@atharkhan
So I bought “A random walk down wall street as well. I’m about 50% of the way through it, and it’s a fantastic book thus far. I’ve always been very skeptical of people claiming they know the secret to beating the market, and it was very nice to read a book telling me that there is no easy way. I think anyone invested in the market should read this one, even if they don’t agree completely with what it says.
The author gives fundamental analysis a pretty big beating, and has somewhat tempered my enthusiasm for that particular strategy. Moreover the claim is that Wall Street analysis’s have not been able to justify the expense of their commissions. Essentially, their picks tend to do no better than index funds when you factor in the additional expense of commissions and management fees. However, he does not argue with the basic premises of fundamental analysis theory (more so with it’s lack of results), so it does seem like a viable technique provided one is good at it as well as they aren’t paying a premium for someone else to do it for them. Also, he mentions that it seems that analysis may be more effective with smaller stocks since they have fewer eyes on them and that the market is likely less efficient with these stocks than with blue chips.
Based upon these assumptions, I am going with the following strategy. I’m going to pursue the author’s recommended diversified portfolio strategy, however, I’m going to use fundamental analysis to try to select securities I think have good value when picking my diversified portfolio. I plan to buy and hold, however if any given security seems to be greatly over-valued, I will sell it, and find a different one that seems to have a better value while fulfilling the diversification role of the previous stock.
If I can adhere to this strategy, I think I stand to benefit from the author’s advice, as well as having the possibility of generating a modest improvement on that performance through hard work and analysis. In a Pascal’s wagerish way I win either way. Either, I can’t beat the market and I get the same return as everyone else while managing my risk through the recommended portfolio diversification techniques. But if I can pick stocks that perform better than the market, I will still remain diversified as suggested, but I stand to achieve a modest profit from the hard work of analyzing securities. In the worst-case scenario, I will have only wasted my time and energy conducting fundamental analysis without it adding anything to my bottom line and learned something from the process.
Once I finish this book, I’m going to proceed to the Damodaran book on valuation techniques. I’ll keep you guys posted on my progress. In the meantime, I’m playing on investopedia.com’s stock simulator game with fake money to see how I do. While I continue to save up, I’ll use this as a litmus test to see how well I can do before “playing for keeps.” I’ve been fluxing between -0.5% and 1% over the past couple weeks although I’ve remained in the green since last week. Thanks again for everyone’s advice.