Ben Graham is considered the godfather and inventor of value investing.
What Ben Graham meant with the above quote was that in the short term stock markets mainly run on emotions and stocks will be priced like a popularity contest. If you are an Australia investor, you will see how often there are stocks that have a stellar 12 month performance only to crash back to reality the following 12 months. When you’re hot, you’re hot!
The second part of the quote refers to the fact that Graham believed over the longer term investors would weight the evidence using logic not emotion to determine the appropriate value of a company’s stock and price it accordingly. So as Warren Buffett is fond of saying “price follows value”.
So, in the short term a stock or the whole market will experience considerable momentum, but over the longer term you will get what the stock is worth – what he deemed value.
Most investors fall into one or the other camp when it comes to investing. There are those that swear that using technical analysis often referred to referred to as trading is a superior method for making money in stocks. On the other hand we have fundamental investors who prefer and support a long term approach believing that the optimal amount of profit is made by taking a longer term perspective.
For an investor first setting out to learn about stocks you will hear technical analysts say their method is superior and fundamental investors will say their method is superior. And there are 1000’s of books and articles that support one side or the other. As a beginner, I remember being considerably frustrated at trying to decide whether I should be a trader or investor and becoming confused about when was the best time to sell or buy a stock.
Traders say look at the momentum, and use technical indicators referred to as stochastics. These will be things like moving averages, price oscillators and trend indicators. Traders will seldom care for the long term and in some cases, don’t care what the company does so long as the “technicals” look good.
Fundamental investors think long term (at least the next 5 years) and so focus on company growth rates, earnings per share, assets and liabilities, competitive advantage and other company information which is used to determine the company’s long term value and stock price.
So, short term or long term?
Do you use the voting machine or the weighting machine to make money?
First of all, you should understand that there are successful traders and there are successful investors and there is sufficient evidence to show that no one method has exclusive rights in how to make money in stock markets.
So if the evidence is that you can make money in both the long term and the short term then you might be no closer to deciding if you are a trader or an investor.
Now I believe you can actually use both (you knew that was coming didn’t you).
One of the critical variables to investing is to understand the role your personality plays in investing. We each brings different points of view to the investing arena and often you will find people prefer either trading or investing based on their personality.
At www.stockmarketmentor.com.au I have developed a unique system which identifies your personality type and can be used to assist you in deciding whether you want to be a shorter term trader or have a personality better suited to being a longer term investor.
Once you understand your personality together we can create an investment map built especially for you which will increase your probability of investing or trading successfully. So a simple investment map may look like this: