How much research is enough?

[bepra1]

Hi guys,

I am in my fourth year in the Uni and I have only been trading for about 1 week now to try to get a feel of the share market. I am just wondering how much research is actually enough to determine which shares have the most potential for gains.

As for me, all I did before deciding which shares to be purchased, I read heaps of finance news (such as, business section, smart investor and etc.) to get a glimpse of what might be the best shares are. Then I just compared various financial ratios such as EPS, quick ratio, current ratio, debt-to-equity and other ratios, look at the company past performance as well as future strategies and also financial forecast which are provided by CommSec.
With this mediocre research, my portfolio managed to perform quite well for the week (I must admit that a week is too short to judge the effectiveness).

But from the forum, I know that many of you are actually perform much much deeper research into the shares by making full use of charting and many other strategies. I am just wondering how much research is actually enough to determine which shares have the most potential for gains and how to be able to spot the rising / falling shares in the market. Thanks in advance for your response guys....

 

[GREENS]

Hi Bepra

I am also a uni student, and started investing around 1.5 years ago, and was in a very similar position to yourself. But over this time period my knowledge of investments has risen exponentially (helped by the fact that I do finance). The most important points that I believe are useful for surviving the first year would have to be the following:

•Don’t believe what others have to say about a stock unless you can back it up with your own research.
•Invest only in companies and sectors you understand and don’t just jump on the latest fad for a quick buck (its very tempting)
•Predicting future macroeconomic trends and then finding the most suitable company to take advantage of these trends. (E.g. ageing population – healthcare stocks). All stocks I have done using this method have performed exceedingly well but have also been backed up with fundamental valuations. This is where your financial ratios can come into play in narrowing down a selected stock.
•Invest with a longer term view, if you’ve done your research and understand a companies fundamentals you will sleep easier knowing a fall is only temporary. In contrast if you’ve invested in a company and don’t understand its fundamentals your better to cut your losses while you can rather than hoping it will just pick up.
•Finally you will make mistakes; but make sure you see where you went wrong and how you would do it differently next time, as they provide the best learning experiences for you to become a better and wiser investor.

Good Luck…and continue to read and read (especially a companies website before investing)

 

[doctorj]

I am just wondering how much research is actually enough to determine which shares have the most potential for gains.

I should point out, its not about perfection, but being profitable. You're never going to pick the best one, but as long as you're getting a reasonable rate of return considering the risk your taking on and your opportunity cost, it doesn't matter. The nature and depth of the work you perform will vary depending on your strengths and experience. There's no benchmark (ie. you should perform atleast x hrs of research per $1000 invested). Do what's profitable and what suits you.

There are many different styles on this site - from Yogi's planetary cycles, tech's mechanical system, Wavepicker's elliot wave, YT's fundamental. Each does what they do because it works for them. I dare say they're all profitable trader's and investors.

YT might spend hours scoping stocks to research and then many more going in depth. Tech may spend 15 seconds looking at a chart identified by his software before placing an order.

Each does what they do because it's profitable. Those that stick to doing things that aren't profitable soon fall by the wayside.

 

[theasxgorilla]

DoctorJ, I'd post here but that was a really good response which says it all. Spot on!

 

[bepra1]

Thanks a lot for your responses guys. :bier:

About charting. Are there any of you guys that have been successfully applied this strategy in the share market? For me charting is so confusing, so far I have managed to understand OHLC and I feel that OHLC does not really help me in making decision regarding which shares should be chosen.

Another question is that how can I develop this skill of predicting future macroeconomic trends. I know one way is through reading newspaper. I read newspaper everyday but for predicting future macroeconomics trends is still cloudy as ever. All that I can see is that there will be an election coming up around next year and the share market might be bearish.

 

[Joules MM1]

the first question in the "how long is a piece of string" is what is the basis of the research?

........there are two ways to aproach research; 1 to find the best instrument to trade for profit and 2 the best instrument qualities that provide the best capital protection..........to put that another way, one is aggressive and the other is protective, so, if you plan to search, research, to be aggressive, then you are prone to biasing, whereas, when you research to lower your risk of capital degredation that is quite different.........there you clearly have two defined frames to view transactions..........

...........this means you must first profile exactly what constitutes "research" ............simply searching through screeds of data, fundamental and technical is not the key...........one needs to first quantify what quality data actually is before that data can be used as (part of) a strategy or trading plan..........

some great pitfalls of (company) research entail; the hidden beast of bias that is created by an attatchment to indepth research.........where a trader may contact the company being researched, gotten brochures, met the coo, talked to staff and talked to independant fund managers about the company.........the vibe is good.........the products look good...........the researcher becomes attatched to the concept of the company which has little to do with good trading...........the bias is then set, the trader becomes anchored.............so the depth of the research is not always the key to successful capital protection...........the traders number one job is to protect capital, period..........of course, all the fundamental hallmarks might say leave this company alone and weeks later it has tripled in stock-price and not likely to decline in the near future.........

.............research can also have the extreme opposite affect of the false feeling of being safe by hiding behind that same research...........so if the research is a one-sided fundamental approach, then, the same trader will be completely dismayed when a positive news release sees the stock fall in price just after the trader has entered on good news-release prospect............again this highlights that the trader needs to know WHAT to research and WHEN to research.

Traders need to research themselves as much as they need to research the instruments they want to transact.........they also need to research the people they are trading with or against, the type of market action they are going to go into...........someone once tried to define to me the difference between trading and investing ..........frankly, they are one and the same.........money goes on the table and at some point that money comes back off the table different parameters of research possibly..........here again, the use of time needs to be researched.............we need to research the things that give us patience and not expect patience to be constant..........understanding how markets function, how different levels of capital function, different levels of liquidity flows might affect the instrument you are going to transact...........most importantly, who these contra traders are..........there is someone on the other side of your trade; research them............

...........how much research is enough? ............welcome to the wonderful world of "enough is never enough" and you need to define how much research is too much......... booyah!

One thing you should know; there are some great mechanics who adjust the formula-one machines but none of them are ever going to be great race drivers .............markets are multi-dymensional and the price of every stock is dynamic based upon the different levels and demands of capital sizes operating on any given day............the game is about supply and demand of valuations, so, that area of research is as vital (if not more so) as the price-to-growth ratio or the earnings-per-share ..........research is actually an everyday event and needs to be focused..........a misplaced (indepth) research can also make a trader lazy, feel like youve done enough, yes, maybe in terms of sheer effort but not the appropriate application......this highlights the lack of priority of the research..........research needs to have a system of its own within the trading regime and that system dictates what needs to be researched each day ............

..........research needs to allow for interpretation..........this one is the key..........you see, because price is dynamic, with all these other players involved, you cannot set-and-forget at any stage...........you need to have a clear guideline, a clear focus and while parts of the trading strategy may change, I think you'll find, the priority of how you select which part of the whole process, at any stage, is a major key to lowering your risk both before and after you enter the transaction...........this is a business, not a scientific field trip.........

Another question is that how can I develop this skill of predicting future macroeconomic trends.

that quote is a good example.........ask yourself; "what is it that makes me think that this question effects or has an affect on the insturment(s) I am going to transact.?".........while there is a plethora of questions to ask, knowing which ones makes all the difference.............this defines the focus of research, the inappropriate research leads to..........you know..........

research the questions rather than taking an imperic stance that getting an answer must hold the key to capital gain ............a lot of time-wasting is avoided..........

have a nice weekend


J

 

[Solaris]

Hi Joules,
Have been reading your posts and still enjoy reading and ASF should be very proud to have a member like you posting here.
However I do not understand why you asked Joe to remove those important posts you mentioned in YT thread about volume and sp manipulation.
It would have been very helpful for many newbies to get to understand the reality that you mentioned.

I am also new to this forum and glad I read those posts but would kindly urge you to post something similar for all newbies to understand.

Hope you get to read this and put something for us all to consider.

Cheers,
Solaris