Tài liệu UNDERSTANDING STOCKS PART 2 docx

PART TWO
MONEY-MAKING
STRATEGIES
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Want to Make Money
Slowly? Try These
Investment Strategies
As mentioned in the first chapter, a strategy is a plan that helps you
determine what stocks to buy or sell. If you are new to the stock mar-
ket, it’s best to keep an open mind before choosing a strategy. If a par-
ticular strategy seems to make sense to you, take the time to do more
research. It can take a long time before you find an investment strategy
that not only makes sense but also increases the value of your portfolio.
Keep in mind that you aren’t limited to only one strategy. Some
investors and traders use a variety of strategies, whereas others are
comfortable using only one. No matter what strategy you use, here are
a few things you should remember:
1. A strategy is only as good as the person using it. In other words,
no matter how brilliant and ingenious the strategy, you can still
lose money.
2. Not all strategies work during all market conditions.
CHAPTER
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3. Don’t become so devoted to a strategy that you are blind to the
fact that you are losing money. Money is the scorecard that deter-
mines whether your strategy is working.

You have to take the time to find the strategy or strategies that fit
your personality and lifestyle. Unfortunately, there are no magic
answers to finding success in the stock market. For most people, the
only way to find out what ultimately works on Wall Street is through
trial and error.
Buy and Hold: The Most Popular Strategy for Investors
The reasoning behind the buy-and-hold strategy is that if you buy a
stock in a fundamentally sound company and hold it for the long term
(at least a year), you’ll realize a profit. The beauty of a buy-and-hold
strategy is that you can buy a stock and watch it rise in price without
having to constantly watch the market. Investors who bought compa-
nies like IBM, GE, and Microsoft in the early days made huge sums of
money on paper without having to pay much attention to the market.
The other advantage of buy and hold is that because you are not con-
stantly buying and selling stocks, you are paying very little in brokers’
commissions. Buy and hold is the easiest investment strategy to use,
and, in retrospect, it worked extremely well during the bull market of
the 1990s.
Perhaps the only time buy-and-hold investors sell is if something
fundamentally changes in a company. They don’t sell because of what
is happening to the market, the economy, or the stock price. They are
focused only on the business, and they intend to hold their reasonably
priced stocks as long as possible.
One of the most successful buy-and-hold investors of the twentieth
century is billionaire Warren Buffett. He rarely buys stocks in technol-
ogy companies, but rather buys the stocks of mundane companies such
as insurance companies and banks, and he has the skill (along with a
team of independent analysts) to buy low and sell high.
In the hands of a professional, buy and hold can work, although
many investors who used this strategy ended up losing their shirts dur-

ing the recent bear market. Rather than buying low-priced value stocks,
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they bought and held high-priced technology stocks. Buy and hold does
work, but it’s not as easy to use as people think.
Buy on the Dip: An Offshoot of Buy and Hold
The buy-on-the-dip strategy was also very popular during the 1990s. In
this strategy, when a stock you like goes down in price, especially if you
believe the decline is only temporary, you buy more shares. The idea is
that because the market always goes up over time (or generally has in
the past), the shares you bought at a lower price will eventually be
worth more. People who used this strategy in the past made tons of
money as the shares they bought kept going higher.
The problem with buying on the dip is that stocks sometimes dip
two or three times before dropping permanently. In the late 1990s, mil-
lions of people poured their life savings into stocks that seemed like
bargains but actually were extremely overpriced. With every dip, more
buyers stepped in. Then, during the 2000 bear market, many of these
stocks didn’t just make a temporary dip, they crashed. During the bear
market, the stocks that made up the Nasdaq fell by over 80 percent. It is
still too early to know if these stocks will ever return to the price levels
they were at before.
Bottom Fishing: Finding Bargains among Unloved Stocks
If you are a bottom fisher, you look for stocks that are so low that they
seem to have hit bottom. Professional bottom fishers are constantly
on the lookout for stocks that are so low that they have nowhere to go

but up.
The danger of bottom fishing is that you never know exactly when
the bottom has been reached. For example, when Enron went from
nearly $100 a share to $15, many people bought more shares, assuming
that the stock couldn’t go much lower. When the stock was trading at $1
a share, the bottom fishers stepped in. The stock then fell almost 94 per-
cent before really hitting bottom, finally closing at 6 cents. You also face
the danger that companies like Enron will eventually go out of business.
Because it could be years before many of these unloved stocks rise
in price, you have to be extremely patient to be a successful bottom
WANT TO MAKE MONEY SLOWLY
?
TRY THESE INVESTMENT STRATEGIES
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fisher. Stocks that are in the basement tend to stay there a while. (Many
bottom fishers will wait 2 or 3 years before scooping up favorite stocks
that other investors have ignored.)
Dollar-Cost Averaging: A Systematic Stock-Buying Approach
Instead of buying stocks whenever you have extra money in your
pocket, with dollar-cost averaging you buy stocks on a regular, sys-
tematic basis. You invest a set amount of money, perhaps $100, each set
period of time—for example, each month. The beauty of this system is
that as you buy stocks that are dropping in price, your average price per
share also drops.
For example, let’s say you buy 100 shares of Bright Light at $20.
The next month it drops to $10, so you buy another 200 shares. Your
average cost is now $13.33 a share. As long as the market keeps bounc-
ing back, dollar-cost averaging is a winning strategy. The problem is that
if your stocks keep dropping, you will be left with substantial losses.

A strategy similar to dollar-cost averaging is called averaging down.
With this strategy, instead of investing a set amount of money each set
period, you buy additional shares of stock on the way down. With dollar-
cost averaging, you have a plan. With averaging down, you buy addi-
tional shares of stock whenever you please.
Value Investing: Buying Good-Quality Companies at a Cheap Price
Value investors primarily use fundamental analysis to pick good-quality
stocks that are a bargain compared with their actual worth. In other
words, value investors are looking for stocks that are on sale. Often,
value investors will buy stocks in companies that other investors don’t
want. These are the low-P/E stocks of companies whose earnings grow
slowly, such as insurance companies and banks. Value investors are
long-term investors and are willing to wait years for their stocks to
become profitable.
During the 1990s, value investors were ridiculed for not buying the
high-flying technology stocks. While some growth stocks were doubling
or tripling in price, many value stocks were producing what some con-
sidered pitiful returns. Ironically, after the 1990s ended, value stocks
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were back in favor. It seemed as though everyone wanted to buy fairly
valued stocks in companies run by competent and honest managers that
showed signs of improved earnings performance.
Growth Investing: Buying Growing Companies
In general, growth investors use fundamental analysis to find stocks that
are growing faster than the economy or earning more than other stocks

in the same industry. Growth investors like to see earnings growing by
at least 15 or 20 percent a year for the next 3 or 4 years. Most important,
these companies’ earnings are growing faster than those of other com-
panies in competitive industries. Usually, these stocks don’t pay divi-
dends because whatever extra money the company earns is plowed back
into the company.
For many years, growth investing worked spectacularly well. Invest-
ing in growth stocks, particularly technology and Internet companies,
was all the rage during the 1990s. It was not uncommon for investors
to see returns of 100 percent or more per year. Although investing in
growth stocks can be risky, the rewards can be tremendous.
An offshoot of growth investing is called growth at a reasonable
price (GARP). Investors who engage in this strategy basically combine
value and growth investing into one strategy. They are looking for
growth stocks, but they are willing to wait until they can get the stocks
at a reasonable price.
Momentum Investing: Buy High and Sell Higher
Momentum investors are growth investors who look for stocks that are
ready to make explosive moves upward. They buy stocks at a high
price but plan to sell them at an even higher price. They don’t care too
much about the price they paid as long as the stock goes higher.
Momentum investing works best during bull markets when there is a
lot of liquidity. In the late 1990s, it seemed as if no matter which stock
you bought—especially if was an Internet stock—the stock would go
higher.
Some critics call momentum investing the “greater fool theory,”
which means that no matter how high the stock price is, you will always
WANT TO MAKE MONEY SLOWLY
?
TRY THESE INVESTMENT STRATEGIES

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