The economy, market and company must all say yes or we answer no!
This post continues the White Top View series: Playing Market Odds. The series discusses how superior investors play market odds and avoid common investment errors. Links to all parts of the series are at the end of this post. This Part 3 of the series, covers how superior investors wait for three positive signals before investing. The economy, market and the company information must all give positive signals or we say no to investing.
Before investing we research the facts on the economy as well as the market and company. That gives us three layers of useful information.
Three layers of investing information tips the odds
Look at the economy
Look at the market
Look at the company
Good research helps produce decisions that give us favorable odds. Controlling risks and getting favorable investment odds accelerates our portfolio performance. That puts us well ahead of alternative strategies like averaging down that produce mediocre or poor outcomes.
1. Look at the economy
We begin by looking at the economy. The keys to the big economic picture are trends in jobs, cars and housing. We check the 3 and 6 month trends.
All are readily available by using Google. In minutes we can gather this key information. Up is good, down is bad. When all three trends are positive, the economy is giving us our first yes!
It could be a good time to buy. Check off one yes!
Up is not forever
When economic facts, not just rumors, go negative, things can change. To check, we follow the trends.
Should a trend falter, we can hold off on buying. If all three, jobs, cars and housing turn, we may have good reason to exit the market.
Bad economic events do happen. Declining economic results profoundly affect stock markets. So when we see convincing and negative economic facts, the economy could be saying, selling time has come!
Don’t panic buy or sell
Being prudent, wait for a trend to turn negative before selling on negative economic news. Most often a negative or poor economic report is an outlier. Most likely the next report will be positive, and so the positive trend will continue.
However, not always, it could be the start of a down trend. If so, we look further, but do have selling in mind.
Good and bad stock market noise needs filters
The economic news is never all good or all bad. Generally, the economic balance has a favorable tilt, but never gets 100% positive. We can continually consider and judge an unending parade of economic factors and data. When the balance tips to produce negative trends, sell, when trends stay positive, stay in the market or buy.
Although it is never all positive, generally speaking, trends move up. Currently, we are in a weak but positive general economic outlook. The first layer of our decision matrix, gives us a positive signal. We are in a period of economic growth. That puts the odds in our favor and gives us a reason to buy.
2. Look at the market
Secondly, we look at the stock market where we are considering making our investment. In North America, the markets have been good. What’s not to like?
The tales in Europe and the emerging markets differ. For today’s discussion, we limit ourselves to the Canadian and American markets.
An O.K. or rising market is normal and a positive sign. This happens during periods of economic growth that gets reflected in the market. We can be confident that the trend will continue. That is, it will continue until the economy stops expanding!
As a rule, when trends in the economy has told us yes, we can be confident that the stock market will also give us a yes! But not always, and not necessarily when we want to buy.
During stock market trends, price dips and corrections are normal and regular occurrences.
Markets dip, correct and fall
Markets only fall by significant amounts for good economic reasons. Daily, weekly and monthly gyrations, turbulence, dips and even corrections are normal. The favorable trends soon return, when the economy continues to expand.
Like riding favorable waves while surfing or sailing, we benefit and enjoy our ride on market waves. And just as we sail through the dips and troughs at sea, riding through market dips and corrections are opportunities. Think of them as opportunities to buy stocks on sale!
This lets us think of stock market price dips as buying opportunities to boost our total returns.
Positive economy means positive stock markets
There are many economic issues and troubles worldwide but for the time being, on balance, international economic influences on North American markets remains positive.
As always the noise level in markets remains at full volume. It is all normal North American market racket! On balance, the big economic facts are positive. So the market has been good. With the market going up it tells us, yes, it is time to buy and stay in.
Our second layer or look has been positive which confirms that dips and corrections are buying opportunities. We can use them as open doors to larger gains. This second layer or look tells us that definitely the odds favor us!
Before passing on all other markets keeping a general awareness of them gives us useful information. The international markets provide valuable indicators of economic progress. Or at times, when that progress is faltering. That knowledge raises our awareness of both good and bad factors that could be coming to our economic future.
With our second yes in hand, we next turn our attention to the individual company.
3. Look at the specific company
Accepting that 1. the economy, while not excellent, is favorable and 2. markets are remaining positive we look to step 3. the company that interests us.
In such a positive environment we can confidently look at specific companies as we want money-making winners to ride.
The positive environment puts us in the mood to take a bite and munch on some shares of good companies that will make us money. That investing decision comes after completing the important third step of subjecting the specific company to some basic investigation.
Investors want established, well-managed, growing, money-making companies that they can understand. When you get to yes on all counts, buy!
That third step remains as important as the others. Investing means economy, market and company all say yes, by making sure all give positive signs we control risk and keeps the odds in our favor. All say yes, or we say no!
Investors wrap their decision in facts
Making ourselves aware of the big economic picture, the stock market picture and of our individual holdings lets us make good investing choices. Doing our research homework, makes us ready for any contingency.
Then when facts change and some panic, we are able to make good decisions. Most importantly, being prepared by doing that homework positions us well to make timely decisions and seize the day when opportunity knocks.
To invest well we must become aware. We must watch. Finally, we must have ourselves psychologically ready and able to take needed action.
In Part 4 of the White Top View series, Playing Market Odds, we discuss that important third step. Researching to learn about a specific company before buying any shares. Links to all seven parts of the series are at the end of this post.
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These discussions and information intend to help you better understand markets and investing. I am not a financial or investment advisor; opinions are for informational and educational purposes only and are not intended as investment advice. For syndication of the site or blog, please contact info@WhiteTopInvestor.com. © 2014 Bryan Kelly
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Links to all parts of this series follow: