“Every gambler knows that the secret to survival is knowing what to throw away and knowing what to keep. Because every hand’s a winner and every hand’s a loser…” Boy, is any song more true this year. Two traders could have traded the exact same stocks all year and the results would have been vastly different depending on their timing. If there was ever a year which highlighted the need for understanding basic fundamental and technical analysis, this was it. Basic fundamental analysis compels you to only trade quality, no matter how good the charts look. Remember, the dot coms looked technically sound for much of the year, but many of their prices are now under $10. Just last year, these same stocks moved that much in an hour.
The fundamental problem for these companies is that they had no earnings. Earnings drive the stock price over the long run. Their eventual doom was sealed because their business model did not work. Yes, a lot of people made plenty of money on these stocks, but like the game of hot potato, the person who holds the potato at the end of the game loses. How could you avoid this situation? Only trade stocks that have solid earnings and are in sectors which will grow over the next several years.
When you buy these solid companies, you protect yourself because if you do pick a bad entry point and quickly go underwater, there is a decent chance that the quality will come back. The easiest place to check out a company’s earnings compared to other companies in its sector is the Investor’s Business Daily. This paper also ranks and charts industry sectors.