For most investors, the process of producing a stock is, choose one of two basic scenarios. The first is simply that down with a subject so boring in this topic until you get to a single share. The second scenario completely bypasses the whole process, because the equity pick a company based on news or announcement. On the surface, the two scenarios have a certain obvious logic behind it. However, actual results may induce an investor to invest, lookhas for a third method in the search for ideas on how the first two processes often do not deliver the expected results enough to blind them.
The errors in the Theme-Driven Process
One of the classic examples of a thematic selection process is the search for a beat has that is deeply undervalued. Superficially, the theme makes sense - buy a stock, temporarily undervalued, before it again, or returns to its reasonable price. The mistake here is that it is one of theone-dimensional view of the assumption that there is obvious logic in all points in time. However, it is not. Let's look at an example.
One of the most common starting point for investors looking for good ideas-value is the P / E ratio. Depending on the P / E lower, the "cheaper" the stock. And if a company a significant drop in the P / E, then most investors would say it is a good buying opportunity. But the issue is more complicated. Take Dell Computer (DELL) forInstance. At 31 December 2004, the P / E was 34.83, while the shares trade at 42.14. Of 11 November 2005 was the P / E of 22.79. The 34.6% decline in P / E had many investors think that it would be a much better time to get in Dell shares at the then current price of 29.40. From 12th May 2006, the P / E was 17.26, and shares was 25.20. Any investor who bought at the end of 2005, ended based on a low P / E of losing 14.3% on their investments in a few months. In thisCase 'low P / E "from all makes sense. However, there was obviously more to the equation, which only a cheap stock.
In this case, the fact that the P / E kept dropping highlights one of the main problems with a theme-based approach. Dell shares were in fact cheaper end of 2005, when they were in late 2004, but the stock is still falling like a stone. The strategy of buying cheap stocks was not faulty - it was the topic itself has been on an assumption that get cheap stocks. The theme,However, ignoring the fact that the stocks and not be able to develop a negative momentum, not even the issue recognize an absolute P / E values measured using as entry points. Clearly a P / E of 22.79 was not cheap enough to adapt to the market, but the topic does not account for this idea.
The issue should turn on each investor in the stock takes generalizations to ask is whether or not the generalization is incorrect. Obviously, no method is perfect, but at least it is complete, with dark sideminimized?
The Flaw In The Event-Driven Process
The event-driven process is notably different than a theme-driven process. Rather than taking a broad idea and finding a stock that fits within that mold, an event-driven selection process starts and finishes with a specific stock or company in mind. Classic examples of even-driven picks are buying stocks after strong earnings are announced, buying after a key FDA approval, or buying after a positive news story in a high-profile
Let's go back to Dell Computer scenario, many investors were thrilled that Dell hit record levels (1.02 billion) in September 2005. The results rounded off what was almost a perfect five-year streak of improving results, and the stock to go anywhere, but, Right? In September 2005, Dell's shares reached as high as 41.02. By the end of April 2006 was 26.20 on Dell shares. Good news for the company was not good news for shareholders. It was quite the opposite, in fact. One could argue that the following quarter earnings dip was the culprit, and that the pessimistic view was the reason share declined. Maybe this is the case, but it does not explain the fact that Dell appeared to result back to 1.012 billion in the quarter that even DellShares are still well below the 40 level, they were the result was only a fraction higher, at 1.02 billion. The point is, earnings reports have clearly shown inconsistent results for the owners, even if the message is consistent.
Favorable write-ups in magazines as problematic results. In the 20th February 2006 issue of Barron's, published the blurbs on the cover:
1) Texas Roadhouse (TXRH) looks tasty. "
2) "Toll Brothers (TOL) is a buyagain. "
Between 21 February (the first trading day that the message was actionable) and 12 May 2006, following the advice would be more than disappointing. Texas Roadhouse shares fell by 13.3 percent. Toll Brothers fell by 6.2 percent.
Could the two bullish recommendations have just a very unexpected run of bad luck and marketwide been sold? Perhaps, but not likely. The S & P 500 rose only slightly (+0.3 percent) over the same period. So, the two stocks inQuestion no major obstacles to overcome, it was simply ill-advised timeout (or fully mobile).
And what if three months not think the time frame of the journalists? Good point. The problem is that in both cases, the only stated time frame was a vague reference to a calendar year. There were no specific price targets or stop-loss price. Since the stories ran, there was no follow-up in Barron's, either stock.
An alternative method
Instead of cleaning theNewspapers and absorb the constant flow of information from television, an investor would be well advised to choose stocks from a completely bottom-up approach. In simple terms, means that the reversal of the process by which you shares. A specific approach could ......
1) scan and sort functions for the shares that are higher at the beginning (Table Action trend)
2) Check to see the fundamentals, whether it justifies further growth
3) Scan for these stocks, whichrather, the "cheapest" (P / E-comparison)
4) Compare individual stocks to the broad sector - it is in the fight against the current?
5) Make sure that the market is in fact higher, since a bear market can drive even the best stocks reduced.
You will notice that the steps may be used not so much different than the top-down approach, most investors already. What is different today is the order, which ultimately means that the order in which you weed out stocks you will become a guideentirely different list of potential buy candidates. What you are likely to find names that have never heard you. That's fine - those are usually the best buys. Shares have jumped around the media are always under great let-downs, and many investors are emotional because they hyped by the media. Plus, chances are that the thematic strategy is an investor with the help of most other investors will be used as well. But that does not mean to give you an advantage, as do all others the sameThing. For a good quality of the names and ideas in ways and places, which is nobody else. The best way to do start with the scan and sort tools that dark, undiscovered ideas that not even the news sources and other investors find the idea too.
There are many free websites offering the basic functions of scanning and sorting functions can.
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