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Strategy

When we are determined to invest in the stock market, the first thing we want to know is what product to buy and if it is a good time to do so. Also, if we have already invested, we want to know when is a good time to sell, or buy more products with new savings. Fortunately, the variety of products in which you can invest is almost infinite, so investing in the stock market can be more fun than going shopping at the mall.

 

One of the most important things that we have to keep in mind is that the price of any quoted product does not reflect the present of that product, but what is expected of it. That is, the price of a share reflects what the market expects of that company for the future. Investors already discount in the price if a company can improve or if it looks like it will get worse.

 

This is what causes things like a company to post profitable results and the stock price to go down because shareholders thought the profits would be much higher. Or that there is a rumor about a company that could be bought and its price skyrockets and when the purchase is made official and appears in the newspaper, the price drops. Hence the saying, “buy on the rumor and sell on the news”. Or that the stock market starts to rise before a recession is over, because investors think that the worst is over. This is what makes the stock market a game of probabilities that will never reach 100%. We, as small investors, have to try to put the maximum probability on our part to hit as many times as possible. And when we fail, detect it as quickly as possible.

 

It is also important to understand that in the short term of days or a few weeks, prices can move for speculative reasons as "noise" but in the medium and long term a trend prevails. And that's the one we have to get right.

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There are different types of valuation tools and methods that investors use to try to increase those odds. For me, it's best to use several of those tools and not stick to just one. In this way, if by different methods we get the same result, it is foreseeable that we will have more probabilities on our part. The tools or types of analysis that I like to use are the best known in the sector:

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Macroeconomic Analysis

 

The macro analysis focuses on the study of the economic cycle since there is a relationship between it and the stock market. This makes all the sense in the world. If the stock market indices are made up of companies and, as we have said, the price of these companies depends a lot on their profits, it is to be expected that in the face of recessions these profits will be negatively affected, pulling the share price down and vice versa in expansions.

 

Rarely this is not true. An example could be the Spanish case of the years 2000-2002. Although the country did not enter a recession, its main stock index, the Ibex35 profit, fell as much as those of other countries that did. Among them, the US or many Europeans. This is so since the Ibex companies are all multinationals whose businesses depend mainly on the global economy. In addition, the dot-com bubble had also affected companies in the technology sector.

 

For this reason, the cycle that is best worth studying is the American one, since it is the world's leading economy. Also that of the European Union, although it is closely linked to the North American. Developed and open countries offer a greater amount of information about their economies so tracking your health becomes a bit easier. In the case of the US, reliable data can be found on an infinite number of topics, so it is better to focus on this country.

 

Since we have said that the stock market discounts what may happen in the future, it is necessary to look at macroeconomic indicators that are as advanced as possible. That is, indicators that inform us that there may be problems in the economy before officially entering recession. In fact, when a country goes into recession (negative GDP for two quarters), the stock market has always gone down before that and the same thing, but in reverse, usually happens when it comes out of recession. Remember, it is a game of probability.

 

Nor is it good to get obfuscated in pages and pages of information, but to focus on the 10-12 most well-known and reliable leading indicators such as those related to employment, benefits, surveys on different sectors, sales data, production, credit,... which They will appear in the articles and reports.

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Fundamental Analysis

 

Technical analysis is the favorite of many analysts since deep economic knowledge is not necessary and it is capable of analyzing any listed product since it only focuses on the study of the drawing that the price leaves on the charts.

 

The great advantage of this valuation method is that it is very fast and it is not necessary to understand the business or the operation of the product that is being analyzed. In other words, you can analyze a stock, an index, bonds, currencies, ETFs,... practically whatever you want in the same way.

 

It is an almost mandatory method in currency or forex analysis as it is the most used. Learning is relatively easy and takes much less time than studying finance. It is the most widespread method, and that is why it is necessary to pay attention to it.

 

It can be very useful for finding entry and exit points for investments. Also, even if you don't have the slightest idea, a simple look at a chart can help you avoid making mistakes as serious as investing at the top of a bubble. When we have decided what we are going to buy, if we take a look at its chart and we see things like the Tourmalet or an exponential rise, it should be reason enough not to buy.

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Fundamental Analysis

 

Fundamental analysis is about getting into the “guts” of companies. It is a type of analysis that is less liked, since it entails a longer study time and in which the time spent is only valid for one company. Correct fundamental analysis is not just about comparing different multiples of the company or the P&L account. It is necessary to correctly understand each business and understand the reason for the results that are being published. Analyzing the value of a company is much more than putting a price on it in 10 minutes. And only the fool confuses value with price.

 

I will rarely talk about a single company in articles as they focus on more general topics. However, it will be possible to obtain information from the desired companies in the on-demand analysis section. In this section, a basic analysis of companies will be made under a series of fundamental premises that filter good investment opportunities.

 

Large fundamental investors have become rich and famous by applying a type of analysis such as Value Investing or investment in value that tries to find companies that are listed at a price lower than their value and that meet a series of requirements that gives them a competitive advantage. over your competitors. And of course, it is not easy.

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Would you buy?

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Sentiment Analysis

 

It is probably the type of analysis that is least known to the general public. Although some politicians dress them as the devil, markets are nothing more than people managing money borrowed or saved by the entire world, and as people, psychology plays a fundamental role.

 

It is extremely helpful to know if the inverbubblessores are feeling fearful, elated, or skeptical. The big bubbles that are generated are those in which it seems that it is impossible to lose money. Everybody talks about it. In the year 2000, every Spaniard had a neighbor with shares in Terra. That was the panacea. In 2007 you bought a mini-apartment for €300,000 on the beach and how could you say no if they financed you 120% of its value and you could always sell it because apartments never go down! Similarly, a few days after Lehman Brothers went bankrupt, the world seemed to be ending. We were going back to bartering. In 2012, the euro crisis predicted the disappearance of Europe. It is precisely in those moments when the alarms have to sound, both to sell and to look for buying opportunities, since human beings tend to exaggerate the good and the bad. Going against the majority (or being the opposite) in those moments of extreme feelings is often a good idea.

 

There are different ways to measure that feeling. There are official surveys in the sector that ask managers about future expectations, or indicators that reflect the level of "cash" that investment funds keep without placing them, or simply surveys on websites. However, there are also other ways to measure that feeling simply on a day-to-day basis. Reading the news from online newspapers, watching the news or talking with our family and friends. And it is that when the general media or people who are not from the sector talk about the stock market or the financial markets for better or for worse, probably no one else will be left to hear the news and the price will be about to change trend because the Most will have bought or sold. And that's when they catch us.

 

If you don't believe it, try it from now on. As an example, this of the drop in oil at the beginning of 2016. It seemed that the downward trend had no end and the ABC newspaper published a front page warning of a "historic" drop. Well, he couldn't tune the minimum better. This does not have to be so clear cut, but it is certainly a red flag.

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The 4 types of analysis or tools are key to finding good and bad times to invest. If we reach the same conclusion through these different paths, our chances of getting it right will undoubtedly be greater. And although it seems easy, it is not. It involves personal psychological training to be patient and flexible enough to change your mind if you're wrong.

 

Finally, highlight the need to gradually adapt the analysis to each situation, since our environment is changing and it is possible that hypotheses that were correct 10 or 2 years ago are not correct now. But that does not mean that the analysis tool is invalid, just that it is based on incorrect assumptions. Therein lies one of the keys to err as little as possible.

 

Enjoy it!

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