It took me a long time and a fair bit of money to realise that just because a price has fallen significantly that does not mean it cannot fall further or that it is cheap. If you were standing at a fairground and a man was hitting a stake into the ground and the stake was 500 cm long and he had already knocked in 372 cm would you want to bet a £1000 a cm that he could not knock it in any further? A lot of people who thought Marconi could not get any lower lost money.
The opposite is also true. Just because something has gone up does not mean it cannot go further. If the same man was flying a kite and had got it up to 50 m would you want to bet he could not get it any higher?
How do you choose a winning share? There are thouands of shares listed on the Stock Exchange. It's rather like studying the runners in a horse race but with a far larger field. First you must learn how to read the form.
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This could mean knowing how to study a company's annual report and balance sheet and understanding the various indexes and ratios quoted in the newspapers and magazines. In other words you need to learn the fundamentals, just as you would any other trade. Skill and inspiration come later.
Many people find analysing a company's records a fascinating business. Computer enthusiasts can have great fun preparing pretty charts showing, for example, price movements and resistance levels, the levels at which prices are not expected to go above or below.
But all these facts and figures will not guarantee YOU a winner. If success on the stock exchange was simply a matter of research and analysis there would be a lot more rich investors around. Don't fall into the trap of putting all your faith in statistics. Statistics are the past, they are dead. It's what is going on now and in the future that really matters. The price of a share is based on supply and demand, not on statistics.
Read the industrial as well as the financial news. But if you see that a company has gained an important contract don't rush in and buy its shares. Shares react to good or bad news before it appears in the newspapers. The initial reaction could be exaggerated, or even wrong.
Before you buy any share you could try and discover everything you can about the company - its management, competitors, profits and possibility for growth. A growth share is your main aim. But it's not only you who must think that the share is a winner - other investors must think so too, preferably after you have already bought it.
You may spot a promising growth situation as you go about your day-to-day affairs; a new drug, a fashion house, or a food chain. 'They must be making a bomb' you say to yourself. This may be true and there is no reason why you should not have your share of the profits (provided their shares are available in the market) but you must do your homework first.
Many years ago I bought some shares in a company producing pots and pans at very reasonable prices. I liked the product - in fact I bought some myself. The factory was on my way home from work and I noticed that they were working far into the night. I even talked to one of the employees who told me that their order book was full and they were taking on more staff.
I lost more money than I could afford at the time on those shares. The trouble was that they were selling their products too cheaply. A proper study of their annual figures could have given me a warning. I had not done my homework. There are lots of web sites which now publish comparative information on shares - some of it for free and some paid.
Stockbrokers' web sites also have information and list the recommendations of City analysts which you may want to follow or ignore. You need to have the courage of your own convictions.
In addition to the study of a particular company's affairs you must also consider outside influences. To give a simple example, if car workers are threatening to strike don't buy a share in any company connected with that industry. On the other hand, if a tourist boom is forecast it might persuade you to hang on to your shares in a hotel chain.
Shares move in accordance with supply and demand, but in the final analysis the value of a share is determined by its return to the investor. This depends on its profitability and on the value of its assets. Therefore, if you look for undervalued assets you must be on the right track -provided the assets are what people want.
If general conditions are improving ask yourself whether that particular company is having a fair share of the general improvement. Is its value rising? If so, determine whether the price of its shares is low or high with reference to its value. If the price is low buy the shares. Keep it until the price appears to be up to the value and then take your profit.
Some investors study only one or two shares, usually blue chips. They get to know their intrinsic value and deal mainly in their stocks, buying when they are out of favour and selling when they are riding high. Admittedly, this can be a fairly long-term speculation, but it has proved a reliable one.
Don't buy an inactive share (i.e. a share in which there are few dealings). As a speculator you must always be able to sell as soon as you think it is the right moment. Inactive shares will have a large difference between the buying and selling price. Sleep with a lazy dog and you awake with fleas.
Don't buy more of the same shares at a lower price. Once a share starts to fall it often continues on the downward path. A dried up cow goes to the butcher. Average up, never down.
Don't let your political views cloud your judgement. Moral values are a different matter. The Ethical Investment Research and Information Service (EIRIS) set up by Quakers, Methodists, OXFAM and other church organisations provides an ethical analysis of the activities of many companies.
Don't buy because you are attracted by the name of the company. You may laugh, but many people allow a name to influence their decision.
Be wary of the sure winner. When you think you have a dead cert, think again. More people get stung by sure things than by bees.
If the market suddenly rises don't rush to buy. You could be buying at the top price. There is often a reaction to a big rise. Buy on reactions. Sell on sharp rises in price.
Never try to take revenge on the market. This is totally wrong and it could lead you into a reckless gamble. Buy only with a view to making money, not with the idea of making up your losses.
The market does not move as one body. For example, the FTSE index may rise 100 points in a month, but the shipping and transport group index may actually fall. On the other hand newspaper and publishing shares may rise far above the average. Follow the Leaders and Laggards table in the Financial Times or on-line.
If you are playing the business cycle and plan to buy when you think that the bull is just waking up, go for a market leader which responds to an upturn in personal spending (consumer goods). Later when the boom gathers strength consider a switch to companies supplying capital goods such as machinery or engineering shares.
Remember, when you buy is often more important than what you buy. The market is in its strongest position when prices are weak and the outlook gloomy; it is in a weak position when prices are high and business booming. The strong have potential weakness. The weak have potential strength.
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