By David McEwen
Monday 26th February 2001
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One way to out-think the market is to ignore traditional wisdom about investment. Instead, why not apply some lateral thinking to some of those familiar investment cliches and come up with some phrases to replace them?
Here are some examples:
Old cliche: 'Buy low, sell high'.
If one could always buy shares at their low point and sell at the absolute peak, then fabulous riches would result. The trouble is, achieving this goal is extremely difficult. How can one be sure a share has bottomed, or peaked? For that matter, what do the terms 'low' and 'high' really mean - they are relative terms.
New cliche: 'Buy high, sell higher'.
Some companies are simply better at making money than others. These businesses have superior management, operate in fast-growing sectors and stick to their knitting. Naturally, such companies generally produce steadily improved profits and appreciating share prices. This is not to say investors should buy shares simply because they have gone up. Rather, work on the basis that, if a company is good and its prospects are sound, then its share price is likely to be higher in the future than it is now.
Old cliche: 'You don't lose money until you sell'
Many investors react to shares that go down by holding on, hoping that the price will rebound. Unfortunately, not all shares that go down eventually go up again. Some never recover their former highs and others go right out of business.
New cliche: 'Take the hit and get on with it'
In other words, it helps if you know why a share should be sold. A useful guide is whether the reasons why you bought the share have changed. If there is a decline in market conditions, an increase in competition or a slowing of the economy, then it may be time to limit your losses on a weak share by selling. This allows you to put the money somewhere more productive.
If there is no change, then you need to decide whether you initial research was flawed or if the market is wrong.
Old cliche: 'The trend is your friend'
Selling into a rising market or buying into a falling one can lead to regret and low profits. On the other hand, believing that the past always reflects the future can be even more harmful. As we saw with technology shares last year, once a trend turns the outcome can be sudden and traumatic.
New cliche: 'Climb the ladder and pick those cherries'
It is possible to lose money in a bull market and make it in a bear one. One way to avoid the former and achieve the latter is to 'cherry pick' the best shares. Ascending the ladder of success requires plenty of research and experience, however. If that doesn't appeal, then play safe and try an indexed or managed fund.
There are sure to be many more would-be cliches we can invent. Contributions from readers are welcome and I may publish some of them in my next column.
David McEwen is an investment adviser and author of weekly share market newsletter McEwen's Investment Report. He is commissioned by the New Zealand Stock Exchange to write an independent personal investment column. He can be reached by email at firstname.lastname@example.org.
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