There's a buyer and a seller in every stock trade. Both have access to roughly the same information, yet they choose to make polar opposite decisions about a stock. If you want a shot at winding up ahead of the pack, you have to accept that fact.
To be successful, you must pay attention to what the person on the other side of your investment is thinking. Why is he selling when you're buying? Why is she willing to buy the shares you're trying to unload? If you can figure that out, you'll be light-years ahead of the competition.
Go! Fight! Win!
There's simply no such thing as a perfect investment. If there were, investors would soon bid up its price to the point where it was at least as risky as any other alternative. As a result, there are always two legitimate sides to any given analysis. To drive that point home, The Motley Fool runs a weekly "Dueling Fools" feature, where analysts square off against each other on opposing sides of a stock.
While most investors look to buy stocks, the bear side of the duel points out the opposite side of the story -- reasons to consider selling shares. Quite often, the bear rightly predicts problems ahead -- ones that were visible to an outside observer but not yet priced into the stock. As this chart shows, failure to heed a real warning can prove costly:
|
Company |
Duel date |
Total return |
Return vs. SPDRs |
Duel bear's warning signs |
|---|---|---|---|---|
|
Overstock.com |
9/1/2005 |
(56.5%) |
(79.5%) |
|
|
eBay |
10/6/2005 |
(12.7%) |
(38.6%) |
|
|
XM Satellite Radio |
11/10/2005 |
(58.6%) |
(80.3%) |
|
|
Imax |
3/2/2006 |
(46.3%) |
(61.9%) |
|
|
Whole Foods Market |
3/9/2006 |
(27.3%) |
(44.7%) |
|
|
HouseValues |
5/25/2006 |
(48.8%) |
(65.4%) |
|
|
Select Comfort |
10/12/2006 |
(28.2%) |
(36.6%) |
In each of these cases, the stocks have fallen by double digit percentages since the relevant duel was published. Worse yet, their performances versus the SPDRs -- an exchange-traded fund that tracks the S&P 500 -- have been absolutely atrocious. The risks were well-known, in public, for all who wanted to pay attention.
Protect your money
Because there is no such thing as a perfect investment, and because there are always two sides to every analysis, any given stock will move up and down quite frequently. As our dueling bears have shown, even great businesses can easily become overpriced and headed for a fall. On the flip side, however, there are times when the worrywarts take full control of a stock and send it plummeting to well below its true worth. That's when value investors, like those of us at Motley Fool Inside Value, get interested in buying those same great businesses.
By always considering both sides of the story, it becomes that much easier to see those times when the market is driven to excess. Too much optimism? We sell. Too much pessimism? We buy. That's the simple truth to how we've managed to beat the market since our launch in 2004.
Make sure you're truly considering both sides of any potential investment. If this article has taught you to be skeptical enough to not blindly buy, congratulations -- you've already mastered the first step to becoming a successful value investor. For your prize, we'll give you a 30-day trial to Inside Value, free.
This article was originally published on Nov. 22, 2006. It has been updated.
At the time of publication, Fool contributor and Inside Value team member Chuck Saletta owned shares of Select Comfort that he picked up after its fall from grace. EBay and Whole Foods are Motley Fool Stock Advisor recommendations. Imax is a Rule Breakers pick. HouseValues and Select Comfort are Hidden Gems picks. The Fool has a disclosure policy.
