It seems that every time I visit this thread there is all kinds of banter concerning P/Es, accounting principals and all the things that fundamentally go into buying or selling a stock. Well, here is another view: from the Smart Money web site........ " The Way of the Trader"
By Jonathan Hoenig
February 8, 2001
(Editor's note: With this column, we're pleased to
introduce our newest weekly commentator. Jonathan
Hoenig is an author and portfolio manager at Capitalistpig
Asset Management (Capitalistpig.com), a Chicago-based
hedge fund.) .......
.As a trader, I approach all markets with egalitarian indifference. I have no particular asset class or trading style. My faith isn't in stocks, but the bottom line. I won't say that fundamental analysis is completely useless — just darn close. Attempts to justify why a company should trade at 125 times earnings rather than 80 times border on the insane. And if you buy a stock that trades at a mere 80 times earnings (like say, Cisco Systems), don't kid yourself that you're buying a piece of the company's business — i.e., of its fundamentals — since it will take decades before your portion of earnings exceeds what you paid for it. The fundamentals are pretty unlikely to justify your purchase of a stock whose price-to-earnings ratio dwarfs your investment time horizon. All you're really doing is waiting for a greater fool to come along.
So forget the fundamentals and spare me the message-board banter. Let's talk technique and start by understanding what really moves markets — and that is the relationship between price and liquidity. More than any other factor, what moves XYZ higher is the liquidity situation for the company's shares. Got it? What moves the market — any market — is a disruption in the normal supply-and-demand situation for that particular security. Stocks go up because there is more demand than supply at current prices. End of story.
So I primarily use technical analysis — not because technical analysis is a guarantee of profit, but because nothing is more central to my goal of making money than the price action of a particular security. If you're going to attempt to profit from buying low and selling high, studying the price action itself seems like a logical place to start. I've got better things to do with my time than figure out how many Pampers Wal-Mart (WMT) is going to sell in the fourth quarter. Technical analysis is where the rubber meets the road. In short, a stock is good if I'm long and it's moving higher.
So if the fundamentals are out, what should you watch? What criteria would prompt you to buy a particular security? And once you've decided to buy, when is a good time to get in? And how do you practice sound money-management skills that can protect your downside while participating in the
upside? I'll approach these nuts and bolts of making the trade in my next column, one week from today. |
