I DON’T PICK TOPS or bottoms…and for good reason. Although investors spend an inordinate amount of energy talking about them, like stock market crashes, there are actually barely a handful of days when tops and bottoms actually occur. In the past 100 years of trading, there’s been — what — maybe four or five stock market crashes? The reality is that, in the price lifetime of individual stocks or securities, tops and bottoms are equally rare.
A market spends the vast majority of time rising, falling or trending nowhere. So I start with the notion that, out of the hundreds of days in which I’ll hold a trade, there’s only going to be one or two of them that actually constitute a top or bottom. From a purely statistical perspective, an investment strategy that banks on being able to pick those few days has the odds stacked against it from the start.
In truth, you don’t need to sell the top or buy the bottom in order to make money on a trade. The real scratch isn’t made on the top or bottom 20% of a move, but within the vast middle 60%. To that end, the disciplined investor should always opt to play for the big moves — essentially, an overall valuation shift — much more than a simple three-point pop in Google (GOOG) or Amazon.com (AMZN). (more…)