Investing in stocks requires lots of guts, patience, balanced risk-appetite, a hard-nosed attitude, market sensitivity, a stick to the plan mentality, the abandon ship flexibility, and a whole lot more. All this on top of experience, luck, divine providence, great timing and cash of course.
Mark Twain says that:
February is the most risky month to invest in stocks. As well as July, December, April, January, June, March, October, November, September, May and August.
I forget the exact order of the months as he quoted it but it does not matter. You should get the drift.
Again, from what I know, there are 3 types of stock investors.
1. Technical Analysts (TAs): They are the chartists, those who love playing around with stock graphs, may it be line graphs, candlesticks, moving averages, convergence/divergence, support, ceiling, resistance. They predict the next price movements, long-term and short-term through the charts. They are usually the ones with lots of technical terms such as gap down, doji, dead cat bounce (yes you should see one!), inverted cup and handle, head and shoulders, etc. Just look these up separately.
More often than not, technical analysts are also the day traders, who get in and out of stocks during the day. So timing is crucial and invested amount must be big such that minimal movements already earn you a lot, otherwise you lose on the charges per transaction. They are usually the short-term traders. In Filipino, they are usually called Tsupiteros (and Tsupitero.com is probably the only Pinoy blog who’s devoted to the PSE as a tsupitero. Lots of good reads from that blog. Idol.) Officemates of mine are predominantly TAs as well, buying basura stocks, stocks unheard of before or stocks they don’t even know what the company is all about, as long as the trends signal buy.
2. Fundamentalists: Most classic example here will be Warren Buffet and Peter Lynch. Fundamentalists are long-term investors, not easily swayed by the daily movements, but once they strike, they move the markets with big transactions and acquisitions. They look for the value of the company via AFS (audited/annual financial statements), projected income and growth, cash flows, debt-servicing ratios, market and competition observations, potential and a whole lot more of financial ratios.
Basically, their concern is present and future company value, vis-a-vis company valuation as reflected in the stocks: P/E Ratio and market capitalization. Lots of research and KYC is done by fundamentalists before buying into the company, and when they do buy, it’s for the long haul.
In time of recessions and stocks are down, TAs usually sell-off since the charts and indicators are on free-fall. NOTE though that dipping stock prices do not always mean the company is going down as well. And it is at this time that fundamentalists go company shopping and bargain hunting. On the other hand, when prices skyrocket to ridiculous and illogically insane levels already, fundamentalists slowly and silently pull-out while TAs will most likely just start to join the frenzy.
Yeah, you might have noticed the bias, but I try to be a fundamentalist. Since it’s a lot easier and friendly to those with little budget to risk. And it makes more sense to me, investing my hard-earned money in things I know. Returns will take sometime though.
3. Actuarians: A mix of both worlds, actuarians try to read the short-term trends and match it against the company valuations and AFS (which is always delayed by the way, year-end reports usually come out by April so you already have 4 months of delayed info: a risk for fundamentalists). It is very difficult to become an actuarian since there will be times that technicals and fundamentals will tell different stories. Some say there is no such thing as an actuarian.
Personally though, my goal really is to be an actuarian. Oh well, I try.