- Created on Tuesday, 06 September 2011 16:02
- Written by Jared Levy, Editor, Option Strategies Weekly
- Hits: 1292
I was so excited to finally publish Your Options Handbook earlier this year. It was the culmination of 17 years of listening and learning from both professional and retail investors distilled into 460 pages of some of the most important investing advice.
I found that the common threads in every successful investor were adaptability and a consistent, actionable plan.
The most successful investors also had access to accurate information, opinions and different trading ideas. Sometimes they acted, sometimes not.
After a conversation with one of my clients last Friday, I realized just how scared and confused people are.
Taipan can help clarify the noise out there and guide you in the right direction when all seems chaotic. Right now, guidance, strategy and explanations are needed the most.
Recently, I put together a FREE webinar detailing ways that you can reduce risk and capture solid returns in this chaotic marketplace. You can register here.
I wanted to take some time today to offer a little explanation on "value" in the markets. Hope you enjoy.
What Is a Fair Price?
First, when you look at a stock quote, you are viewing the "best price" at that moment in time. The guy who was willing to sell for the least and the guy who was willing to pay the most meet and determine price. This happens in a millisecond.
And then the price changes.
Let's assume you like a company or its products and you want to buy its stock. How do you know where or when to buy? Everyone has heard "buy low, sell high," but that is certainly easier said than done and is completely relative.
This is where your "time horizon" comes into play. A time horizon is how long you are willing to dedicate to an investment. You MUST know it before selecting a stock!
You also need to have a reason for buying (or selling) this stock, which is something that only YOU can decide. Reasons can be a report you read or your own research. Just make sure it's sound and you know the source.
The question of "fair price" has plagued investors forever, whether they are analyzing stocks, mutual funds or even the latest fashion craze. The wide span of investor opinions and motivations is what creates fair value for the current trading price of a stock.
All of those different rationales coupled with varying opinions toward risk and timing create the free marketplace.
Here's the thing, though.
If too many people have the same opinions, markets can move violently in one direction or the other. Eventually when prices move too far in one direction, some investors begin to take the other side of the trade because prices become favorable to them.
One Trader's Trash May Be Another's Treasure
This is because they could have completely different investment objectives and time horizons!
Assume you bought a condo 15 years ago for your young family in a developing neighborhood for $50,000.
Fast-forward to today when your home value has increased to $175,000, the neighborhood is now crowded with condos, traffic and young urban professionals, and is no longer desirable for you and your teenage kids.
You're ready to move to a bigger, quieter house in the suburbs, so you sell your condo for $175,000, which is a win for you (you made a profit and got what you wanted) and it is probably also a win for the 20-something couple that bought it. A trade has been made!
This happens every day in the stock market. Traders who have owned a stock for some period of time (maybe at a much lower price) sell to other traders who maybe just want to hold it for a week, day or even an hour to see a little appreciation.
Investors don't always sell because they think the stock is going to tank. There may be other motives involved, such as their need for money or having found another opportunity. And even if there isn't another reason, there is usually someone there to buy it because they believe there is value at that price.
The lesson here is that you can use panic selling as an opportunity to buy or panic buying as an opportunity to sell. Just so long as you have the time and patience.
Timing Your Entries Into Stocks
Projecting the future price of a stock or the market as a whole is everyone's goal and obviously an impossible task. I believe it's more realistic (and statistically easier) to bet on a "range" or an "area" of price. Certain option strategies will allow you to do this.
There are so many methods and techniques used by traders around the world. They range from insanely complex to relatively simple. Some investors spend countless hours looking at dozens upon dozens of different data points, mixing them with economic theories and technical indicators before they even think about making a trade.
Others maybe have one technical indicator or maybe just read the tape (look at price movements) to decide when to jump in and out. The interesting thing is while you have this huge gap in styles on both ends, you can have immensely successful traders. There is no secret sauce!
If you keep your analysis and tools relatively simple but use the data consistently, you should at least improve your chances to succeed. You don't want to find yourself stuck in that cliché paralysis by analysis, when you look at so many different things you can't come to a decision.
The more data points you need to agree with one another, the lower probability you have of them actually agreeing with each other. This is why you need a consistent and actionable plan -- or a professional -- to guide you through the sometimes volatile market. Our reports can help you with this, and my free webinar can help you reduce risk and make solid gains at the same time!
Average In and Spread Your Risk Out
Speaking of risk...
If you are planning on staying in the markets for four years or more, right now may be a great time to begin a systematic buying program. In other words, set aside an amount of money you'll use to buy this year. On every major dip, you can step in and use 5% of that total annual investment to buy up stocks or ETFs.
This helps spread out your investments and if the market goes lower, you can average your prices down. If the market climbs, you will still get a good average price because you bought on the dips!
Finding a fair price in the markets may be like throwing darts, but by following these simple strategies, you can make sure you're never far from the mark.
Publisher's Note: Jared's been called "brash-talking" because of his no-nonsense approach to making money. But man, can he back it up! Barely four months into the job, he's cemented his reputation as the money-doubler, serving up potential huge paydays of $1,961... $2,909... even $5,205. And get this -- he's making these types of paydays even as the Dow, Nasdaq and S&P 500 crash. That's because his system works.
Can Jared help you get ahead? Find out here...
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