As a writer and freelance author, I have been fortunate to interview many stock market experts over the years. One of the most memorable is with the legendary Peter Lynch, former director of mutual funds Fidelity Investments. Years ago in an article, I talked to him about one of his favorite topics: Helping young people learn to invest.
Lynch popularized the idea of investing in what you know – owning stakes in companies you are familiar with. He’s written three bestsellers based on his ideas, including actually meeting in person to observe what people are buying in person.
Lynch is famous for visiting companies in which he wants to buy stock. For example, before buying a stock in an auto stock, Lynch would go to the dealership’s showroom, chat with the salesperson, and check the inventory.
His advice, while it sounds simple, is really great. After all, most people spend more time and effort researching buying a new refrigerator than a warehouse. I made that mistake when I first started investing, investing $ 50,000 in shares of a Texas cell phone company that I never even heard of. Why? Because someone who knows more about the stock market told me I should. “You can double your money,” he promised. Famous last words.
Instead of doubling my money, I lost half of it within a few months when the company went bankrupt after some suspicious accounting. This is also my first and last time buying margin stocks.
Using margin, the broker allowed me to use my initial $ 25,000 to buy another $ 25,000 worth of stock (2-1 return). When the stock plunged, I not only lost my initial investment but also owed my brokerage money because I borrowed. Mismanagement of margin ratios is one of the ways that many investors get into trouble when their stocks go against them.
Study balance sheet and stock chart
If I follow Lynch’s advice and do some basic research, I will discover that the so-called cell phone company is a scam. It has been promoted by fake press releases and hype posts on social media.
Looking back, I was able to fly to Texas and visit the company. I have found that it only has two employees. It should have been a lot cheaper to fly than it was to lose $ 25,000. I may also have studied the company’s balance sheet, looked at its stock chart, and studied its earnings reports. It sounds like common sense, but think about how many people buy the stock every day without doing the most basic research, which is called doing an “appraisal”. Others call it “doing your homework.”
How Lynch handles a bear market
From my interview with Lynch, I know that he’s not making predictions. “I don’t know what the market will be like in a year or two,” he told me. “What I do know is that if interest rates rise, inflation will rise and in the near future the stock market will go down. I also know that every 18 months the market drops 10%. These are called corrections. We can easily make 10% adjustments. Perhaps one out of three of these adjustments translates into a 20% to 25% correction. This is called a bear market.
Lynch made every effort to regulate markets, including bear markets. Although he dislikes the bear market for being a longtime manager and hates losing money when something goes wrong, he doesn’t panic. “If you understand the companies you own and who their competitors are,” Lynch says, “you’re in good shape. You don’t panic if the market goes down and the stock goes down. If you don’t understand what you own and don’t understand what a company does and it’s halved, what do you do? If you have not done your research, you can also call the psychic hotline for investment advice.
I learned from Lynch that while bear markets are inevitable, they are unpredictable. That’s why, before a malfunction occurs, you must evaluate the stocks or funds you own. If you are confident about your investments, you won’t be swayed.
For me that means some downside of my positions, especially with current technical indicators of the US market. Even though the market has gone through a 12-year bull run, it is still susceptible to a steep correction, or worse, a bear market. That’s why fundamental research (i.e. balance sheet and stock chart studies) is more important than ever.
For short-term traders, this is what some solid technical indicators are saying about US markets as of the April 8 close.
Moving Average: Price increase. S&P 500
declining – well above its 50, 100, and 200-day moving averages. According to the moving average, all systems are “working”.
RSI (relative strength indicator): Buy too much. The RSI, which measures overbought / oversold conditions, is telling us the market is approaching danger zone. When the RSI touches 70 or higher, it is a danger sign. By the way, the S&P 500’s weekly RSI is currently at 69.14. Consider this: In less than three weeks (since March 25), the S&P 500 has risen around 250 points higher. Dow Jones industrial average
The RSI is 70.86, while the Nasdaq
If the market continues to rise, the short-term risks increase. Remember that the market or stock can remain overbought or oversold for long periods of time. For example, right now some individual stocks have an RSI of 90 or higher, but they are not falling yet. The best RSI is used as a clue, but not the timing of the market.
MACD (Moving Average Convergence Divergence): Neutral. Many short-term traders rely on the MACD for reliable trading signals. Currently, while the MACD for the S&P 500 is above the 0 (positive) line, it is also above the Nine-Day Signal Line (neutral). Currently, the MACD is not giving a clear signal for the S&P 500. Meanwhile, the MACD for the Dow is bullish (MACD above the zero line and the nine-day signal line) and neutral on the Nasdaq.
VIX (CBOE Volatility Index): Fear not at all. VIX,
measures the implied volatility of the S&P 500, which has been down for months and is in the basement (currently just under 17.0). This tells us that there is less volatility and less fear. Few expect anything bad to happen to the stock market, and if stocks slide, many believe the market “will come back.” Only Mr. Market knows if this is true.
The bottom line: If you’re a long-term investor, Lynch’s methods and ideas are excellent. If there is a bearish market glitch, use the opportunity to buy stock of a stock or index that you have studied.
If you are a short-term trader, there are clear warning signs that the US market is too good to be true. Most importantly, don’t own anything you don’t understand, or you get advice from your neighbors or TV sales. And be careful with margin purchases.
Michael Sincerely (michaelsincere.com) is the author of “Understanding options”, “Understanding stocks” and his latest book, “Monetizing options”, introduces the single option strategies. simple for beginners.