The key to making money in any market lies in mastering the fine art of buying low and selling high. This, of course, is a lot easier said than done.
When it comes to stocks, most of us have been taught that a stock's price is low after it has fallen in price. So we bought stocks that were going down in price, hoping they would turn around and start going up. Bitter experience taught me that this was a dangerous practice...you never knew how low they would go. So the alternative would to be to buy stocks that were going up in price, right? Right.
You have to be kidding. If they were going up in price, they are higher now than they were before, so how could they be low? The answer lies in your assessment of what the stock's price is likely to do. If the stock's price has been going up and you thought it was likely to continue going up; then it would be low in price. On the other hand, if you felt that the stock's price was more likely to start going down; then it would be high. So the secret to buying low and selling high lies in assessing what a stock's price is likely to do.
Fundamentalists, who tend to invest for the long term, believe that undervalued stocks, such as those with low P/E ratios, are most likely to go up in price over time. They also believe that stocks of companies with consistent, predictable earnings and solid growth rates, i.e., safe stocks, also will go up in price. Technicians, who tend to invest for the short-term, look for evidence, such as moving averages, of price movement to the upside. Both of these schools of thought have merit, therefore, VectorVest advocates buying safe, undervalued stocks, rising in price. Even so, judicious application of these techniques is not enough to achieve the best results in both bull and bear markets.
Our experience has shown that if you want to make money in both bull and bear markets you must let the trend be your friend. You must buy rising stocks in rising markets and sell falling stocks in falling markets. Everything starts with the market direction and that's why we put the Color Guard right at the top of our Home Page. It tells you in an instant what the market is doing. When the Color Guard is showing Green, the market is rising. When it is showing Yellow, the market is in transition. When it's showing Red, the market is moving lower.
In my essay of September 12 2008, I said, "Think of the Color Guard as you would a traffic light. Green means go, it's OK to buy stocks. Yellow means caution, it may or may not be OK to buy stocks. Red means stop, don't buy any stocks." I urge you to read the entire essay, which is entitled, "The Color Guard, Clarified." It will go long way in helping you master the fine art of Buying Low and Selling High.
IS USING LEVERAGED ETFs WORTH THE RISK?
If you "Google" the term "Risk of Using Leveraged ETFs," you'll get about 175,000 hits with several good articles in the top 10. So the risks of using leverage ETFs has not gone unnoticed, but understanding why and how the risks arise may also be of interest to you. We're not going to go into those subjects here, but Mr. Todd Shaffer, one of our best instructors, will give us a fascinating presentation in which he compares the performance of standard ETFs vs. leveraged ETFs. So visit the VectorVest University to see this week's "Strategy of the Week:" "Is Using Leveraged ETFs Worth the Risk?"
