My name is Anders Bøgebeck. My mission is to help you become a better investor and trader. Why is this important? We are not only helping ourselves by becoming financially free. Along the way we help society by either allocating capital the right places or creating better products and services. That's why I want to help you achieve the life you desire!
To understand why this statement comes from someone like me, who likes making decisions based on facts, we must dig deep to understand, how the stock market actually works.
1. The stock market is not the economy.
First of all, the stock market is not the economy. You cannot say, that because the SPX (Standard & Poors 500) price is at all times high, then the economy is doing great. Indeed SPX will be at all times high, if annual inflation is 100%. That's because more money is chasing the same amounts of shares of a company. Some of the many technology IPO's (Initial Public Offerings) have seen their share price soar based on greed. They are really thirsty for cash but have never turned an actual profit. Increasing sales are what keeps them alive. The hope of one day, they will control their expenses and run a profitable business. We have also seen companies, which have an interesting business plan and then cash is diverted to them, even though they have no sales yet. When that is being said, I think it is a good functionality of the stock market. The idea of the stock market seen from a company's perspective is to attract investments. It also benefits society in general, because it makes small businesses with great products grow much faster than otherwise possible. But they can also fail big time and that is why the stock market is not the economy. The stock market does not tell anything about debt levels, comfort of living or work ethics in a country.
2. Do fundamental metrics work?
So does forward price/earnings work? Or profit margins? Or maybe price/book value? The answer is, that all these ratios WOULD matter, if you were supposed to buy a company, where YOU would be in control of the cash flow and budgets. Buying private equity where you become a board member or chief something officer, there it makes sense. But in the stock market, there could be a good reason why these ratios look good. Some bad news may have hit a company, and the share price tanks. Then the ratios look good, but the stock NEVER rallies, because nobody wants to own the shares of that company! That is why, it is much better to buy a great company, which comes out with great news all the time, at a "fair" price than buying the shares of a company, which have seen its share price drop by 80 %. Some people believe in these ratios, because it makes sense when taking ownership 100% of a company. If you buy a Mc Donald's, then the price is as important as what you buy. Just like when you are shopping. But when going to a casino like the stock market, forget about these ratios, really.
3. So how does it work?
What really moves the stock market is greed and fear. You would think, that some great news about a company always moves the stock price up. But that expected news could already be priced in. When a stock is in an uptrend, it is a signal that the whole market believes that the company will do better for the future. It could be right, it could be wrong, but no one knows the future. And it does not help to be a "specialist", because no human is capable of predicting the future. An expensive company can stay expensive for a decade and still see its share price going up. And the other way around is also possible, that cheap can get even cheaper and stay cheap for a decade.
4. What to do?
So what DOES work? My opinion is that you must make small bets on well-known companies, that are currently popular. When a company is popular or an industry, then investments will flow in that direction from all over the world. You must always ask yourself: What direction is capital flowing? I.e. "follow the money" principle. When you follow the money, traders will bid each other up and you need buyers to profit! At the moment of writing, when Tesla shares are at a key moving average price, greedy traders from all over the world will see this and bid up. That kind of scenario is a good bet. But there is no guarantee of anything, so always make small bets. Be prepared for the worst thing possible, it could happen tomorrow.
So when I refer to fundamentals, I mean a great, growing and popular company. Combine this with technical analysis and you will do good!
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