Forecasting and Stock Strategies

     Forecasting market movements is a fools game. Nobody knows what the stock market will do in the next 12 months. This doesn't keep every so-called expert from trying though. Instead of predicting what the market averages will do, I just want to try to predict what stocks are likely to do well if the market does continue its steady assent. If the market does poorly, then I just wait until it reverses while cherry-picking bargains amid the rubble. It always pays to have a buy list in case stocks do go on sale. How do I assemble my list? First I read financial publications like Barrons and The Wall Street Journal for ideas. I don't believe everything I read but I appreciate the information. Look at the political environment, the direction of interest rates and changing trends in technology and consumer behavior. Think through the implications of these changes. What industries are likely to benefit from these changes. This is VERY important: write down your thoughts and keep a record of them, you may be exactly correct but forget everything. Next, after determining what industries (sectors) will benefit under your assumptions, search for the best and most undervalued companies in that sector. Watch them for a period of time before buying them. If they are still falling and you buy too early, you have caught a "falling knife" and will suffer. Basic forecasting is not rocket science, for example, interest rates have recently bottomed at the lowest levels in decades. They are bound to go up as long as the economy is improving. Is this a sure thing? No, but it is as close as it gets to one. What benefits from higher rates? Banks and companies that invest large amounts of cash obviously. What drives rates up? Inflation and a hot economy. What benefits from inflation? Gold and fixed assets like real estate. You get the picture, its common sense. I call my assumptions for the future Themes. One of my current Themes is my expectation of increased defense spending. There are about a dozen of large defense contractors who will benefit under this scenario. A google search will reveal them. My concern is to not pay too much for them. You might have guessed that I am very cost conscious when buying. I can be called a Value investor as opposed to a Growth investor. A Growth investor will pay a higher multiple for a stock because his basic premise is that a stock in motion is likely to stay in motion. The Value investor likes "fallen angels" or stocks that have stumbled but are fixable over time. Also by paying attention to valuation (P/E ratios), and buying low P/E stocks, a level of protection is built-in if the market tanks. Think "less distance to fall". There are an unlimited number of strategies to pursue stocks. You are only limited by your imagination. Next I will discuss a strategy that I have never tried and never want to because it is too risky. Just because you don't use it doesn't mean you shouldn't know about it. It is called Selling Short.