In the short run, a market is a voting machine but in the long run, it is a weighing machine.
– Benjamin Graham
This quote is one you will hear or read about often in your journey through the stock market. It is an important quote and one that strikes to the very heart of the investing in the stock market. A voting system may represent a short-term popularity contest. Voting represents the raw opinion of the voters. In many cases, those who stand to gain from winning a vote may shout out loudest, advertise to the widest audience, promise the world to anyone who agrees. The enthusiasm and the feel-good factor the candidate radiates will often sway the vote in that person’s favour.
In the long run however it is the policies of the winning candidate that then stands up to scrutiny. Checks are made if promises have been delivered or broken. Past the noise, it is the long-term underlying capability of the candidate that determines the weight of success or failure.
The stock market in the short term is a competitive, emotional ride of a rollercoaster. Individual private investors are up against multi-billion/million pound institutional investors, high wealth individual investors, short-term traders, gamblers, novices, computerised trading systems and those betting against the market.
There may be stock market listed junior oilers who just claimed that they have struck oil; their share price rocket, possibly by 50% in a few minutes or 100%, 200%, 300% in a few days. Many individuals want to join the excitement and jump on the bandwagon. It is emotions driving the share price. In some cases the business may find that the oil discovery is not viable for recovery and publishes news based on this opinion – the share price tumbles and many short-term traders lose significant chunks of their investment.
Shrewd investors, however, shall study the fundamental strength of the business – its balance sheet, cash flows statement, income statements. Shrewd investors will want to know if the business can afford to recover the oil. Does it need to borrow money? Will the oiler need to go into a joint venture? What is the possibility of bankruptcy? This is the rational weighing machine working over the long term. Emotion is filtered out and no matter the volatility of the share price in the short term; it is the long-term share price that matters. The long-term view will usually represent the fair value of the business.
Discipline is extremely important to successfully navigate the stock market and controlling emotions and trying to keep a rational mind. It is not easy. The most effective way to ignore the noise and concentrate on the rationale is to stick to a workable, understandable stock picking strategy that works. It is a written down strategy; an investment plan. I do accept however that remaining rational and controlling emotion is difficult and Grindertrading recognises this. The system to which I will show you, while heavily sitting on the weighing machine will at times take advantage of short-term movements in the markets.
I will show you my stock picking rules, how to invest in a portfolio of stocks, managing money and finally taking simple notes that will all help keep emotions in check.
So onto Section 2 – My stock picking rules