- THE PRICE MOVEMENT OF A STOCK IS DETERMINED
BY SUPPLY-AND-DEMAND. WHEN PUBLIC DEMAND IS GREATER THAN
THE SUPPLY, ITS PRICE WILL RISE. WHEN THE SUPPLY IS GREATER
THAN THE DEMAND THE PRICE WILL FALL.
A stock's "supply" is simply number of shares
that are up for sale at given price, while "demand" is the
number of shares willing to be purchased at a given price.
If demand increases, the buyer is willing to pay more than
the current market value; if demand decreases the seller
is willing to sell for less than the current market value.
These are the lone forces that cause a stock's price to
rise and fall.
- THE DEMAND (OR LACK OF DEMAND) FOR A
STOCK IS CREATED BY SPECULATION OF THE STOCK'S FUTURE VALUE.
Stock is always purchased with the anticipation
that it will rise in value. Stock is always sold with the
anticipation that it will fall in value or at least no longer
rise. A high demand for stock is created from a widely held
belief that it will be worth more in the future.
- SPECULATION, BY DEFINITION, MUST CONTAIN
THE CONCEPT OF A FUTURE. THE DEMAND (OR LACK OF DEMAND)
FOR A STOCK IS ALWAYS THE RESULT OF SPECULATORS GUESSING
ITS FUTURE (AND NOT ITS PRESENT) VALUE.
Speculation is always about the future,
not the past or present. If there is no belief that a stock's
value will increase in the future there is no incentive
to hold the stock.
- REMOVING FUTURE PROSPECTS REMOVES THE
SPECULATIVE ELEMENT OF A STOCK.
There's an old saying on Wall Street, "Buy
on the rumor, sell on the news." Very often, a stock will
rise on rumors of high earnings and other growth prospects.
Once the rumor materializes the stock gets sold off, falling
in price. To understand why this occurs, consider the fact
that stock prices are determined by speculation of future
value, so once a rumor becomes fact, the element of future
has been eliminated.
- AN INCREASE IN DEMAND FOR A STOCK, DETERMINED
BY SPECULATION OF FUTURE VALUE, WILL CAUSE, BY ITSELF, THE
RISE IN PRICE THAT IS ANTICIPATED. A STOCK PRICE MOVEMENT
IS THEREFORE, BY DEFINITION, A SELF-FULFILLING PROPHECY.
This phenomenon has always fascinated me.
Consider an investor who buys into a company because he
thinks its stock will rise in value. Others, just like himself,
buy into the stock for the same reasons. The result is an
increase in demand, hence an increase in price, the very
thing they were anticipating. Note that the speculative
investor, and not the company's fundamentals, drove up the
value of the stock!
- MARKET VALUE OF A STOCK IS SOLELY DETERMINED
BY WHAT A SPECULATOR IS WILLING TO PAY; IN REALITY THERE
IS NO OTHER EVALUATION MECHANISM THAT DETERMINES PRICE.
What is a stock's true value? It is the
price someone is willing to pay for it, period. One might
have various theories about its "fair value" and
you will hear endless commentaries on stocks that are "undervalued"
and "overvalued." Yet no one will ever get around the fact
that the stock is worth what someone will pay for it, today,
regardless of opinion.
- SUCH THINGS AS "COMPANY FUNDAMENTALS"
ARE ONLY IMPORTANT IF AND WHEN SPECULATORS THINK THEY ARE
IMPORTANT. THE STRENGTH (OR WEAKNESS) OF THE UNDERLYING
COMPANY WILL INFLUENCE A STOCK ONLY TO THE EXTENT THAT SPECULATORS
ASSIGN VALUE TO SUCH THINGS.
Investors often lose sight of the fact that
price movements are determined their own collective speculation,
not by the underlying company. Company fundamentals may
be outstanding, yet if speculators don't think so then the
stock's value will not reflect any of these fundamentals.
In reverse, company fundamentals may be unsound, yet speculators
may like stock for whatever reason and bid it up. Investing
into fundamentals is only successful when and if the speculators
believe the fundamentals are worth speculating about.
- INCREASING, COLLECTIVE SPECULATION CREATES
PRICE MOMENTUM. IT CAN BE NEGATIVE OR POSITIVE.
A single speculator probably won't move
the price of a stock, but the combined efforts of many will.
Movement in either direction could be a study in the subject
of "mob psychology." When speculators see what other speculators
are doing, there is a tendency for a bandwagon effect, which
we call price momentum.
- SUCCESSFUL TRADING CAN ONLY BE ACHIEVED
BY ACCURATELY PREDICTING THE BEHAVIOUR OF SPECULATORS. IN
A SENSE, ONE MUST SPECULATE ON THE SPECULATORS.
The art of stock trading lies in the simple
fact that the sentiment of speculators is the lone force
that drives the market, not company fundamentals or any
other factor. If speculators feel positive about a company's
future then the stock will rise, not because the company's
future is bright, but because the speculators think it is
bright.
- ALL SUCCESSFUL TRADES OCCUR BECAUSE
THE TRADER CORRECTLY PREDICTED THE DIRECTION OF PRICE MOMENTUM.
IT IS THEREFORE THE STUDY OF THE SPECULATOR, AND NOT THE
UNDERLYING COMPANY THAT LEADS TO SUCCESS.