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7 steps to becoming a proactive investor
We have all heard the self help advice telling us to be proactive in our lives instead of reacting to our lives.
Proactive people are generally ahead of the curve and are more likely to be “lucky” because they are better prepared for any opportunities that arise.
The same can be said of investors. Many of them tend to take a reactive approach to investing.
They buy stocks after analysts upgrade them, they hear news on the TV to form trading ideas and they always miss the big moves.
Does this sound like you?
Here are 7 easy to do things that will get you ahead of the curve and turn you into a proactive investor.
- Know the trend
- Know the big players
- Watch the government
- Keep track of the rates
- Keep an eye on commodities
- Use technical analysis
- Mark down important dates
This many sound very simple, but it is dreadfully important to keep the market trend in mind at all times, otherwise you may fall victim to a bad trade.
In today’s deflationary markets, the primary trend is down. Even if a stock does rally during this market, the gains are short-lived.
For example, take a look at HP, (symbol HPQ). Here is a company that has an amazing balance sheet, some of the best management, a steady dividend but can’t seem to get off the ground with any of its rallies.
Over the past few months, it has experienced many short term corrections, but in this environment – it could not keep it up for long.
If you took a long position in HP after it was given a $111 million contract with the US government, or after it expanded its notebook lineup or any of its other good news, you’re probably sitting in the red.
Who else is buying / selling your stocks?
Is the institutional ownership of the stock high and are the hedge funds still liquidating? If so, maybe now is not the best time to go long.
What are Buffet, Soros, Templeton or any of your other favorite big players buying? Can you invest along side of them?
Are the insiders buying up the stock? They may know that the prices are too good to pass up.
This may be a great indicator to help you keep ahead of the markets.
Even back in the day when the governments weren’t acting as a giant hedge fund, it still paid to watch what the government was doing.
Under George Bush, defense spending was high and that led to many defense suppliers having amazing years of growth.
When congress enacts a new tax, you can bet retailers will feel the hit as disposable income is reduced.
So stay aware of government actions such as the development of Obama’s infrastructure plan and the growing debt of municipalities to be proactive.
Which rates am I talking about? All of them.
You should know the Fed funds rate, LIBOR, prime lending rates in your area, the yield on T-bills and 10 year bonds, tax rates, etc off the top of your head.
You don’t have to be an expert on the many ways each of those effect the current environment but even knowing that the current yield on T-bills is less than your local FDIC / CDIC insured savings account can save you money.
There is a direct relationship between commodities and currencies and stocks. If you keep up to date with the prices of various commodities, you may be able to get the jump on stock markets.
For example, as crude prices go up, so does the stock of many energy companies. That can damper the prices of airlines and solar companies. Sometimes the damper on solar companies overseas is not as quick to occur as it is in the US. That can make for a profitable arbitrage trade.
If you see the price of gold edging upwards as it is these days, that can put downward pressure on the US $ because it is seen as a hedge against inflation. That may be a good time to invest in TIPS.
Technical analysis is looked down on by many investors because they don’t see its real benefit to them.
Technical analysis can be used to make a good investment a great one.
If a stock looks attractive based on fundamentals, an investor can be proactive by using simple support / resistance trend lines to get the best entry and exit points.
Use stock alerts, available through Yahoo Finance, to inform you if a stock has broken through resistance, a very bullish sign or if a 50 day moving average was broken or any number of other technical signals to avoid spending too much time with the charts.
You should know when your stock’s ex-dividend date is, when the company will issue conference calls, earnings release dates, what dates it re-purchases shares et al.
Along side of those dates, you should have a pretty accurate prediction of the announcements. If the company is releasing earnings next week, get to know what the analysts are expecting and what the company projected for this quarter. Does the company have a history of beating expectations? Can you reasonably assume that the economic downturn has hurt the company and is that already priced into the stock?
All of these things will help you get one up on the market making you a more pro-active investor.
If you follow the tips above you will have a better grasp of the market as a whole and be able to make better decisions.
Malcolm Gladwell, in his book Blink, wrote that time wasting research can sometimes be less effective than a knowledgeable mind’s intuition.
So take that to heart and be as well prepared as you can be to take on the many opportunities in the markets.
