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Individual Investors
Should Focus on the Long-Term
by Douglas GerlachAmerica's first stock market began beneath a tree near New York's Wall Street in the 1700's, where gentlemen gathered to make business deals. Agreements were reached, deals were made, and a handshake sealed the offer.
Today, hundreds of millions of shares of common stock change hands each day, as individuals and investors buy and sell bits and pieces of America's business. More likely than not, buyers and sellers are matched through computers, a far cry from the face-to-face arrangements that were the beginning of the American stock market.
Outside the exchanges, the computer has had an even greater impact on the market. A large part of the daily volume on the major exchanges is due to traders who hope to make a small profit by taking advantage of small discrepancies in the pricing of securities, or who are able to buy a stock as soon a favorable analysts report is issued and who hope to profit before the inevitable runup. The instantaneous access to information that financial institutions have gives them an enormous advantage over the individual investor when it comes to short-term trading. How can an individual compete?
Most people don't have the time necessary to be a trader, watching the market every second, able to react instantly to to changes in the market. Most people just end up following (when they're trying to get the jump on everyone else) and barely eking a profit for their endeavors.
Technical analysts use their computer to chart a stock's price and volume over a period of time, in an effort to find patterns that indicate when to buy and when to sell a stock. Sometimes, though, it seems that interpretation of these charts is more of an art than a science, and sometimes the patterns are more easily discernible in hindsight rather than in real time. Diligence is also required to know when the signals are right to sell a holding.
Some investors rely on tips from friends, family, brokers, or they buy and sell merely on hunches. This is usually one of the fastest ways to lose a bundle in the market.
The average investor just doesn't have time to devote hours a day to following the market. Fortunately, they have an alternative -- and can still become successful and profitable investors. By spending just a few hours a month, investors can build a successful stock portfolio, one that will stand up over the long term and deliver excellent returns.
Over the history of the modern stock market, one trend is clear: the overall market keeps growing and growing. The setbacks have been relatively minor and short-lived, compared to the tendency of the market to grow year after year. Statistics have shown that even if you invest at the peak of the market year after year (which would probably be pretty tough to do), you would still show a decent return on your investment, much higher than nearly every other kind of asset.
That's why most individual investors should focus on growth for the long-term, and concentrate on fundamental analysis in building a portfolio of stocks. Fundamental analysis is simply buying hot companies, instead of hot stocks. The current mania in Internet stocks is an example of how not to invest in the market if you're a fundamentalist -- these companies typically have no earnings, lots of debt and no proven management track record. While many of these companies will become and remain profitable, buying into any mania is still speculation and not investing.
Using fundamental analysis, and with a long-term perspective, it's possible for any individual to identify a diversified and balanced portfolio consisting of the stocks of quality companies. Once selected, these stocks can be held year after year, and any downturn in the market would likely signal a buying opportunity. Maintaining a portfolio like this would only require a few hours a month. (If you're not willing to spend at least a few hours on stock research and analysis each month, you should probably keep your money in a no-load Index fund and call it a day.)
Here are some guidelines for long-term growth stock investors:
- Buy good, strong growth companies with proven track records. Don't buy concept stocks, IPO's, turnarounds, merger candidates, or industries.
- Don't try to make a quick buck. Slow money is worth just as much! Invest with a long-term perspective.
- Don't invest on tips. Do your homework and find out the facts before you buy a stock.
- Above all, invest, don't speculate! And don't try to compete with the professionals.
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