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Friday, October 14, 2011
What Is Technical Analysis? | 360 Stock Charts
What Is Technical Analysis?
Typical Stock Chart
Technical Analysis is the study on how security prices behave and how to use that information to trade and avoid losses. Technical analysis illustrates the classic economic theory of supply and demand in a visual manner, that also has a predicative value in its ability to forecast future price movements, or trends, often based on probabilities and sentiment in the markets. So instead of reading a company’s financial statements or analyzing the industry conditions, technical analysis focuses on the emotions and behaviors of the company’s investors.
It is like visual investing or a visual representation of how a stock behaves over time.
Technical analysis, or stock charting, utilizes a wide variety of indicators to help predict the future movement of a stock, for example, the relative strength index or RSI, moving average convergence-divergence, or MACD, and regressions.
WHAT IS TECHNICAL ANALYSIS?
Technical Analysis is the study on how security prices behave and how to use that information to trade and avoid losses. Technical analysis illustrates the classic economic theory of supply and demand in a visual manner, that also has a predicative value in its ability to forecast future price movements, or trends, often based on probabilities and sentiment in the markets. So instead of reading a company’s financial statements or analyzing the industry conditions, technical analysis focuses on the emotions and behaviors of the company’s investors. It is like visual investing or a visual representation of how a stock behaves over time. Technical analysis, or stock charting, utilizes a wide variety of indicators to help predict the future movement of a stock, for example, the relative strength index or RSI, moving average convergence-divergence, or MACD, and regressions. Just as there are many indicators there are also many techniques, for example, candle stick charting, Dow Theory and Elliott wave theory. No one indicator or method is sufficient to guarantee profits on every trade, so the investor must learn and then decide which indicators and methods to use in his or her analysis, and then apply them with a disciplined approach. Technical analysis is one of two broad categories of analysis, the other being fundamental analysis. Some authors will try and tell you that technical analysis is only used for short-term or speculative purposes. I do not agree! Technical and fundamental analysis are siblings: Once you perform your fundamental analysis and identify potential investment opportunities, you can use technical analysis is identify entry and exit points of your investments. Think of technical analysis in this matter: How do you know whether the price today is good or bad? By comparing it to the past and forecasting into the future. Technical analysis allows you to do both. You can look at the current price in relation to the past, or historical prices, and project the current trend or direction of the stock into the future. And technical analysis goes way beyond these basic principles. It allows you to determine whether a stock is overbought or oversold, long- and short-term trends, trading ranges, and even measure sentiment. Lastly, since most of us think and see with our eyes, technical analysis allows us to ‘see’ an investment in real-time. Good investing, Kevin of the 360 Investing Guys
Sunday, August 14, 2011
What is value investing?
By Nimi Akinkugbe
Value investing is an investment approach that is based on the premise that with some effort, you can find good, strong companies whose share prices have fallen, so offer good value for money. It was made popular by Benjamin Graham, and Warren Buffet, who largely based his investment decisions on the tenets of value investing and used this approach to build his extraordinary fortune. According to Warren Buffet, “value investing is the real form of investment, anything else is pure speculation.”
Assumptions of value investing
More often than not, the stock price does not reflect the real value of the stock itself. Market volatility, emotions and fear drive price volatility. The result is that stock prices will be either overvalued or undervalued at a particular time.
Nobody knows exactly when the market will reflect the stock’s true or fundamental value; it could take months, years, even decades. However, its future prospect and potential growth is the best indication of a stock’s true value. Fundamental analysis helps one in uncovering hidden gems in the stock market. Such companies would usually have valuable assets, a strong balance sheet reflecting stable earnings and dividend history with potential for growth, an experienced board and management team, and would command a sizeable market share. How a company’s financials stand, its credit ratings, and industry outlook; all these come into play and are key to fundamental analysis.
Value investing is somewhat subjective and two investors may have exactly the same information on a company and yet place differing values on it using different valuation methods. Companies of different sizes or in different sectors may differ in terms of what is considered to be of good value. For example, what is cheap for a banking stock may not be cheap for a company that produces consumer goods.
Value investing thrives on fear and uncertainty
Markets often over react to negative news with the result that good stocks fall far below their fundamental values along with less attractive stocks. Value investing relies on the psychology of fear in the market. When there is fear in the market, many “investors” start to sell in a panic. In this process, some attractive stocks fall below their fundamental values ready to be snapped up by the discerning value investor.
Bargain hunters
Value investors are often labelled “bargain hunters” as they actively seek out the stock of companies that they believe are undervalued; they are not just looking to buy cheap stocks but are “smart” shoppers looking for the stocks of companies with good fundamentals. When they are undervalued, they buy them, and where they are overvalued, they stay away from them.
The Cash advantage
As far as possible, it is advisable for investors to hold some cash in their portfolios at all times. Stockmarket investing comes with a degree of risk. It is thus important to hedge your risks by diversifying your investment portfolio to include not just stocks but other asset classes such as bonds, real estate and cash; this helps reduce volatility in your portfolio and protects your net worth. Value investors with cash holdings in their portfolio have the luxury of buying great stocks at relatively low prices during a market correction or crash; this can lead to a solid appreciation in their portfolios over a longer period of time.
Think long term
Markets tend to overreact to good and bad news and price movements may not necessarily correspond with a company’s long-term prospects. Value investors believe that although the stock market may be volatile in the short-term, and may not capture the fundamentals of a business, in the long-run, the fundamentals are of paramount importance. This is not about making quick money; thinking long term forces you to think more about quality. As Warren Buffet comments, “Great investment opportunities come around when excellent companies are surrounded by unusual circumstances that cause the stock to be mis-appraised.” Uncertainty favours long term value investors as it creates fear, leading to panic selling, which forces prices downward regardless of a company’s long term prospects. They are better able to weather the storm of market volatility as they expect that its long term economic value should eventually pull a company’s stock price back up; it doesn’t matter that its share price goes down temporarily.
Are you still apprehensive about the stock market?
Many people continue to be apprehensive about the stock market, yet we are experiencing a time that can be described as the value investors’ dream as we continue to see real discounts among companies with strong underlying fundamentals offering significant buying opportunities. Many companies have hit unprecedented lows in their share prices and some of them represent good value that make them attractive buys for the serious long term investor, in spite of the fact that their share prices could still drop further.
It is important to adopt an investment strategy that will guide your overall investment decisions about which stocks to purchase and when to buy or sell. The style that you ultimately choose should largely depend on your objectives, your expectations of long-term returns and your risk appetite.
Equipped with the right tools, knowledge, research and of course, professional support, you can equip yourself to make better informed decisions. For most investors however, it is far simpler to take advantage of the opportunities that exist by accessing the market through mutual funds and discretionary portfolios where all decisions are made on your behalf by experienced professionals.
via 234next.com
A very timely article by Nimi Akinkugbe given the recent market turmoil we have been experiencing. We've got hundreds of emails the last few weeks asking whether we are up or down in this market. Regardless of your investing approach, you should always have some cash on the side lines to create options for yourself if the markets pull back. Yes, value investors might be getting hit hard with this recent market pullback, but it also creates a great opportunity for value investors to find great discounts for some of the best companies.
Happy Investing,
The 360 Investing Guys
Sunday, August 7, 2011
A Five-Step Checklist for Turbulent Markets
One of my favorite investment sayings is attributed to value investing legend Shelby Cullom Davis: "You make money during bear markets; you just don't know it at the time."
Davis' point, much like Warren Buffett's oft-quoted "be greedy when others are fearful" advice, is that opportunistic contrarians can set their portfolios up for great returns by buying when and what others are selling.
Unfortunately, many investors also lose their money during weak markets. They panic-sell and upend what had seemed like sensible investment plans when cooler heads prevailed. Then, when the market inevitably begins to ascend again, they're left with that nagging question: Is now the time to get back in? I'm still getting emails from people who moved to cash during the last downturn.
But telling people to stay cool or go run around the block (my mom's favorite advice for restless kids) can seem platitudinous on days when the market drops by 500 points. And let's face it--as with most weak markets, there are scary headlines out there: gloomy economic news here at home, combined with concerns that Europe's current debt crisis is more widespread than initially feared. If you were among those many investors compulsively hitting "refresh" on your computer for market news on Thursday and Friday, I can hardly blame you.
One way--really the only way--to stay grounded at times like this is to concentrate your energies on your own portfolio and your own financial status. Changes may indeed be in order for your investment program, but you won't know that without conducting some analysis. Your best first investment during turbulent markets is an investment of time. You want to invest in time to see where you stand now, and, if you determine changes are in order, thoroughly research your options.
Here's your five-step checklist for times such as these.
Step 1: Check adequacy of cash reserves.
By far the best way to manage your portfolio--and your emotions--during volatile markets is to make sure that you have adequate cash on hand to cover your near-term needs. That way, your long-term stock investments can do what they're going to do, but you can take comfort in knowing that it won't affect your ability to pay your grocery tab or the bill for next year's college tuition. For retirees, that means that you need to hold one to two years' worth of living expenses (those expenses that are not covered by any other regular income you have coming in the door) in cash.
You can then stage the rest of your money in progressively more aggressive/long-term investments. (This article discusses how to employ what's often called a "bucket" approach to retirement income.) Folks who aren't yet retired can run with smaller amounts of cash--three to six months' worth of living expenses, plus enough to cover any near-term bills that you can't fulfill with your regular paycheck is a good rule of thumb. Don't include any residual cash in your long-term investment holdings--such as stock or bond funds that are holding cash--when you do your tally.
Step 2: Check your long-term positioning.
Once you've done the liquidity check, the next step is to check the asset allocation of your long-term assets. Market sell-offs can be alarming for retirees and people getting close to retirement simply because they typically have more money invested, period, than do their younger counterparts. For example, someone with an $800,000 portfolio that's split 60/40 between stocks and bonds would've lost about $25,000 on Thursday alone. But particularly jarring losses can be symptomatic of a problem that needs addressing. You might have too much in stocks given where you are in your life stage; this article provides some guidance for making sure your stock/bond split is in the right ballpark.
Alternatively, you might have your asset allocation right, but your subportfolio allocations skew too heavily toward aggressive investments. For example, your equity portfolio might lean heavily on small- and mid-cap stocks or your bond portfolio has too big an emphasis on corporate bonds rather than the government issues that tend to hold up better when recession worries grip the market. Morningstar's Instant X-Ray tool can help you identify unintended bets that expose your portfolio to extra risk.
Step 3: Initiate defensive hedges with care.
As the stock market has swooned, a very small handful of the usual suspects have actually benefited: gold, U.S. Treasury bonds, and bear funds that are shorting stocks. I hope the long-term performance pattern from bear funds is enough to deter you from monkeying with one of these investments; nearly every fund in the group has a negative to scarily negative five-year return, and these funds' short-term performance gyrations can also be unnerving. Gold and Treasuries, meanwhile, can serve a much more legitimate defensive role in a portfolio. The problem with them, however, is that both investment types have already enjoyed a sizable runup. So if you're moving into either, do so very slowly, and only after you've checked your existing exposure to those asset classes; if you own funds run by active managers, those managers might have already beaten you to the punch.
Step 4: Make sure you're taking advantage of "gimmes."
In unsettling times, the most empowering strategies are those that stick within your sphere of control. Checking your long-term asset allocation and cash reserves clearly falls under the "in your control" heading, and so does carefully calibrating what you put into--and what you take out of--your portfolio. It might seem obvious, but boosting your own savings rate (or making sensible cutbacks to your withdrawal rate, if you're already retired) is a guaranteed way to increase the size of your nest egg. So if you haven't revisited your contribution rate for a while, now is a good time to do so. It also makes sense to prioritize saving within any tax-sheltered wrappers you have available to you; Roth IRAs and 401(k)s are particularly sensible if you're concerned that taxes could head higher in the future.
Step 5: Develop a strategy for deploying cash.
Now, back to the Shelby Cullom Davis quote that I used to kick off the article: The best way to make money is to be willing to invest when others are afraid to do so. So if you have cash to invest or are in the process of moving around already-existing holdings, do so with a contrarian mind-set. We've recently published a series of articles and videos about 
stocks and ETFs that appear attractive to our analysts on a bottom-up basis. I'm also a big fan of Morningstar's Market Fair Value graph and ETF Valuation Quickrank when I need to get a quick read on what parts of the market appear cheap and which parts are still pricey.
Original article via here
With the current turbulence in world and local financial markets, now more than ever a disciplined approach to investing is vital. An excellent article, mind you a bit advanced for beginner investors, from Christine Benz, director of personal finance, on Morningstar. We're here to break this down for you, feel free to keep leaving us questions by email or here on the blog.
Happy Investing,
The 360 Investing Guys
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