Thursday, December 24, 2009

20-20 rule in stock selection? Interesting!

ET has this interesting article on stock selection in a bearish/bullish market. The idea it churns out is something like this.

When the markets are declining, people don’t buy stocks because they doubt that the stock prices would decline further, resulting in a loss or else they will wait to buy the stock at the lowest point. But the article argues that waiting to buy stocks at the lowest point may not be fruitful because, less and less people sell stocks as its price nears the lowest point.

On the other hand, when the markets are bullish, people don’t sell stocks because they doubt the stock prices would go higher or they wait for the stock prices to reach the highest point. And, here the article argues that at the highest point there would be less and less people willing to buy the stock and hence selling it at the highest price may not be possible.

Due to this phenomenon, the article suggests that in a bear market, buy stocks when the market goes down by 20%, rather than waiting for it to touch the lowest point and in a bull market, sell stocks when the markets goes up by 20% rather than waiting for it to touch the peak.

Interesting though!

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46 comments:

sumi said...

A very good read. Nice to refresh our basic principles at the start of the year

Bankbars said...

ya its right, when we wait to buy stock at lowest rate, may be rate will increase slightly.

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i agree.. it's not complicated to do. It's just that i wait too long for it to release..right???

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I never believed that such a rule also apply to stock selection.

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mshah said...
This comment has been removed by the author.
mshah said...

Looking at the market going up or down by 20% and selecting stocks might not be safe as not all stocks follow the market trend. One might end up picking the wrong stocks. And if this rule is to be followed for individual stocks, then in what time period shall one look at for the stock to rise or fall. One should know the true worth of stocks to decide when to buy or sell. I found these portfolio management tools http://bit.ly/portfolio-managers where in individual stocks are assigned MRP prices like normal goods have MRP, MRP in this case being the true worth of stocks. And they have a concept of discount price. So one can buy below the discount price and sell above MRP. I found this concept interesting as instead of looking at markets going up and down, we can look at individual stocks ideal buy and sell prices and make decisions

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But the article argues that waiting to buy stocks at the lowest point may not be fruitful because,
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