When It Is Gambling

Fundamentals of Market Investing by Adam J. McKee

Investors that buy and sell stocks frequently tend to like the process.  They are fascinated by it and love to share information about the companies they own or may want to own.  Some people just think that the stock market is a good place to get rich quick, so they don’t do their due diligence and study how it works or learn how the companies are really doing.  If you hear a coworker talking about Facebook being a “hot stock” and buy some based on that, then you are gambling!

You need to understand what is happening at Facebook that is creating value.  If you don’t do that, then you might as well go to Vegas.  Often, hot stock tips are bits of stock market history.  When a stock jumps up in value in a short period, it is said to have “run.”  A few stocks just keep on running for days on end, but those instances are very, very rare.  Often, buying on a tip will mean that you got a stock priced at the high point, and there is nowhere for it to go but back down.

Always keep in mind that the objective is to buy low and sell high.  You cannot buy stocks that are already high unless you are certain—based on company fundamentals—that it will go higher still.  Of course, there are folks that don’t study the underlying companies, but rather trade on the way certain numbers behave on graphs.  These technical traders are gifted in math and have a knack for statistics (the successful ones anyway).  The effective ones also spend many hundreds of hours learning how to interpret those graphs.  Unless you have the talent and the drive to learn the art, you had better stick to fundamentals analysis.  Anyone that can read, add, and subtract can learn to value companies on fundamentals.

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