Many investors think that good news about a stock means it’s time to invest. They believe that if a stock is rising, it will continue to rise; and, if it is falling, it will continue to fall further.
In this video, I will show whether this investment strategy works and under what circumstances. Let’s assume that an upward trend lasts for three months and the same is true for a downward trend. Let’s further assume that it takes one month to recognize the trend.
In this example, you didn’t do anything in the first month because you couldn’t recognize the trend. In the second month, you see the upward trend and you buy the stock. You do the same in the third month.
Then, however, the trend reverses and it takes you one month to notice. In that month, you lose money. But after that, you recognize the trend and act correctly for the next two months but are wrong again in month seven. What was the bottom line? You were right four times out of six. Well done.
However, what if the cycles were shorter and the trends held for only two months? Then you would be wrong every second month. Three months right; three months wrong. A zero sum game.
And what if there was only a one month cycle? Then you would be wrong every month. Minus six. Ouch!
We are now in a world in which things happen faster and faster. For that reason, looking at stock trends makes less and less sense because they reverse too quickly. The example stated here may be simple, but it may just as well speak for the fortune of far more complex models.
I am buying stocks completely independent of the current cycle. I may not make more money than the average investor, but, at least I get the market returns and all that without the large trading costs and consulting fees - and, more importantly, without all of the work associated with following each cycle.