Common Approaches to Stock Investing

There are many truths to the world of investing that prove themselves over the course of history time and again. Most of these strategies require much personal restraint and dedication to research, and this is where many people fall short. Nonetheless, the strategies themselves bear repeating.

1. Run in the opposite direction. At its core, the stock market functions on the notions of greed and fear. Stocks go up as people get greedy for a company, and stocks go down as people get fearful of a company. Though some theories state that the price of a stock always reflects the latest information, a good stock trader knows differently. Greed often pushes a stock too high; fear often pushes a stock too low. The strategy, used by such large investors as Warren Buffett, is simply to buy when others are selling and sell when others are buying. Of course, the premise is that the company itself is stable and unaffected by the whimsical nature of people, and will soon return to its natural equilibrium based upon the merits of its products and / or services. Buffett's success comes from his ability to pick incredible companies and ride out the waves of arbitrary behavior of less talented traders.

2. Stack the deck on the way down. Again, this strategy relies on finding a fundamentally good company. There are many reasons that a fundamentally good company can have a stock price that is too low. If an investor believes in a company that is simply having a bad quarter or year, he or she can profit by budgeting a certain amount of the portfolio to that stock. Put 25% of that number in the stock as it goes down. If it continues, add another 25%, and so on. The idea is to space out investments so that you do not have to time the swing from the bottom - you will profit by riding the entire wave.