Every day I hear from the experts on CNBC-TV and the radio gurus that the way to buy stocks is find value. One man's Rembrandt is another man's connect-the-dots and fill in the spaces. Valuation is like beauty. It is in the mind of the beholder.
If valuation is the key to buying stocks then there should be some kind of a formula to determine what is undervalued and over-valued to know when to buy and sell. In every industry there are formulas for standards of performance. For cars we want to know the zero to 60 miles per hour in how many seconds. For soap we want it to be 99 and 44/100 percent pure. For alcoholic beverages it could be how long it has been aged. And on and on.
Yet in the stock market we have no hard and fast set of rules by which to judge a company performance. Ah, and theres the rub! No matter how good a company performance might be it may have no bearing on the price performance of the stock. Finding a good company within a sector that is doing poorly is difficult. Yet one company can be making huge profits and sales, but the stock price is going nowhere. There need not be any correlation.
When you are in a bull market almost every stock goes up even the dogs. When you are in a bear market almost every stock goes down even the best ones. We ended an 18 year bull market in 2000 and almost without exception every stock headed for the exit until 2003.
Bull and bear markets follow relatively standard patterns. If an investor owns stocks or especially index funds during the bear periods he will be lucky to have broken even at the end of the cycle. Cash in the mattress will outperform market returns while the bear is in charge. During bear times there will be periods when the market will have a nice advance that can last for many months leading investors to believe the bull has returned. These intermediate rises can ultimately bring many investors back into the market only to lose it when the rally is over and true valuation returns.
During any historical 10-year stock market period there has always been a bear market. Many of them have hurt investors with losses of 40% and more. No one knows when the next bear will come out of his cave to ravage stock investors. There can be many reasons for a sharp or sustained market break that may be apparent, but the market continues to advance. Logic does not give the answer.
Individual investors or their money managers must have an exit strategy. Without a solid plan they will lose again as they did in 2000. Investors must ask their money managers and financial planners what they will do when the next bear appears. If there is no solid strategy a different manager should be found immediately. Without it profits and principal will disappear.
No one knows exactly where the top or bottom of a market move will occur. Have an exit strategy in place at all times.
Al Thomas' best selling book, "If It Doesn't Go Up, Don't Buy It!" has helped thousands of people make money and keep their profitswith his simple 2-step method. Read the first chapter and receive his market letter at http://www.mutualfundmagic.com anddiscover why he's the man that Wall Street does not want you to know. Copyright 2007 All rights reserved