Bob Robertson

Article Summary:

Reasons why you should invest in the stock market.

Why Invest in the Stock Market

Why invest in the Stock Market? If you are reading this you have your hands on the best reason of all financial times: The Computer.

With all the information and potent tools at our disposal, a boring 12% growth stock can return five times that value. Delta Airlines rose from $21 to over $70 in 20 years. That's a return of almost 12% each year.

Because of the inherent volatility of the market, Delta didn't make this rise smoothly, but rose and fell on its way up. Had we bought Delta each time near the bottom of its channel and sold each time near the top, the annualized return would have been near 60%.

Peter Lynch, former manager of the gigantic Fidelity Magellan mutual fund, averaging over 26% a year for 15 years, has suggested that the amateur investor has built-in advantages, that should result in outperforming the experts and the market in general. Why? Here are five important reasons:

1) When institutional investors find a stock they like, they buy huge blocks of shares, not the few hundred shares we might buy in an average trade. They must acquire those shares patiently and slowly to avoid driving up the price before they reach their goal. The same is true when they want to sell. They must dispose of their shares gradually to keep the price up before they unload their fund's shares of the stock. You and I can sell our few hundred shares the minute we smell a change.

2) Professional money managers look for value in their stock picks. A company that is undervalued is a good candidate since its value is likely to go up. Over valued companies represent the opposite, with odds that its stock price is more likely to go down. Identifying such prime candidates is as easy as a click of the mouse with today's sophisticated investment software.

3) Another advantage the computer provides lies in patterns created as the institutions favor specific industries. Since institutional investors account for 70% of all trading, their impact has created the concept of industrial group rotation. As large amounts of institutional money flows into segments of the market, those market sectors respond with rising prices. Similarly, falling prices result as these same institutions move out of an industry group. Computer tools highlight this ebb and flow which if taken advantage of can turn an ordinary group of stocks into an exciting portfolio.

4) Insider trading has always signaled movements in stock prices. When insiders buy their own stock it means one thing; those close to the action think the price will eventually go up. This type of trading is a matter of public record today, and is another ready bit of information off the computer links to strengthen our position as investors.

5) The ability to scan thousands of stocks and sort by hundreds of different criteria has made many stogy investment strategies come alive. An example is the Rolling Stock strategy (called channeling or simply Buy Low/Sell High).

On-line brokers have given us the opportunity to invest and deal from the comfort of our home. There are over 70 different on-line brokers we can chose from with a variety of services available and transaction costs.

This is a fiercly competitive arena with prices between $5 and $50 a trade. This will surely change as new faces make their entry. Some may even offer free trades (read the fine print). Discount trading prices make computer investing even more attractive.

There are three fundamental reasons to invest:

1) Cash Flow

2) Tax Protection

3) Growth.

Each reason has its place in an investor's portfolio.

Peter Lynch:
"What the academics are saying is that people have done a bad job at investing, therefore they shouldn't invest. As a result, people become convinced by the academics and the media that the large investors all have the edge with their large computers and their MBA degrees, and that the small investor - I don't know what that means except maybe all people under five foot two - the small investor doesn't have a chance." Stockmarket Guru's, Peter Tanous, New York Financial Institute, 1997.

John Ballen:
"It has gotten easier to beat the market, not harder, over the last five years. The reason is that, in some sense, the market has gotten more irrational and random. There are a lot of new players out there, especially on the momentum side, who create great disparities and huge volatility in the market. You can notice that, with stocks up 50% or down 50% in one day. Those become opportunities. From volatility emerges opportunity." Stock Market Guru's, Peter Tanous, New York Financial Institute, 1997.


Quotations from INVESTMENT GURUS by Peter Tanous. Copyright (c) 1996. Reprinted with permission of Prentice Hall Press, a Division of Prentice Hall Direct. Available in bookstores.

Bob is the co-founder of Pro-fundity, an Internet forum for beginning investor improvement, helping investors think and do for themselves. The difference between success and failure in the market is razor thin. That balance is tipped predominantly to those that learn as much about themselves as the market. Pro-fundity helps that happen! For more information, visit www.pro-fundity.com.

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