Sunday, December 6, 2009

Dealing with Market Randomness

Before you read this post, you must convince yourself that direction of the market can never be predicted. You may see my other post titled "Rule no. 1: Never predict the market." and see whether you are convinced.

Methods on dealing with certainty and randomness are completely different. For things that are certain, you just need to go for the best approach to get maximize gain. For things that are random, you will need to manage your risk in order to maximize your gain.

So how to deal with the market since it is random? The keys are:

1) Fixed your own winning strategy and follow it all the way. Don't use it randomly or stop it half way. You can find my strategy in my post "My strategy in investing stocks. "

Have you ever hear of stories from people who had bought the same 4D number for many years. For many years, they have not strike the number, but when the moment they stop buying the number, the number suddenly appeared as the first three prizes in the next few days or weeks. I am not encouraging people to buy 4D as it is a losing game in long run, but I just use it as an illustration. Fixing your own winning strategy and following it all the ways is perhaps a better method as compared to those who never follow it consistently.

Following your strategy all the times is one of the hardest thing to do in the stock market as you are facing real time prices jumping up and down every second. If your will is not strong, your emotion will prevent you from following your strategy. "Buy and don't look back" is one of the ways one can use to ensure strictness on your strategy.

2) Make “dropping of price” and time as your friends and not enemies.

As an investor, I will make “dropping of price” and time as my friends and not enemies.
Seeing a good stock falls in price after buying it at a fair value is not a surprise to me. It is because I have already convinced myself that market is random. See my post "Investor, Traders and Speculators Charts ".

For a trader, he may just cut loss immediately after seeing the price drop. But for me, it provides me a good opportunity to buy more. If the price goes up, I will not buy anymore, but rather wait for the stock price to be overvalued to sell.

Time is my friend as I will just wait as long as I like for the stock to go up. I will collect dividends while waiting. Remember, contra player make time as their enemies as they cannot hold their position for more than 3 days. They are most likely to lose money as compared to a investor who is doing averaging on a good stock.


Createwealth8888 said...

From your portfolio holding, I could tell that you are a defensive investor. If you are risk averse, then probably this is not a bad investment strategy.

Freedom Achiever said...


I buy shares based on fundamental and dividends. I looking more for reinvestment of dividends and passive income rather than capital gain. It may seem defensive, but as long as it meets my investment objective then it is ok for me.

Freedom Achiever

Have you started your journey towards financial freedom?