Clifton H. Rodriquez is a certified public accountant (CPA) by profession, but a passionate investment enthusiast.
Famous Investors Who Made Lots of Money
Investors Are Better At Making Money Than Traders
Nobody on Wall Street talks about famous traders who made a fortune in the Stock Market. The conversation always revolves around famous investors like Warren Buffett, the late John C. Bogle, the late T Boone Pickens, David Einhorn, Stanley Druckenmiller, Peter Lynch, William "Bill" O'Neill IBD), Karl Ichan, Jim Cramer (CNBC) and many others. Why are traders ommitted from the conversation? Because trading in the Stock Market generally does not result in substantial winnings or profits. Investors are generally taught to perform their due diligence on stocks prior to investing their capital. That due diligence would entail evaluating stock performances with an emphasis on annual return of equity (AROE) and dividend yields. In general, the investors know how to make money because their emphasis is always on high quality growth and value stocks that perform well over a long time horizon.
Following A Viable Investment Approach Leads to Positive Investment Results
All of the successful investors have said in very clear terms that their success in the Stock Market is based on selecting and using a viable or proven investment strategy and adhering to it over an extended time horizon. They do not try to time the Market as most traders do, nor are they moved by the daily fluctuations in the Stock Market. They have mastered the art of stock picking. A significant numbers of investors is generally bullish (i.e., they believe that the Market will advance) over the long run. Most traders are generally moved by ticker tapes, and tend to take what the Market gives on a daily basis. Thus, many traders have earned the moniker of "daytrader". In general, they are bullish when the Market is bullish and bearish when they Market is bearish. In effect, they have no "investment soul", choosing to be neither bullish or bearish, and losing substantial amounts of their capital as they try to successfully trade in the Market. Trading to them becomes a frustrating and unsuccessful experience.
Investing To Make A Profit In the Stock Market
Investors and traders alike risk their capital for the sole purpose of making money in the Stock Market. However, their approaches are completely different. It has been stated that investors are inclined to risk their capital with the hope of realizing substantial profits over a long-term time horizon whereas traders have a short term focus, and lack the patience of waiting on time. Thus, there is an urgent inclination to time the Market. Attempting to time the Market and harnass substantial profits does not work for the majority of traders. Traders are not disciplined investors, and tend to be moved by immediate, albeit temporary "hickups" in the Stock Market. In most cases every trading decision is based on emotion (reaction to said temporary event) rather than a measured and viable investment strategy. Traders are short distance runners who attempt to acquire monetary prizes after a short sprint to their imaginary finish lines.
A Sound Investment Approach For A Disciplined Investor
There are a significant number of investment strategies that a disciplined investor can follow to make money in the Stock Market. IBD has an approach called the "CAN SLIM". Within the CAN SLIM is the "Smart Select" with Fundamental Analsis. IBD has made a concerted effort to combine both "Fundamental Analysis" with "Technical Analysis" in an effort to achieve profitable investment results over an extended period of time. It is a viable system which appears to be succesful when used properly.
Despite the fact that CAN SLIM is reliable and works extremly well under normal Market conditions, investors and traders alike still need to understand "Market Timing", trends and patterns as well as established relationships between investment vehicles of the Stock Market. A very significant item that investors need to understand is Market timing. In general, investors need to understand the best times to be in the Market or on the sidelines (idle cash waiting to go to work). The Stock Market experiences bullish trends (market rises in value) during the period October through April. During this period of time growth stocks generally appreciate in value. However, during the period May through September, growth stock tend to trade sides; value stocks (REITs & Oil Trust Stocks in particular) tend to increase slightly in value. Thus, many investors and traders tend to stick with the old adage, "Sell in May and go away". The main reason for this is that during the summer months, Market Makers tend to go on vacation more and there is a general slow down in investment activities. Investors and traders normally move their monies to value stocks that pay substantial dividends (yields are 3-12% depending on the stock. REITs in general have higher yields). The investors and traders collect their dividends and patiently wait for October thru April investment period.
OUTSIDE INFLUENCES ON THE MARKET
Market Declines Over the Decades
Furthermore, all investors and traders understand that certain relationships do exist within the Stock Market. There is an inverse relationship in the Stock Market between the US Dollar (USD) and stocks in general. When the USD falls in value (goes on a downward or bearish trend), US stocks tend to do go in the opposite direction (i.e., rise in value or assume a bullish trend). Also, when the USD is strong or rises in value, US Stocks tend to go on a downward spiral, or what is commonly called a bearish trend. Very rarely is this relationship disrupted, but some exterior forces do tend to disrupt the relationship. The actions of the Federal Reserve System (affectionately called the "Fed") can throw a monkey wrench into the Market. Geopolitcal occurences can also throw a money wrench into the Market and in effect disrupt the relationships.
Finally, investors and traders recognized the distinct inverse relationship between commodities and the USD. Again, there is a distinct inverse relationship between oil, gold as well as other commodities. In general when the USD is up in value, the prices of these commodities tend to take the inverse position (they decline in value). When the USD or Dollar declines in value, the prices of these commodities tend to rise in value. Investors have used this inverse relationship to profit from trades or investment involving commodities.
Wall Street-The Hub of Market Activity
EVALUATION OF STOCKS & TRADING OR INVESTING IN THEM
|SYMBOL||Market Price||R/S Rating||ACC/DIS||Daily Vol||Div%||BETA||AROE|
The Process of Vetting Stocks As Investment Vehicles
Not every stock traded on an exchange is worthy of an investor's capital. A stock can be valued based on certain factors. From IBD Smart Select approach and fundamental analysis certain factors can be selected and used to vet or evaluate stocks. The relative strength (R/S) is a representation of the price movement of the stock in relation to the rest of the Market (S & P 500). A rating of 77 or higher is an average rating that should be considered. Also, the Accumulation/Distribution (ACC/DIS) is a representation of acquisition and selling of stocks by institutional buyers (insurance companies, pension funds, etc). In general, the rating goes from "E" (no interest) to "A+" (optimal interest). Why is the ACC/DIS rating so important? Institutional investors' volume buying tends to move the market price of stocks. BETA is the factor that determines the degree of risks associate with the stock. The overall market risk is characterized by a BETA of 1.0X (times). If a stock has a BETA greater than 1.0X, it means that the stock carries more risk than the overall Market. By the same token if a stock carries a BETA less than 1/0X, then it means that the Stock carries less risk than the overall Market. In general high BETA stocks tend to give greater returns when the Market is in a bull run; they provide greater losses when the Market is in a downward or bearish spiral. Dividend yield (Div%) represent the dividend return offered by each stock. It is determined by taking the annual dividend of the stock and dividing it by the current market price). Finally, the annual return on equity (AROE) is the amount of return on the equity investment. When combined with the dividend yield gives an assessment as to the total return from the company.
Finally, investors can look at other factors in evaluating or vetting stocks. Other factors such as "Debt to Equity", "Annual Pre-Tax Margins", "Three Year Sales Growth Rate" and so forth. The entire idea is to use a set of good factor to determine whether an investor or trader should risk their money on a particular stock. Good stock evaluation leads to a reliable and viable stock picking strategy which results in successful investment activities over time.
This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.
© 2022 Clifton H. Rodriquez