Tuesday, April 21, 2009

Technical Analysis Investing Strategy Review

Technical Analysis is a method for choosing investments that relies upon examination of the security's price history via its chart. Those who use technical analysis are often called chartists because of this fact.

In technical analysis, the investor attempts to gauge the future movement of a stock's price based on how it has behaved in the past, and how those behaviors compare to similar behavior in many other stocks over a long period of time. The theory is that investors tend to react in similar ways to similar situations and thus the price of the stock will react in a common way as well.

Technical analysis usually takes place in two basic ways.

In one method, the chartist looks at a stock's price movement chart and attempts to spot a familiar pattern. If such a pattern can be found, the chartist can then analyze what kind of price movement that pattern has led to in the past. For example, if a certain pattern is usually followed by an upward price movement, then the investor might look to buy the stock or take another bullish position. In contrast, if the pattern typically leads to a downward price trend in the stock, then the investor would look to sell the stock or take a bearish position using options or other instruments.

In the second method, the chartist looks for trendlines which delineated the price range the stock has been trading in over a specific period of time. Typically, a stock will continue to trade within this range until a "breakout" is established. One a breakout occurs, the stock will typically continue to move in that same direction until a new trading range is established. Chartists are particularly interested in breakouts that occur on high volume because this is an indicator of a "real" breakout and not just a short-term price fluctuation.

While these two methods sound basic, implementing them is much more complex. There are hundreds of trading patterns that have been identified and the trader must determine which pattern applies and how likely it is to be accurate.

Identifying breakouts requires understanding support and resistance as well as other statistical metrics such as momentum and oscillators. We'll cover these more complex topics in later posts.

Tuesday, April 7, 2009

Buy and Hold Investing

The most well known of all investing strategies is Buy and Hold Investing.

The buy and hold strategy boils down to purchasing stocks, bonds, mutual funds, or other securities with the intention of holding those investments for a long period of time. In order for this strategy to be successful, the investor only needs to choose solid companies that will grow over the long term.

This can be harder than it looks. The guys at Motley Fool, for example, got famous largely on espousing this theory during the 1990s while holding AOL stock in their portfolio. The stock counted for the majority of their returns and was often pointed to as one of those companies that would be great for the buy and hold investor. Unfortunately, when the Internet Bubble popped, it took AOL (actually AOL Time Warner) down with it.

Along the way, many seemingly very solid tech stocks plunged down as well, including Microsoft and Cisco. These stocks may still recover, but for those who purchased them with the intention of buying and holding them near the top of the market have shares that are still underwater (worth less than when they were purchased).

What Makes a Stock a Good Buy and Hold Investment
Good buy and hold stocks are generally good companies with solid earnings and a history of growth. This means that many buy and hold companies are going to be large household names like Proctor and Gamble, IBM, and ExxonMobile.

However, there are also good opportunities among lesser known companies as well. Use these criteria to help with your search.
  1. Profitable - Many an investor has lost his shirt for having purchased a company with a great product or idea, but no way to make money from it. (See Internet Bubble, et. al.)
  2. Industry Leaders - Companies that are leaders in established industries tend to survive better than others. However, even then, the investor must monitor the company stock to make sure that leadership position isn't lost. (See GM).
  3. Stable or Growing Dividends - The account scandals of Enron and others taught investors that just because the company says it is doing well, doesn't necessarily make it true. However, you can't fake paying out cash. A company with a long history of paying dividends is going to a be a true earner.
These factors should help point the way toward starting your search for good buy and hold stocks.