ollama-model-training-5060ti/training_data/relevant/text/eb8dee4a2b8370350634cd00667257aae39793552261b5195cd311cf028bf392.txt

The all-important details
In this chapter and the one following, we take up a number of elementary suggestions intended largely for the benefit of those who have never kept charts before. Much of this will seem obvious and repetitive to the advanced student, although even he may find some thoughts that will simplify his work. The beginner should read these chapters carefully and use them for later reference.
The details of how and when you keep the charts will not guarantee you profits, but if you fail to work out these details in such a way as to make your work easy, as part of a regular systematic routine, you cannot expect to keep up your charts properly or make any profits.
Charting and analyzing your charts is not a difficult process, nor will it take too much of your time if you have determined a reasonable number of charts and have arranged for doing the work regularly, meaning every day without fail.
You will need a source of data—the day's market prices and volume. If you live in a big city, your evening paper will carry the complete list, and you can plan to set aside a certain period before dinner, or after dinner, or during the evening. If you cannot allot such a period and keep it sacred against all other social or business obligations, then plan to do the charting in the morning. The key is to set a definite time and let nothing interfere, ever, or you are lost.
(EN: This process is radically simplified by automated computer downloading procedures and access to data sources and internet sites, but the principle is the same.)
You should have a suitable place to work and keep your charts. If it is at home, in the dining room or living room, other members of the family should understand that what you are doing is important. You should be able to shut the door and work without interruption. The light should be bright and as free from shadows as possible. (It makes a big difference, especially if you are keeping a large number of charts.) The ordinary desk lamp throws a reflected glare directly across the paper and into the eyes. It can be a strain if you are doing much of this close work. Better to have an overhead light, placed just a few inches in front of your head and a convenient distance above; and if this light can be a fluorescent fixture using two 40-watt lamps, you will get almost perfect shadowless lighting. These suggestions apply in case you are not working by daylight.
Additionally, have plenty of room. A big desk top or a dining room table with a large clear space for chart books, extra sheets, pencils, scratch paper, ruler, calculator, computer equipment, and anything else you need. If your working surface is fairly low, say 28 or 29 inches from the floor, it will be less tiring than the usual 30-inch desk height.
Whether you are working in ink or in pencil, pick out the writing tool that is easiest for you to use. If you are using pencils, try several different makes and degrees of hardness. Find one that is hard enough not to smudge too easily, and yet is not so hard you have to bear down to make a clean black mark. The wrong kind of pencil can tire you and irritate you more than you realize. Also, have plenty of pencils, a dozen at least, well-sharpened, so as soon as one becomes a trifle dull and you are not getting a clean, fine line, you can simply lay it aside and continue at once with another freshly-sharpened pencil.
Keep your charts in loose leaf books with big enough rings to make turning the pages easy. Do not overcrowd the books; get new books if a volume is too crowded. Finished charts may be kept in file folders. The only ones that need to be in the books are the current sheets and the sheets for the immediately preceding period. If possible, use a seven-ring binder. Pages are easily torn loose from two- and three-ring binders, but seven rings will hold the pages safely and you will seldom have one tear out.
The charts you keep will become increasingly valuable to you as the chart history builds up. The old chart sheets will be very helpful to you for reference. Provide a file or space where they can be indexed and kept in chronological order, and also have file folders for brokers' slips, dividend notices, corporate reports, clippings and articles, notes on your own methods, and analyses and special studies of the work you are doing.
In this connection you will, of course, keep a simple but complete record of each purchase, sale, dividend, and so on, on stocks you have bought or sold. This record will make your work much easier when the time comes to figure out income taxes. It will also give you all the statistical information you need to judge the results of your trading operations.
(EN: At the beginning of my investment career, and often in the middle of it, I thought the above was cracker-barrel wisdom. The longer I last the more I think that homespun wisdom might be the best kind to have in investing—somewhat like Mark Twain, who was astounded at how much his father increased in wisdom the older Twain himself got.
We may restate the modest homilies above: Be serious. Be methodical. Be disciplined. Be businesslike. Anyone who succeeds in investing without these qualities is the recipient of blind luck and will be fortunate not to fall into a hole before his career is over.
These thoughts occur when one is wondering how Magee would have viewed the advent of the microcomputer and its impact on technical analysis and investing. Might he have said, “What hath this tool wrought?! Wonders and abominations!!”
Given the possibilities for complicating analysis and operations when confronted with all the bells and whistles of the average computer software package, the investor must maintain perspective. What, then, are the all-important details in practicing technical analysis with the aid of a computer?)
The simplest and most direct way to use
a computer for charting analysis
In reality, the computer can be used as a simple tool to do a simple job. There is nothing inherently complicated about keeping a chart on a computer. All computer software packages enable bar charting and many, if not most, enable many other kinds of charting, from candlesticks to oscillator charting. The process, in almost all commercially available packages, is so simple that explaining it here would be superfluous (see Appendix B, Resources, for demonstrations), except to generally say it consists of retrieving data, updating the program's price database, and clicking an icon to run a chart. The software packages themselves explain their features better than can be done here. What is important here is to give perspective. Even simpler when the whole process takes place on the internet, as at
http://www.stockcharts.com
or
http://www.bigcharts.com
, or
http://www.
tradestation.com
.
In this respect, charting can be done with quite expensive programs and also on publicly available free programs or freeware. Charting can also be done with interactive charting programs on many internet sites. The basic bar chart can be enhanced with an unending number of technical studies— moving averages, oscillators, and so on. Therein lies the danger. Chart analysis in itself is a qualitative process. Decorating graphic charts with number-driven information and studies can lead the general investor astray—and into confusion and indecision.
Thus, the first preference of this analyst is to keep the process as simple as possible. Get the data, draw a chart, analyze the patterns, consider the volume, and draw the appropriate analytical lines—this can usually be done by the program on the screen. Often a better graphic picture may be obtained by printing the chart and hand-drawing the analytical lines. This brings to the fore one of the main problems of almost all the software packages—screen graphics are poor and, at least to old chartists, disorienting. They are especially befuddling to analysts who are accustomed to working on TEKNIPLAT™ chart paper. With passing editions of Resources, this problem will be dealt with.
(EN9: In the intervening years since the eighth edition, two things have occurred: the editor adjusted to modern technology and the technology achieved a level of excellence acceptable to a carping analyst. Internet technical analysis sites such as
http://www.stockcharts.com
and
http://www.thinkorswim.com
improved to be surprisingly valuable resources at unbelievably low prices—even free.)
The question of graphic representation of the facts is worth noting as a persistent one. To a certain extent, the individual analyst will solve this conundrum by adapting his eye and mind to a graphic environment, using one graphic method consistently and seeing how it relates to the facts in the market. John Magee-oriented solutions to this problem will be available on the website
http://
www.edwards-magee.com
.
In Appendix B, Resources, the reader may see some examples of simple and inexpensive software packages and internet sites that are quite adequate to the required tasks of charting technical analysis, as well as more complex number-driven analysis.
Summary
The computer is an invaluable tool for analysis. Use of it will enable the following:
•
Data may be acquired automatically via internet or dial-up sites at little or no cost. Some of these even offer real-time data, which is a way for the unsophisticated trader to go broke in real time, but which the general investor may desire on the day of executing a trade. Many of these sites offer every kind of analysis from respectable technical analysis (usually too complicated) to extraterrestrial channeling.
•
A computer package and internet portfolio sites will give the analyst virtually effortless portfolio accounting and mark-to-market prices—a valuable device to have to keep the investor from mixing his cash and accrual accounting, as Magee says.
•
The computer will enable processing of a hitherto unimaginable degree. An unlimited number of stocks may be analyzed. Choosing those to trade with a computer will be dealt with in
Chapters 20
and
21
.
•
Appendix B, Resources, contains information on software packages that the reader may try and purchase at quite reasonable prices. In all likelihood, the least expensive of these will be adequate to the needs of most general investors. In addition, I present a brief discussion of internet sites and resources.
Taylor & Francis
Taylor & Francis Group
http://taylorandfrancis.com
chapter twenty
The kind of stocks we want:
the speculator's viewpoint
The specifications of the kind of stock we want to chart are fairly simple and few. We want a stock that will enable us to make a profit through trading operations, meaning a stock whose price will move over a wide enough range to make trading worthwhile. There are those who are concerned mainly with safety of principal and the assurance of income from a stock. For them, there are
(EN9: or were)
stocks that afford a considerable degree of stability. You may (and probably will) want to keep a substantial part of your total capital in stocks of this type. They move in a narrow price range; are extremely resistant to downside breaks in the market; are also (and necessarily) unresponsive to fast upside moves in the market as a whole, and are highly desirable for the conservative investor. They are not, however, the most suitable issues for trading operations, because their swings are small, and commissions would tend to diminish the narrow trading profits that could be taken. Also, they do not make the sharp, clear chart patterns of the more speculative issues, but move in rounding, sluggish undulations.
(EN9: These remarks reflect a bygone time. The described stocks by and large went the way of the Dodo. When T can disappear from the market as a factor, there is no place to hide, except in bonds, which, when stagnant, only lose real value at the rate of inflation and loss of purchasing power of the dollar. Even bonds should be subject to frequent reevaluation using the tools described in this book.)
(For illustrations in this chapter, see
Figures 20.1
through
20.4
.)
To amplify this comment and explain a bit about what underlies what we are doing, let us assume a certain company has two issues of stock, a preferred and a common. We will assume the concern has a certain steady minimum profit it has earned for years, sufficient to pay the preferred dividend, the continuance of these dividends seems practically assured. The dividends on the preferred are fixed at, let us say, 6%. Now the common stock gets all that is left. In one year, there may be $0.50 a share for the common stockholders. The next year, there may be $2.00 a share or four times as much. In a case like this, if there are no other factors, you would expect the preferred stock to sell at a fairly steady price without much change, whereas the common stock is subject to a “leverage” and might shoot up to four times its former value. The more speculative issues represent either a business that is, by its nature, uncertain as to net profit from year to year, where the volume of business or the profit margin fluctuates widely, or one in which the majority of the “sure” net profit has been sheared off for the benefit of senior obligations. There are also other factors that affect the speculative swing of a stock, and, as a result, one issue may be very sensitive and another extremely conservative, and between them there would be all shades and degrees of sensitivity or risk. It is enough here to note briefly the nature of the business itself does not always account for the habits of the stock because the other factors may be very important. Most stocks have a fairly well-defined “swing” power, which can usually be determined by past performance of
76
72
68
64
60
56
52
48
44
40
36
32
28
--------------------------------1--------------------------------
_ GOODYEAR TIJ
COMMON
RE
”ti
J1L
J
Ji
1
1
I
pnpr
1
ir
I
1943
1944
1945
1946
1947
120
112
104
96
88
80
---------------------------------1---------------------------------
“GOODYEAR T
1st
PREFERR]
IRE
RD
II      ill
l.lll,
■■•I,,..."
1
...........
nil.I
.Hl
1
'
r
1943
1944
1945
1946
1947
Figure 20.1
Opportunity vs. Security. Here (at left) is Goodyear Common, representing the residual interest in all profits after senior obligations have been met, compared (at right) with the Goodyear $5.00 Preferred, which carries a high degree of assurance that the $5.00 dividend will be met, but no promise of further participation in profits. Monthly range of each stock for the same 54-month period is shown on a ratio scale. As the Common makes an advance of more than 300%, the Preferred advances about 25%, leveling off at a point that represents the maximum price investors are willing to pay for the sure $5.00 dividend.
88
89
90
99
00
92
93
97
500
400
300
1500
1400
1300
1200
1100
1000
900
800
700
600
SPX LAST-Monthly-—
94
Figure 20.2
S&P. Here the benefits of relaxed long-term investing may be seen, buttressed, of course, by the longest and handsomest Bull Market in American history in the Clinton-Gore years. At the end of this record, the effects of public enthusiasm (or as Chairman Greenspan of the Fed said, “irrational exuberance”
vide tulipomania
) can be seen in the wide undisciplined swings (best seen in
Figure 20.3
). The dotted line represents 150-day (approximately) Moving Average. Just using the Moving Average as a signal (or the Basing Points Procedure) would have beaten the market and 99% (the 99%) of other investors.
II'.
Zj
I
I’
2000000
1600000
1200000
8000000
4000000
'5/19986/19
r
987/i99887i998
,
9/1998’'
2/19993/199
>4/1999 5/1999 6/1999 7/1999 8/1999 9/1999 10/1999 11/1999 12/199
'10/1998'11/1998 12/1998 99
129.999
).999
114.999
• 104.999
.. 9 4.999
■ •    • 109.999
SPY LAST-Daily J ;     ;
Created with TiadeStation
www.Tai
i +-■
T
i
i.....
Figure 20.3
SPY. For illustration, here is a chart of the AMEX Index Share, the SPY, or ETF based on the S&P 500. After the crash of 1998 (the Asian Economic Flu crash), the fan lines tell a story, as does the last phase of the chart where the market whips in what appears a Broadening Top.
(EN9: Note this Broadening Top was identified in 1999-2000 before the crash as documented in the
http://www.
edwards-magee.com
archives. See
Figure 20.4
.)
Figure 20.4
The S&P 500 in all its glory and tragedy. An especially good portrait by Holbein, the younger. The Broadening Top pointed out in
Figure 20.3
in 2000 foretold the decline of the S&P to below 790—not quite 50% but close enough to catch the eye. Particularly fine lessons here, besides the Broadening Top lesson. All of them
screaming
for action. The broken trendline at A, the broken trendline at B, the broken “neckline” or horizontal line at C. Notice the close correspondence of the break at B and C. The next lesson is not to buy downtrends until a clear bottom is made in a major bear market. Clearly no bottom is made until the Kilroy Bottom at 1-2-3. Even then, the least risky trade for the long-term investor is when the Kilroy Fenceline (Neckline) is broken at D. All of this was knowable at the time.
how a stock will behave in the future as to the extent of its swing.
(EN9: Or we might say, short-term volatility and long-term range.)
Incidentally, for short-term trading
(EN9: amusing in the modern context; by short-term trading Magee means trading of trends of shorter length than Dow Waves)
, we are thinking about the habits of the stock that are only partly determined by the business it represents. Purchase of stock in one company that has a somewhat uncertain or fluctuating profit record may be more conservative than purchase of a highly leveraged stock of another company whose basic business is steadier and more conservative. We will take up the matter of determining these risk constants a little later.
One should also understand the short sale of a stock does not imply any feeling that the country is going to the dogs or even that the concern represented is going to the dogs. Such a sale merely indicates your belief the stock may be temporarily overpriced; that earnings or dividends may have been abnormal in recent years and are likely to be reduced; or that for one reason or another, the stock of the company may be worth a bit less than it has been worth.
For technical trading, we want a fairly speculative stock, one that will make sizable swings up in a Bullish Trend and down in a Bearish Trend. The very factors that tend to make a stock safe and desirable to the investor may make it entirely unsuitable for trading. Also, with certain reservations that will be taken up later on, the more speculative the stock the better it is for our purposes.
(EN: Entering the third millennium (since we Anglo-Saxons started counting—the fourth or fifth by other measures), the distinctions between “speculative” stocks and every other kind of stock has grown increasingly blurry. Rather than apply a perhaps pejorative (in the minds of some readers) term like “speculative” to otherwise-innocent stocks, we would do better to describe stocks as wide ranging or narrow ranging, as volatile or nonvolatile. Stocks may then be evaluated one against another by their betas and historical volatilities, statistical data easy to obtain. “Betas” and “volatilities” are dealt with in
Chapters 24
and
42
.)
In line with this more current thinking, there is another question for readers of this book—the choice of trading (or investment) instruments for the long-term investor.
The kind of stocks we want: the long-term investor's viewpoint
Changing opinions about conservative investing
Virtually no one invests like the conservative investor described above in
Chapter 20
— except perhaps trust departments of antediluvian banks. There may be some investors still out there who are so risk averse they still follow the method described. Bank trust departments may be still doing it; they used to do it so the trust beneficiaries could not sue them. This is the reason trust departments exist, to give legal cover (the so-called prudent man rule) to trustees in case of suit by beneficiaries. Most enlightened trust departments and trustees now probably follow indexing or other more productive strategies to cater to new understandings of the prudent man rule.
“Indexing” refers to the practice of constructing a portfolio to replicate or closely reproduce the behavior of a widely followed index such as the Standard & Poor's (S&P) 500 or the Dow-Jones Industrials. These portfolios never track the Indexes exactly because the advisors and funds who manage them take management fees and expenses. These fees are generally less than fees and expenses on actively managed funds, but in fact are not necessary for the private investor to pay because even the tyro investor can now use “Index Shares” (e.g., DIAMONDS™ [DIA], S&P Depositary Receipts [SPDR; SPY, QQQ,] and so on) or other proxy instruments to do what the funds and professionals do. Essentially what indexing does is track the Averages, a strategy that was impossible or difficult (expensive) when Magee examined it, as in
Chapter 15
.
(EN9: In the opinion of this editor, hiring a management company to run an indexing strategy is a waste of capital. Much better for the investor to invest directly in ETFs
and
to exit the market when uptrends end and reverse. This is a much better strategy than “passive indexing,” which cleverly manages to capture both losses and profits in the Averages.)
The kinds of stocks long-term investors want:
the long-term investor's viewpoint
Perhaps one of the most important actualizations of recent editions is to bring current this book's treatment of the Averages, noting that it is now possible to trade the Averages in stock-like instruments. This fact deserves to be marked as a vitally important development in modern markets. This chapter will confine itself to describing facilities for trading and investing in the Averages and Indexes.
In 1993, the American Stock Exchange (AMEX) introduced trading in SPDRs™, an Exchange-traded unit investment trust based on the S&P 500 Composite Stock Price Index. The AMEX calls these securities Index Shares™, a name they also use for other similar instruments. As noted above, large investors and funds have long traded “baskets” of stocks representing the S&P 500, obviously an activity requiring large capital. In fact, a certain class of investment managers and funds have practiced “passive investing” meaning indexing, primarily for large clients. The purchase and liquidation of these and other “baskets” is one form of “program trading.”
Recognizing the utility of this investment practice, the AMEX created the SPDR as a proxy instrument to allow the smaller investor to practice the same strategy. The effectiveness of this product introduction may be measured by public participation in the trading of the SPDR (SPY). By 2000, almost $15 billion was invested in SPDRs with more than 100,000,000 shares outstanding. These units allow the investor to buy or sell the entire portfolio or basket of the S&P 500 stocks just as he would an individual stock, but the capital required to do so is radically reduced.
In 1998, the AMEX introduced DIA, Index Shares on the Dow-Jones Industrial Average™ (DJIA), which is analogous in every way to the SPDRs. Thus, an investor may “buy the DJIA.” So in current financial markets, it is possible to “buy the market,” unlike those conditions under which Edwards and Magee operated.
Construction of the Index Shares and similar instruments
The AMEX unit investment trusts are constructed to replicate the composition of their base instrument. The SPDR, for example, is an instrument that represents one-tenth of the full value of a basket of the S&P stocks and trades on the AMEX, just like a stock (SPY). Other characteristics of stocks are also reproduced such as long life (the SPDR Trust lasts into the twenty-second century) and quarterly dividends (cash paid on the SPDRs reproducing dividends accumulated on the stocks of the S&P 500). Even dividend reinvestment is possible, and the units may be traded on the AMEX during regular trading hours. Under normal conditions, there should be little variance in the price of the SPY relative to the S&P 500. (In 2008, the AMEX merged with the New York Stock Exchange. Trading and instruments remain as described.)
These elements, as discussed for SPDRs, are common to all the Index Shares— DIAMONDS, World Equity Benchmarks (WEBs), and others. There are, of course, some expenses and costs to using the Index Shares—a small price to pay for the use of the instrument and generally less than the costs of a fund. Index Shares are also much more flexible for the independent investor. Among other advantages, the private investor can control the tax consequences of his investment, which is not possible in funds.
Other Exchanges have created similar security instruments or derivatives or futures to replicate or track the well-known averages and indexes. Among these are tracking shares or index shares or futures (let us call them “instruments”) on other indexes (Russell, Nikkei, and so on) or options on the futures or indexes until there is a bewildering array of instruments available for trading, investing, and hedging. Among the more important exchanges and instruments traded are the Chicago Board of Trade (futures and options on futures on the Dow); the Chicago Mercantile Exchange (futures on the S&P, Nikkei 225, Mini S&P 500, S&P Midcap 400, Russell 2000, and NASDAQ 100); and the Chicago Board Options Exchange (S&P 100 and 500 options). This, by no means, is an exhaustive list. All the futures and options that matter will be found listed in the
Wall Street Journal
under Futures Prices or Futures Options Prices.
This book does not deal in comprehensive detail with futures and options, but it is worth mentioning these exchanges and their futures and options products because of the facility they offer the investor and trader for hedging portfolios in Index Shares and Average trading, not to mention opportunities for speculating.
Briefly, hedging is the practice of being neutral in the market. That is, one might be long the DIAMONDS and buy a put option on the DJIA at the Chicago Board of Trade, meaning that advances in the DJIA would result in profits in the DIAMONDS, and a loss of premium in the put. Conversely, a decline in the Dow would result in profits in the put and losses in the DIAMONDS. As this area is not the province of this book, this is a highly simplified description of a hedge. Nevertheless, the reader should see and understand that hedging can be an important strategy. Hedging can take the place of liquidation of a portfolio when the analyst recognizes a change of trend or unstable conditions but does not wish to incur taxes or wishes to defer them.
An outline of instruments available for trading and investing
It would be herculean to attempt to list the entire panoply of averages, indexes, futures, and options available for trading—herculean due to the fact new trading instruments are constantly in creation and due to the fact, now operating at internet speed, we may expect the rate of change to accelerate. In addition to those listed above, there are WEBS (meaning that exposure to world markets may be arranged).
In all, approximately 30 or more Index Share units or instruments were available for trading on the AMEX at the turn of the century, in addition to DIAMONDS and SPDRs. Similar instruments exist on the Philadelphia and in Chicago, and others are being created daily. To reduce the confusion, the general investor will probably find the major indices of the most importance. The more instruments one deals with the more complicated the strategy and tactics become. Therefore, the Dow, the S&P 500, and the NASDAQ composite (DIA, SPY, QQQ) are probably sufficient for the purposes of the gentleman (or lady) investor. The Mid-Caps, the Nikkei, and others begin to come into play when the trader begins to try to catch sector rotation, fads, short-term cycles, and so on.
The importance of these instruments: diversification,
dampened risks, tax, and technical regularity
It would be difficult to underestimate the importance of these new trading instruments. First of all, they afford the private investor what was previously reserved for the large capital trader—the ultimate in market diversification. The S&P 500 represents stocks comprising 69% of the value of stocks on the New York Stock Exchange. Buying it is buying the American economy. The 30 Dow Industrial stocks represent the most important symbol in the American economy—and perhaps in the world. Investors are well advised to pay attention to both Averages if they would fare well in the markets (Note the plural:
markets
). These two Averages now have the influence or clout that once the Dow alone had to express the state of the markets and stocks in general.
Buying the SPY or DIA then represents the immediate acquisition of a diversified portfolio. And buying the NASDAQ or QQQ gives one immediate exposure to the more speculative and volatile sector of the American economy. Given the long-term bullish bias of the averages and the American economy, it is difficult to argue with this as both strategy and tactics for the long-term investor. This does not mean positions should be taken blindly without thought or not monitored. On the contrary, recall if you will the record of the Dow Theory; even for the long-term investor, bear markets should not be allowed to destroy liquidity and equity value. These questions are discussed at greater length in
Chapter 18
.
Although we believe these instruments are good vehicles, it is wise to remember Magee's frequent admonition (less important now than when spoken) that it is a market of stocks, not a stock market. Meaning when the tide is flowing down with the Dow and S&P, prudence and care must be used in taking long positions in stocks that are in doubt as to direction. Additionally, it is worth noting investments in these instruments will be less profitable than an astutely chosen individual stock. For example, Qualcomm appreciated approximately 240% (temporarily) in 1999-2000 compared with about 24% in the S&P over the same period. Those who bought Qualcomm at its top and sold it at the bottom of its reaction lost about 75% or about $148 a share. Traders in Qualcomm tended to obsess and pay hyper attention to the stock, whereas investors in the SPY reviewed it once a week or less or told their computers or their brokers to give them a call if it broke the trendline or entered stops. Then they slept at night and had eupeptic digestion.
Other advantages accrue to the trading of the SPDRs. Ownership of a fund can result in tax liabilities as managers adjust portfolios to reflect changing membership in the fund or withdrawals in capital by irate stockholders. Since Index Shares last into the twenty-second century, the long-term investor has no need to realize gains and pay taxes. Bear markets may be dealt with by hedging with other instruments—futures, options, or proxy baskets of stock, or individual stocks, and accepting the tax consequences of these trades.
John Magee aptly observed before the direct trading of the Averages was possible that the Dow-Jones Industrials were very regular and dependable from the technical point of view. This observation is annotated at some length in comments on Dow Theory in
Chapter
36
. Therefore, the investor in the Index Shares may have a smoother time technically than a trader of an individual stock.
Summary
The long-term investor and mid-term speculator attempt to capture long secular (as well as cyclical) trends in the markets. They shun frequent trading and capital-eroding transactions. They recognize that risk fluctuates with time and trend, and they know that frequent turnover benefits mainly the broker.
The strategy of the long-term investor may be to match the market by using funds or SPDRs or baskets, but he does not like to participate in Bear trends. He hedges or liquidates his positions on major trend shifts. In fact, he may even short the indexes if his analysis indicates major bear markets.
If he desires to outperform the market (which will happen automatically if he follows the methods of this work), he finds some individual speculative stocks to trade in addition to his foundation portfolio. Depending on his risk tolerance, he may always be somewhat hedged. When long the indexes, he finds some stocks in downtrends to short. When he is short the indexes, he finds some strong stocks to hold long. There is no excuse for a moderately skilled and reasonably capitalized investor to lose money over the long term in the market.
As a reminder,
Chapters 5
and
28
describe powerful methods for the long-term investor using Magee's Basing Points Procedure.
chapter twenty-one