Wednesday, July 08, 2009
In the interests of full disclosure, I will start by saying that I’ve never made any significant money in the stock market which could not be duplicated by moving funds around in savings accounts / GIC’s and other instruments that are guaranteed to return something above the principle no matter what. With that said, I’ll now proceed to give some investment advice for you to mull over in your mind. Whether we like it or not, the universe is mathematically based on the number 2. The number 2 as a fraction is ½. The fraction ½ means that everything tends to even out over Time. Evening out over Time, which is the 4th dimension, means that while you and I may have different adventures in life, our lives tend to even out in terms of results. Some people may have horseshoes and some people may never get anything right, but about 68% of us end up in the middle of the old Bell Curve as average. The primary goal of investing is finding something that is above average. To start, stocks are broken out into different sectors such as financial for example. The theory behind these groupings is that while these groups average out like everything else, they tend to go up and down like a wave over time just like your and my life adventures. This behaviour is the basis of the next great invention called diversification. Diversification means that if one group of stocks is going into the toilet another group is climbing out of the toilet so spread your money over the sectors . Overall you will once again tend to average out over ½. The last great invention is Sector Rotation. If you are an all eggs in one basket sort of gal or guy and since nothing lasts over Time, Sector Rotation means that if your once hot sector is going down like the Titanic then find the lifeboat which is another sector. Now let’s suppose you find the right sector. Not all the stocks in that sector are going to make money. Once again about ½ on average. If the sector is hot its’ returns on average will be above average or once again above ½. The trend line which is all the stock increases together should have an upward trend line. The optimum trend line angle is 45 degrees which you will never meet but the closer the better. The first thing is to calculate the average returns for that sector. The next step is to find the sector stocks that are going up. This might sound silly but we live in a real world where we can only invest in concrete things. If we could afford to invest in all the stocks or some scheme which represents all the stocks we are going to average out at ½ faster over time. The next step is to find 3 stocks that are related in some concrete way beyond a sector relationship that are increasing since the universe tends to stabilize around the number 3. If you can find 9 stocks that are primarily related in groups of 3 that are trending up in terms of stock increases your sector is healthy over the immediate future. If you can’t find any bonded stocks in groups of 3’s the sector is starting to fail. The failing benchmark fractions in terms of stock price decreases are ¼ and 1/3rd . The positive benchmark fractions in terms of stock market increases are 2/3rd and ¾’s. If stock market increases start to double, this result will start to attract competitors for that company’s markets, since market product profitability is reflected eventually in stock prices.