When a stock is seen to rise strongly one year, the reasonable thing is usually to assume that it will continue to do so the next, isn't it? If the entire market rises well in one year, is it safe to assume it will continue to do the same? How tempting it is to think so now, the way we've seen everything rally around the last several months. But you can't just take your money to the market because you believe in inertia - that things have to inexorably move in the direction they are heading in. What these kinds of ideas would make for is a really sorry stock market strategy.
I hate to pull out the big words, but the Dow Jones industrial average, that's been around for more than a century, does act in this intuitive way. About three-quarters of the time the Dow Jones has been around, it has reported a rise in the country's stocks. But it only rose two consecutive years about 60% of the time. The rest of the time, it fell after a rousing year. It certainly looks like the theory makes sense about half the time that stocks rise year on year. The only stock market strategies that are safe then, involve buying something good, and holding onto it until all the rises and falls, average out.
Have you heard of the terms growth stocks and value stocks? These are somewhat important in finding yourself a good set of stock market strategies. Basically, stocks that are priced very closely to the value of their company are considered to be growth stocks, and stocks that are very cheap considering the price of the company, are considered value stocks. All the investment columnists will tell you that growth stocks if they can grow one year, are likely to do so again next year. I do wonder where they get their information; lots of studies published show that there is nothing at all in the last 50 years that shows that growth stocks have performed well two consecutive years. If it were such a simple relationship, why are we all struggling still to find the magic formula? All you need to do to make a bundle, is to find out if your shares did well last year, and this year you would hang onto it, to wait for the prices to rise one more time.
Well at least, reasonably well put-together markets like our own always determine their basic level based on a future performance expectation, not anything to do with the past. But there is a somewhat comforting predictability to one part of the stock market - the small cap stocks. These small companies are not all that efficiently treated on the floor; traders advise people to hold on to their stocks, and not trade them on the slightest hint at the market. It takes them a while to react to them. And so, if they rise one year, they continue to do the same the following. If you're looking for some great stock market strategies for this year, consider buying up shares in small companies that performed well last year. That's a good way to head as far as I can see.
6:45 PM