Thursday, September 16, 2010
Monday, September 13, 2010
Who Makes Money In The Markets?
Derek Hernquist on who makes money in the markets:
Who makes money in the markets? Sometimes it’s the guy with the opinion, and he gets books written about him like John Paulson. Good for him…I think it was more about the low risk/high reward purchase he made on those credit default swaps, but his prediction paid off.
Generally two types of investors make money over time…value investors and momentum investors. Why? Because they’re willing to act when most aren’t. Their success doesn’t hinge on predicting an outcome…it hinges on someone later paying a much higher price than you pay now. The value investor scours the balance sheet, develops a thesis on what “fair value” is, and if it’s well enough below, buys the stock and waits. If fundamentals improve, it’s a home run instead of a double…but the payoff is not contingent on that outcome.
On the other spectrum, the momentum investor looks at rising price or explosive growth and joins in…seems silly, but since most are afraid to pay up there’s actually only a small % of participants aboard. He’s not making a prediction, he’s making an observation…this thing is going up, and I’m going to be involved until it stops going up. Simple, but often effective as most are too worried they missed the boat already…how many people do you know that have actually owned NFLX or CRM or BIDU for more than a week?
Full disclosure: Dorsey Wright owns NFLX, CRM, and BIDU.
Who makes money in the markets? Sometimes it’s the guy with the opinion, and he gets books written about him like John Paulson. Good for him…I think it was more about the low risk/high reward purchase he made on those credit default swaps, but his prediction paid off.
Generally two types of investors make money over time…value investors and momentum investors. Why? Because they’re willing to act when most aren’t. Their success doesn’t hinge on predicting an outcome…it hinges on someone later paying a much higher price than you pay now. The value investor scours the balance sheet, develops a thesis on what “fair value” is, and if it’s well enough below, buys the stock and waits. If fundamentals improve, it’s a home run instead of a double…but the payoff is not contingent on that outcome.
On the other spectrum, the momentum investor looks at rising price or explosive growth and joins in…seems silly, but since most are afraid to pay up there’s actually only a small % of participants aboard. He’s not making a prediction, he’s making an observation…this thing is going up, and I’m going to be involved until it stops going up. Simple, but often effective as most are too worried they missed the boat already…how many people do you know that have actually owned NFLX or CRM or BIDU for more than a week?
Full disclosure: Dorsey Wright owns NFLX, CRM, and BIDU.
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