Understanding The Stock Market

A finance professor and a student who came across a $100 bill lying on the
ground. The student went to pick it up, the professor said, “Don’t bother – if it
were really a $100 bill, it wouldn't be there.”
This is the essence of Efficient Market Hypothesis where it says that investors
cannot make any exceptional profits through fundamental and technical analysis.
Because if there is any, it would be quickly taken by professional market players
in the market. However, in Malaysia and the rest of the world, our stock markets
are not completely “efficient” yet. We are at the stage of semi-strong form to
strong form market efficient.
So, fundamental and technical analysis CAN be rewarding to investors if they
really do their homework well.

The Stock Market Cycle

Next, we must learn how to look at the big picture of the stock market. Like any
other business cycles, the stock market has its own cycles as well.

It is not difficult to understand the concept of a stock market cycle. Just remember
this: “What goes down must come up; and what goes up must come down!” The
stock market cycle has four stages namely:
• Stage 1 The Trough,
• Stage 2 The Expansion
• Stage 3 The Peak, and
• Stage 4 The Contraction
A winning investor should understand how a normal stock market cycle operates
over the time. Particular attention should be paid to recent cycles. Usually, a bull
trend (the uptrend from stage 1 to stage 3) would last for about 9 to 18 months. A
bear trend (the down trend from stage 3 to stage 1) would last approximately 6 to
12 months.

Is The Market Cycle Self-Fulfilling?

Many market gurus have used cyclical analysis over the years to predict
forthcoming crashes and bull markets. As believers of these prediction gathers
momentum, market cycles can become very much self-fulfilling.
For example in the US, the Dow Jones Index often form lows during October. This
is the month when some of the historical stock market crashes occurred and so
people become more prone to overreact on bad news at this time in the market
cycle. They sell in anticipation of history repeating itself, thus causing the market
to move downward.

Even Warren Buffett said, “An investor should act as though he had a lifetime
decision card with just twenty punches on it.” If we have a lifetime of 75 years
and we started stock investing at 25, it simply means that we invest in the stock
market every two years!

Do not try to “get rich quick”. You’re bound to make mistakes! We must wait for
the best investment opportunity to come. If you think the stocks are too
expensive (with high PE ratios), just stay out of it. Look at the big picture: what
goes up must come down; and what comes down must go up. Be careful when
the market is over bullish, and treat every economic recession as a golden
opportunity to accumulate blue chip stocks