine art or selecting the next president, these decisions are deeply personal and shaped by individual preferences.
Consequently, any given answer may hold validity at certain times, while what seems correct one day may be entirely wrong the next. Similarly, answers that appear misguided today could turn out to be the wisest choices tomorrow.
In 2016, statistics show that professionals are struggling, with less than 20% of large-cap funds outperforming the S&P 500 during the first quarter, as noted by CNBC. This marks the lowest performance level since at least 1998, according to data from Bank of America Merrill Lynch.
Essentially, investing in an S&P 500 index fund has outperformed four out of five fund managers so far this year. If experts, who have access to extensive research and analytical resources, struggle to outpace the market, what chance does the average investor have?
The answer may well be that they don’t have one. From a practical standpoint, individual investors might find greater success with low-cost index funds than attempting to outperform the market.
Ultimately, saving and investing is a lifelong journey reflecting one’s approach to life itself. Are you seeking a life rich in experience, engagement, and sometimes turmoil? Or do you lean toward the monotonous?
No matter your inclination, success is never guaranteed.
Yet the allure of surpassing market performance can be a compelling motivator. The prospect of outshining the market, in our view, is too enticing to disregard. As such, we are excited to announce our upcoming newsletter, MN Gordon’s Wealth Prism Letter, where we aim to navigate this landscape with a sense of enjoyment. You can find more information about this new venture here.
Sincerely,
MN Gordon
for Economic Prism
