The Stock Market - Simple Strategies For Investing
The investment strategies I am going to mention are the Contrarian Investment Strategies.
These essentially involve choosing stocksthat a few investors want to buy but the underlying businesses are strongin terms of competitive advantage, market share, copyrights and patents and so on.
They also are unlikely to go out of business.
These strategies basically exploit the psychological weaknesses of investors.
In other words, they are prone to overreact to good and bad events.
The causes of the weaknesses are limited attention to the whole situation of the event as we can only process limited information and too much of it can overwhelm us.
Other causes are herd behaviour, overconfidence, over-pessimismand noisy information.
Noisy information is where humans process public information, which is incomplete since certain and important information is kept secret, differently and subjectively resulting in inaccurate information regarding the markets.
This in turn causes companies to be out of favour and undervalued by the market, which is shown through the following financial ratios:
Conversely, the stock must have dividend yield that is above sector average.
You have to take into account other factors which show the signs of a strong business.
These include but not limited to current ratio of at least 1 so that the company can pay off it's short term debts and making sure the dividend can be increased and sustained in the future.
You should sell the stock if one or more of the ratios reach the market average and replace with another contrarian stock.
You will also need to learn the ways you can avoid the pitfalls of investor psychology.
Note that crises and other bad events such as the 2007 credit crisis happen regularly.
This does not mean the end of the world for you.
Please note that the strategies you choose take time to master.
Finally, I want to mention that the strategies can be tailored according to your preferences.
These and more information regarding the above can be found in the book called Contrarian Investment Strategies: The Next Generation by David Dreman.
I have bought this book from Amazon UK about five years ago.
This is the most brilliant investment book I have ever read.
Dreman backs up the reasons why the contrarian strategies work so well most of the time.
He even outlines various contrarian strategies the investor can use depending on their preferences.
The bit I find the most interesting is that the same principle also works on the other financial ratios as well as his original strategy.
He help readers to grasp the knowledge of behavioural finance through demonstrating various historical and modern examples of irrational behaviour of humans, from the green and red casino room analogy to the Great Depression.
Efficient Market Hypothesis is dealt with a killing blow in this book.
I find that when I pick potential stocks to invest, I refer back to this book often for guidelines.
These essentially involve choosing stocksthat a few investors want to buy but the underlying businesses are strongin terms of competitive advantage, market share, copyrights and patents and so on.
They also are unlikely to go out of business.
These strategies basically exploit the psychological weaknesses of investors.
In other words, they are prone to overreact to good and bad events.
The causes of the weaknesses are limited attention to the whole situation of the event as we can only process limited information and too much of it can overwhelm us.
Other causes are herd behaviour, overconfidence, over-pessimismand noisy information.
Noisy information is where humans process public information, which is incomplete since certain and important information is kept secret, differently and subjectively resulting in inaccurate information regarding the markets.
This in turn causes companies to be out of favour and undervalued by the market, which is shown through the following financial ratios:
- price to earnings (P/E)
- price to book value (P/BV)
- price to cash flow (P/CF)
- and dividend yield (in percent).
Conversely, the stock must have dividend yield that is above sector average.
You have to take into account other factors which show the signs of a strong business.
These include but not limited to current ratio of at least 1 so that the company can pay off it's short term debts and making sure the dividend can be increased and sustained in the future.
You should sell the stock if one or more of the ratios reach the market average and replace with another contrarian stock.
You will also need to learn the ways you can avoid the pitfalls of investor psychology.
Note that crises and other bad events such as the 2007 credit crisis happen regularly.
This does not mean the end of the world for you.
Please note that the strategies you choose take time to master.
Finally, I want to mention that the strategies can be tailored according to your preferences.
These and more information regarding the above can be found in the book called Contrarian Investment Strategies: The Next Generation by David Dreman.
I have bought this book from Amazon UK about five years ago.
This is the most brilliant investment book I have ever read.
Dreman backs up the reasons why the contrarian strategies work so well most of the time.
He even outlines various contrarian strategies the investor can use depending on their preferences.
The bit I find the most interesting is that the same principle also works on the other financial ratios as well as his original strategy.
He help readers to grasp the knowledge of behavioural finance through demonstrating various historical and modern examples of irrational behaviour of humans, from the green and red casino room analogy to the Great Depression.
Efficient Market Hypothesis is dealt with a killing blow in this book.
I find that when I pick potential stocks to invest, I refer back to this book often for guidelines.