Friday, 16 September 2016
Most investors equate stock analysis with making money in the stock market. In reality, these are two different things. Just because you are good at analyzing equities doesn't mean that you can make money off them. On the contrary, the more thoroughly you analyze stocks, the fewer are the chances that you will profit from them. Call it the stock-market paradox, if you will.
This doesn't mean that making money in the market is all about luck and fluke. It's not. But it's not about stock analysis either. The right answer lies somewhere in between. You do need to have some strategy for buying stocks, but analyzing stocks should not become an obsession. Stock-market investing is an art, not a science.
The market doesn't care about your analysis. It doesn't know how accomplished an analyst you are. All it cares about is certain triggers. For instance, companies that turn around see their stock prices racing. If your strategy can spot a turnaround in making, you can make money. Another trigger is rising profits and so on. Aligning yourself with what the market cares about is the secret of making money in the market.
Seeing everything from analytical perspective soon becomes an end in itself. The stock analyst forgets why he is there in the market. He is no longer making money but is getting deeper and deeper into a company's books. Naturally, this leads to analysis paralysis. The analyst can't act now. He just knows too much. Meanwhile, the stock keeps racing. Given that it has now gone up, the analyst enters into a dilemma if he should buy it now. The outcome is that he is left with reams of analysis but no money.
While the stock analyst can still keep analyzing stocks as a part of his job, he would do himself a great favor by leaving the money-making function to someone else.