Investing Strategy - Follow the Masses

by : Smart Millionaires Guide

Oils up, banks are down, consumer stocks are bracing for the inevitable recession and the DOW is continuing its roller coaster performance. Sound familiar, this is perhaps one of the more difficult periods ever to invest in, and investors, as in the 70's, are now selling for ridiculous losses. How often have you heard novice investors mention that they will never invest in the stock market again, its just too unpredictable. Those that relied on the buy and hold strategy, or even the wonders of dollar cost averaging, even after searching for an "undervalued" stock, are now facing the reality that following the herd into an overheated market was not the best strategy. Even those who did manage a "win", come away with lower returns than an active investor or short-term trader.

Business schools across the globe still teach the validity of the buy and hold strategy. But the truth is, the stock market is driven by supply, demand and the herds opionion, which means it will fluctuate and will not go in a straight direction for ever. If you believed speculators at the height of the last boom, the DOW would be returning 35% this year and on its way to 1,000,000 points by just 2020. The reality is the herds opinion has slumped and demand for stock at high prices has decreased, pushing prices down and we are now experiencing a negative year.

Yes a company's assets, profits and overall strategy can have an effect on its price, but the major driver is public opinion, or as I like to call it the opinion of the herd. You can watch the charts, you can calculate the value but unless you have a crystal ball, you will not know what a company's profit will be next year or what its stock price will be in 5 years. Who would have though that just 2 years ago Bear Sterns, Starbucks, over even a company appearing in the famous management text Good to Great, Fannie Mae would be suffering big losses.

You must willing to accept that a company's fundamentals or technical performance will not drive the performance of its future stock price. Instead, the make the returns, you must be willing to become a short term trader. This means you will need to embrace short term uncertainty, accept the risks and understand the opinion of the herd. It many take some time and you may get burnt along the way, but you will develop the right mindset and profit from uncertainty. After all, there still are professional investors out there, and they are making a the returns, for every loser gobbled up by the stock market there is a winner.

Just remember - value is a perception that is based on the opinion of the herd at any given time. If you are not prepared to become a short term focused investor, then consider ETFs or active fund managers.

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