I don’t try to predict why a stock is going up based on market conditions. That strategy is simply fraught with danger that I try to avoid.
I frequently get emails, comments on my site, or Twitter questions regarding my opinion on a particular news story. The questioner is almost always asking for my opinion on the news’ affect on a certain stock.
I strongly urge investors to not worry about such details. I realize that Jim Cramer of Mad Money will often discuss the reaction of a stock to a news item. As a case in point, Mr. Cramer recently tweeted on news of gasoline prices potentially dropping and its influence on the retail segment. Jim is incredibly smart and immensely popular. I enjoy watching his television shows. However, I think that using this information to control your investment is unwise for the individual investor.
As I pointed out in an earlier article, the influence of the news on a particular stock is typically extremely short lived. There was a recent study by an analyst firm that looked at the help wanted ads for Microsoft [stckqut]MSFT[/stckqut] in order to get an insight into Microsoft’s focus for development. I laughed when I saw that story. The recruitment process by a company has nothing to do with the immediate quarterly success of the company. The long-term success of the company obviously depends on its future investments (which I wrote about here) but to try to predict the success of the company based on who they are going to hire in the short-term is giving far too much omniscience to the analysts doing the study.
I honestly do not think that it is necessary to make such deep analysis to be successful. As I teach in my book, The Confident Investor, most of the analysis can be reduced to a 10-year analysis on 4 different metrics combined with a current analysis of two more metrics. This gives you the capability of finding truly exceptional companies. You should grow your investment in those Good Companies using technical trading tools that control your trades.
It is entertaining and educational to listen to Jim Cramer explain how the various macro factors affect a company or an industry. I am sure that he is often correct. However, I don’t suggest that the individual investor repeats this effort.