Forum Archive Index - February 2004

["Steven Moxham" <steve@stevemoxham.com>]

Snoopy wrote: "I cannot explain why Steel and Tube is now trading around the $4 mark...I have a rule of thumb that says when a share gets to 20% above fair value you should look to the sell button and look at an exit strategy."

 

Therein lies the fundamental flaw of why using fundamental analysis to trade the markets is a losing game.

If you try and trade the markets using what is fair value as a rule of thumb, you are going to miss out on some of the most substantial increases in stock market history. People make their fortunes during these times, and if you're out of the market because of what you consider to be fair value, you're riding in the face of what the market is telling you and missing out on all the action. Why try and go against the market? Surely the object of the game is to beat the market. You can't do that if you're sitting on the sidelines with your eyes shut and hands over your ears saying the market got it wrong just because you think it is overvalued. It doesn't matter what you think. Recognise that the market is the maker of share prices, not you, and then trade it accordingly. Get in when it's going up, get out when its going down. Don't try and fit the market around you, let the market decide for you.

 

True, you can make money buying undervalued shares and waiting for the market to catch up. But how long do you have to wait and what about the opportunity cost of money you could be making in the meantime? As Mike Moore said, its important not to be right before your time.