Stock market ups and downs.... How to find the "ups" among the "downs" !

Hi Julie!

I'm thrilled and pleased as punch that you liked my post! :)

I've been investing in the stock market for about four years now, and I haven't lost money yet on any of my investments.... I expect that one day I probably will make a poor call (it has to happen sooner or later), but I feel that I have a quite safe and successful approach.... It's mostly based on the book, "The Warren Buffett Way."

I had to buy myself a "business dictionary" to learn some of the financial jargon, but I'm glad I did. :)

I take heart from the fact that it does resemble what Warren Buffett does, and he has possibly the best investment record around! :)

Here's why (I believe) it works....

Not everyone who invests, invests in a rational way. This means that often the price of a stock can be driven too high, or too low, due to irrational greed or fears.

The essence of the method I use is to try to identify when a stock is priced too low, given the basics of the company....

However, being able to tell the "worth" of a company depends on certain factors. So, I am really only looking at a small subset of companies, those with profit growth rates that seem to be roughly predictable. Then you can use this data to calculate a "worth" for the company, and get some idea as to whether it is undervalued or not....

Other companies, like those which are not making profits, also have a "worth," but it is much more difficult to tell what this "worth" is since you don't know if they'll be making profits in the future, or what those profits will be. That's basically why I exclude these companies from my analysis....

Anyway, I'm thrilled you enjoyed it! I tend to average I think around a 50% return per year.... (I haven't calculated it recently, but just in the last year I'm easily beating that.)

I *expect* that in the long run I can probably get at least a 30% average return (I'm trying to be conservative in my estimates)....

As a small investor, you have many advantages that the mutual funds don't have.

For example, mutual funds often are required to spread their investments around into thousands of stocks, across a wide range of sectors. I prefer to identify the *extremely* promising companies which are highly undervalued, and put most of my money into a few of these highly promising, highly undervalued companies, with the belief that their "true" value will become apparent in the long run.

I follow Warren Buffett's advice to "put your eggs in one basket, but watch that basket!" Fund managers don't have the luxury of doing this....

Also, as a small investor you can put your money into smaller companies, which are too small for the funds. This means that you have more opportunities open to you....

It's something I enjoy, and I'm pleased with how things have gone so far, in the four years since I started investing.... :)

- Dien

P.S. On a deeper level of economic theory, economics often uses the "efficient market hypothesis." This is essentially the assumption that everyone has equal access to information, and that everyone in the market behaves rationally in their own self-interest.

However, in the stock market, MANY people often don't behave rationally. I believe that the "efficient market hypothesis" is wrong. People behave irrationally -- they often over-react due to greed and fear. (The internet stock market bubble was an example of this, and it follows in the patterns of previous stock market bubbles.) The method I outlined takes advantage of those inefficiencies in the market.

This thought about the falsehood of the "efficient market hypothesis" isn't original to me -- I'm just echoing Warren Buffett's wisdom.... However, it makes sense to me.

If everyone behaved rationally, nobody would ever buy a lottery ticket, or gamble at most casino games, since the odds are that you'll lose your money. But we know what really happens.... People pour their money into lotteries and casinos, even though economically this is irrational behavior....