Fundamental, technical, and timing analyses composed together

How to Become a Successful Investor

Investing analysis Investing in the stock market is one of the most profitable and the riskiest kind of investments. Nowadays, in most cases, investment allocation is a result of flowing cash to the assets where the current return and risk are satisfied a certain investor expectation. There are some differences between such participants of the stock market as investors and traders. However, a classical investor and trader are both aim at gaining money. History evidences the different cases, when an investor started with a small amount of money and eventually became very rich, or on the contrary, when a millionaire lost all investments in the stock market and became poor. What is the most important quality that separates the winners from the losers in the stock investing? The answer is simple - it is knowledge in investing, either that is based on collected wisdom by other investors or gained through making own mistakes. Anyway, the following basic principles could be useful to remember:

  1. Never invest all your money in the stock market, especially, if you are a beginner. Common recommended portion of invested money in stocks is from 25% to 50% of your total budget.
  2. Never invest all money in one stock - always diversify among several stocks in different sectors.
  3. Always watch closely general market conditions, especially, when bear market is about to start. Be prepared by selling most holdings in advance.
  4. Never rush with investment solution. Carefully watch financial quarterly reports, news, and macroeconomics trends before making any decision.
  5. Never let your emotions prevail over a rational disciplined approach.
  6. To improve return/risk ratio, use reliable software tools that embody the investors' concentrated wisdom.
  7. All stocks are volatile without exception. There will be always a certain probability that something suddenly will go wrong with any stock. Even the best stocks can depreciate.

USA recent researches show that an average investor has around $250,000 investment assets and more than half uses brokerage advices. Investing is popular for both genders almost equally. For the last decades, the expectation of most investors decreased from about 30% to about 10% of annual return on investment. Most investors prefer a long-term type of investments with less than five transactions per year. Not everyone is able to succeed in investing. Usually losses in investing happen because of lack of knowledge, over-confidence, impatience, greed, fear, and different delusions. An experienced investor knows that there is a direct proportion between time spent to increase investing skills and return on investment.

Self-education can help to improve investment skills. As a rule, after reading tens of books about investing, investors come to conclusion about importance of fundamental analysis and interpretation of technical analysis indicators. Also investors need to read quarterly financial reports, watch market conditions, try to predict macroeconomics trends, etc. How much time all these take? Fortunately, there is an optimized approach that allows investing time effectively to give a maximum return. As an example, to reach excellence in driving it is enough to read one book, get driving training, and regularly practice. Something similar is possible with investing skills, except that a few books will be required. The following books could be good for improving the investment competence:

  • Lessons from the Greatest Stock Traders of All Time by John Boik (good introduction in investing)
  • Stock Investing For Dummies by Paul Mladjenovic (very useful and important to read book)

The following books by William J. O'Neil:

  • How to Make Money in Stocks
  • 24 Essential Lessons for Investment Success
  • The Successful Investor

These books are easy and enjoyable to read. Some experts opinion can be contradictory. For example, some authors offer using such method as "averaging down". This is a method to reduce the cost of purchases. "Averaging down" means to buy more stock of a given issue at a price less than the last purchase successively as the price declines. However, other authors insist that such method is bad. They suggest sell any stock if the market price drops below around 8% - 10% of the purchase price. The problem of this contradiction is that averaging down works well in case if decreasing price is a temporal correction but not a sign of declining business and long-term dropping demand for the stocks. How to distinguish correction from alarming signal? The answer is - to evaluate exactly a real value of company and its stocks, as well as, understand current market condition and know macroeconomic trends.

Nevertheless, all books about investing are useful to a certain extent. The next important step is training. It can be done without money, in a simulation mode. Then it will be naturally to use real money for learning lessons more effectively. A regular practicing is important. However, it is hard to acquire good investing skills fast. One of the reasons is that the market is not always the same. It can be bull or bear market with different corrections. Some market cycles can be very long. For example, a real bear market happens seldom, around once in 12-14 years. Even so, it would be useful to experience a bear market, at least once.

The first step in investment analysis has to be fundamental analysis. The fundamental analysis allows predicting a long-term stock performance. It depends on many factors: company profitability and its growth, assets liquidity, market stock value relatively to earning, book value, sales, etc. Stock price also depends on news, analysts opinions, and different ratings. Such factors can be many and it is clear that each of them differently exerts influence on stock performance. For example, statistical research of hundreds of companies for period of several years reveals that the more number of bad parameters belong to the company and its stock, the riskier investing in it. In general, any company and its stock can be considered as a system and the best model of such system quality is a combination of all influential factors with different weights.

Using technical analysis additionally to fundamental analysis can increase chances of successful investing. One of the best software tools to perform technical analysis is MetaStock. However, since there are hundreds of technical indicators with different interpretations for each of them, it is not easy to complete a full-scale technical analysis. Some investors use only some of indicators that are good from their point of view. In general, each indicator has its own ability to predict stock price. Ideally, it would be good to allow computer software to define the current ability of indicators in prediction of stocks prices and assign each of indicators corresponding weight. Then logically, to maximize accuracy of prediction it would be good to combine all signals from all indicators. Besides fundamental and technical analyses, it should be taken into consideration that price of any stock goes up and down depending on other many factors, including general market and sectors conditions. That means there should be an optimal time for buying stock (as well as for selling). Therefore, timing analysis is also important.

To summarize, it is better to use the software that takes into consideration fundamental, technical, and timing analysis together. One of the computer programs on the market with such capabilities is Fundamental-Technical Analyzer by Addaptron Software. It combines the results of fundamental, technical, and timing analysis into a single composite rating using a special algorithm. The software defines prediction ability of each technical indicator and then combines signals from all of them into technical analysis rating using Artificial Neural Networks. The main output is the composite rating, i.e., the list of stocks from the worst to the best. Due to a fast and automatic data processing, it enables watching hundreds of stocks. It also has other useful features, such as, calculating optimal cash reserve depending on the market condition and forecasting stock price on the basis of cycles analysis. You can find other software tools; the best way to choose the right one is to try their demo versions and read software descriptions (what data used and how they are processed).

January 2008

Copyright © - Alex Shmatov

As Featured On EzineArticles




! All info found on this website should not be construed as investment advice in any way. Be aware of the risks involved in stock investments. Always do your own research or/and consult a qualified investment advisor before making any investment decision.


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