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There are many approaches to investing in the stock market. Perhaps the most
widely known among individual investors is the "fundamental" approach to
picking stocks. Peter Lynch is the typical example of an outstanding
fundamental investor. He examined the underlying economic business of a
company, and if he liked it, he would buy the stock, believing that in the long
run, the stock would eventually reflect its underlying economic value. The idea
is that you buy and hold a stock, even if the stock price is going down,
because you are confident in your fundamental knowledge of the business. The
bull market of the late nineties misled a lot of people into thinking the stock
market was going to go up forever, and all you had to do was buy stocks and
hold them.
Well, the last year has proven to be quite a wake up call. Did you know that as
of July 1, 2001, if you had been buying and holding the S&P 500 on a
monthly dollar cost average basis since the mid-nineties, then you are just
about even with your money? That's five years of investing in the market and
nothing to show for it! You could have made a lot more by simply putting your
money in a bank account. If you were even a little bit more aggressive and
picked up stocks like Yahoo! or, god forbid, eToys (which once had a
"fundamental" Wall Street Analyst recommendation suggesting it would be worth
$10 billion dollars), your net worth has taken a big hit.
At Hot Stix, we believe in an all-together different approach to investing in
the stock market. We fall into the school of thought called "Technical
Analysis." Contrary to fundamental analysis, technical analysis refers to the
study of the action of the market itself as opposed to the study of the goods
in which market deals. The technical investor could care less about
understanding the business of a company. In fact, the technical analyst will
argue that any fundamental information is already priced into the stock, and
that what is going to move a stock only has to do with what is going to happen
in the future. Now, if you're pretty good at predicting the future, you might
just want to stick with fundamental analysis. But if you are like most everyone
else, in today's global-networked economy, where everyone and every institution
has direct access to the stock market and information flies faster than a
speeding bullet, even superman would be hard pressed to keep up to date on the
fundamental story of just one company, let alone a whole portfolio of stocks.
Our belief is that the stock market is nothing more than a never-ending battle
between those who think a stock should be going down (the bears) and those who
think it should be going up (the bulls.) Both parties are constantly engaged in
this battle, and while no one may be able to know all the reasons for why each
side acts the way it does, the results of their actions are etched clearly, and
forever, on a stock chart. What's really interesting, is that this same game of
bulls v. bears has been going on for hundreds of years, leaving us with quite a
record of how these battles evolve and how they play out. And while there might
have been amazing changes in technology, the fundamental drivers of human
behavior in the stock market have not changed. People are still possessed by
fear and greed in the 21st century, just as they were in the 1890's. It may be
trite, but that old cliché holds true; the more things change, the more they
stay the same.
There are many benefits to the technical investing approach, including, but not
limited to:
1) Ability to profit in both a bull and a bear market.
2) No worrying about a great market crash.
3) A strategy with over 60 years of solid historical performance.
4) The ability to maintain the opportunity for significant wealth creation
while minimizing risk.
5) Peacefulness and enjoyment of investing with the emotion and ego removed
from the decision making process.
Now, it wouldn't be fair if we didn't present both sides to the argument.
Here's the downside:
1) Requires a bit more active involvement.
2) More accounting work when it comes to tax time. (While it is true that the
short term capital gains tax is greater than the long term capital gains tax,
we do believe that technical analysis generates returns above and beyond any
saved by a smaller tax bracket).
As much as we would like to take credit for the philosophy we practice here,
alas, we are mere mortals standing on the shoulders of giants. The most famous
work done in technical analysis was begun by a gentleman named Charles H. Dow.
Over 100 years ago, he left a local small town rag to found a newspaper called,
"The Wall Street Journal." Mr. Dow, in 1884, made up an average of the daily
closing prices of eleven important stocks and began to record the fluctuations
of this average.
Rolling out the Random Walk theory long before it was so named, Mr. Dow
believed that everything known about the future business of a company was
already priced into its stock. Therefore, he felt this tool was the best
predictor there could be of future economic activity. And, by choosing the most
important stocks in the United States to compose his index, he could determine
where the economy of the country was headed. A nice tool for a newspaper
focused on such an endeavor. Mr. Dow's work led to what is commonly referred to
as the Dow Theory. This Dow Theory, which started to include investigations
into the trends and cycles of the stock market, created the foundation for what
are now the thousands of types of technical analysis approaches practiced in
the market today.
If you are interested in further reading and understanding about the foundation
to our practice here at Hot Stix, we highly recommend the "Bible" of Technical
Analysis, the 8th Edition of Technical Analysis of Stock Trends by
Edwards & Magee. Originally published in 1948, this tome hasn't changed
much in all of those years. It's truly a testament to just how much, as Mr.
Edwards said in 1948, "the stock market goes right on repeating the same old
movements in much the same old routine. The importance of a knowledge of these
phenomena to the trader and investor has been in no whit diminished."
Technical Analysis of Stock Trends
Robert Edwards and John Magee
At Hot Stix, we don't believe investing successfully requires complexity. We
strive to present our investment approach in as simple a manner as possible. We
look for great setups, we protect our downside, and we make profits. And we do
this again and again and again. The market is dynamic and constantly changing,
but our approach gives us the flexibility to follow and flow with the major and
intermediate trends of the market. This is why computer trading programs will
never work.
While there is a certain "art" to the application of the theory of technical
analysis to the real world, we maintain the strictest discipline in adhering to
our fundamental principles. First and foremost of these, is to always remain
objective. If you ever let emotion make your decision as an investor, you are
destined to lose money. Staying objective in our actions is the foundation of
everything we do. In fact, we have an obsessive compulsion with knowing where
we exit a trade if things don't go our way, and that obsession is fundamental
to our investing philosophy.
Let me give you an example. Let's say that Microsoft has been trading between
80 and 90 dollars a share for the last few months and has established a clear
trading range. Perhaps I'll decide to buy Microsoft on a breakout of this
trading range. So I'll enter an order at 90 1/8, knowing that before I buy it
at 90 1/8, that I will sell it at say 89. Yeah, it happens a lot where I'll get
shook out of a trade only to see it go on and do what I thought it was going to
do and, and sometimes I'll be tempted to not remain disciplined to my charts.
But I still do it, because over the long run, I know that this disciplined
objective approach to trading is highly successful.
See for yourself. Click here to review our
performance.
Everyone here at Hot Stix has a passion for the stock market. We have many
years of experience trading in both rising and falling markets and we know our
approach works. That's why we created Hot Stix. We invite you to become a
member. We are so confident that joining Hot Stix is an investment that will
net you high returns, that we have removed all the risk. That's right, you can
now take a 30 day FREE trial and see if the service is right for you.
Click here to get started now.
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