Here’s a nice, encouraging, happy kind of story I read this morning:
Rumor Confirmed: Idle Ships Pouring Back Into Service In Response To The Global Rebound
Investors love stuff like this, because it’s easy to invest on tips and stories. As humans, we’re hard-wired to love stories. It’s part of our DNA. So along comes a great story about a down-and-out company that’s roaring back. Or a scrappy new little company that’s like David taking on the Goliaths. Or maybe it’s the return of the conquering hero: A guy who successfully ran another company is back with his new venture, smarter than ever and with a “can’t miss” way of meeting the latest demands.
You’ve heard those before. We all have. But that doesn’t mean we should use stories as our basis for investing.
The story describes how shippers, which naturally got torpedoed in the worldwide recession, are seeing a rise in business.
Now, don’t misunderstand what I’m saying. I don’t for one second doubt the veracity of the story. And the writer, Vincent Fernando, has written quite a few excellent posts over at The Money Game. He does great work, and is worth reading.
So … what’s my point?
Even when you read or hear an appealing business story, that doesn’t mean it’s a basis for an immediate investment. In this case, the story is especially appealing because earlier in this decade, shippers like DryShips (DRYS) were among some of the market’s biggest gainers.
It’s extremely tempting to “get in early.” And of course, that’s the name of the game: Buy low, sell high!
But it’s definitely possible to buy too low, and see the stock fall lower still. That’s why it works in investors’ favor to wait for some signals that professional buyers are getting behind the stock.
Right now, the shippers, as an industry, are not showing the kind of buying that big winners typically exhibit right before big price moves. You can easily see that on a chart. If there are big price moves in heavy volume, that’s a sign that the pros, like mutual funds and hedge funds, are buying.
Does that mean it’s a bad tip? No, it doesn’t. It simply means that the charts are not yet giving you the information you need to make a buying decision. By all means, continue tracking the story. But don’t buy based on the story alone. Wait for the chart to show you proof.
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