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Principles and common investment pitfalls
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Investing money is not trivial.
It can event be quite complex and frustrating.
Below are some basic generalization that are accepted as true and that can be used as a basis for reasoning or conduct in your investment decisions.
Those rules should be followed to avoid the common mistakes.
A check of those precepts before you send any order to your broker is a good idea.
This site and the "trend timing" model (quantitative analysis) which is implemented has been designed to avoid those pitfalls, except the investment of your household money.
You would need to scrupulously follow the signals and be strong to avoid those common traps !
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 To refuse to sell with the fall |
To feel married at a company |
| Nobody likes to lose money nor to recognize that a placement was awkward. However, when a value drops durably, it is to better sell quickly and without states of heart. Better to lose 7% on a stock and to gain 15% on another that to lose 30% to have delayed too much. |
Because you made good trading on an stock in the past, you believe that that will reproduce. Non sense ! Or because your grandfather you with bequeathed its Coca-Cola stocks, you do not dare to sell them... |
| To listen to the "good advise" |
To believe in its good faith |
| Do not imitate the buddy who praises profits mirific: it never speaks to you about its losses! Be also wary of the "trading opportunities" of the professionals: they often subjective without value even... are thus remunerated! Lastly, be unaware of the passions with the mode: when the good bargains are published in the press, quite informed people already benefited from it. |
To try to admit that you neither are endowed with a supernatural intuition nor protected by a good star from finance. You are only one small fish in an ocean characterized by the storms and the sharks. |
| To refuse the "expensive" stocks |
To buy the cheap stocks |
| It is difficult even impossible to know if an asset which goes up is with a peak or full ascending inclined! Historically, the stocks which have a Price Earning ratio ("P/E ratio") high are those which pay best. And the analysis show that the stocks which reach a historical peak (the "new high") tend to still go up. |
One can think that it is a good business, but it also should be wondered why they are cheap... Even if certain values are underestimated, the risk is great that they remain it. You will not thus benefit any from it! The Efficient market hypothesis also state that you can't find cheap stocks. |
| To buy with the fall |
To choose according to the dividend |
| You have 1000 shares of a company whose price drops, you repurchase some to increase this position. You average cost price is for sure lower but it is not inevitably a good idea because the fall can continue. Better is worth to diversify it. |
Many investors privilege the actions with high dividend. They box certainly a little cash, but to really earn money, better is worth to choose shares with strong growth which report more than pocket money. |
| To play at the professionals |
To place the money of the household. |
| Temptation is large to touch with the instruments which post incredible returns by leverage : certificates, options, futures, warrants, hedge funds... But the disasters can have the same width! Basic rule: the stock market is not a casino, do not invest in products of which you do not understand the mechanisms perfectly. |
To place money which one will need soon is a bad calculation. The risk is great that, at the moment or you will need cash, it is the worst period to sell. It is wise to invest only the money for which one does not have short-term need. |
| To react immediately |
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| Following the stock market from day to day is enthralling, but that should not lead to buy and sell unceasingly - except playing the fast speculation with large sums. Vis-a-vis peaks of euphoria or blues, it is enough to look at the curves over a longer period. A catastrophic result over one week is relativized very well by stretching the curve on one, two or five years. |
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What is quantitative analysis ?
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A business or financial analysis technique that seeks to understand behavior by using complex mathematical and statistical modeling, measurement and research.
By assigning a numerical value to variables, quantitative analysts try to replicate reality mathematically.
Quantitative analysis can be done for a number of reasons such as measurement, performance evaluation or valuation of a financial instrument.
It can also be used to predict real world events such as changes in a share price.
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In broad terms, quantitative analysis is simply a way of measuring things.
Examples of quantitative analysis include everything from simple financial ratios such as earnings per share, to something as complicated as discounted cash flow, or option pricing.
Although quantitative analysis is a powerful tool for evaluating investments, it rarely tells a complete story without the help of its opposite - qualitative analysis.
In financial circles, quantitative analysts are affectionately referred to as "quants", "quant jockeys" or "rocket scientists".
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Quantitative analysis should solve many of the common traps or pitfalls explained above !
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January 2007
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