buy the rumour ... or not?, page-4

Of interest..
Investor vs Speculator. by Josh Kennon.
[abbr]

An investor is someone who carefully analyses a company,
decides exactly what it is worth and will not buy the
stock unless it is trading at a substantial discount
to its intrinsic value. They make their investments
decisions based on "factual" data and do not allow their
emotions to get involved

A speculator is a person who buys a stock for "any other
reason".Often,they will buy shares in a company because
they are "in play" [another way of saying a stock is in
vogue,experiencing higher than normal volume and its shares
possibly being accumulated or sold by institutions].

They buy stock not on the basis of careful analysis,but
on the chance it will rise from "any cause" other than
a recognition of its underlying fundamentals.Speculation
is not necessarily a vice,but its participants must be
absolutely willing to accept the fact that they are
risking their principle.

While it can be profitable in the short term [during
bull markets], it very rarely provides a lifetime of
sustainable income or returns.It should be left only
to those who can afford to lose everything they are
putting up for stake.

How do these different types of activity affect stock
prices?.The speculator will drive prices to extremes,
while investors [who generally sells when the speculator
buys.. and buys when the speculator sells] even out the
market,so over the long run,stock prices reflect the
underlying value of the companies.

If everyone who bought common stocks were an investor,
the market as a whole would behave far more rationally
than it does.Stocks would be bought and sold,based on
the value of the business.Wild price fluctuations would
occur far less frequently because as soon as a security
appeared to be undervalued,investors would buy it,driving
the price up to more reasonable levels.

Speculators on the other hand,are the ones who help create
the volatility the value investors love.Since they buy
securities based sometimes on little more than a whim,
they are apt to sell for the same reason.This leads to
stocks being dramatically overvalued when everyone is
interested and justifiably undervalued when they fall
out of favor.

This "manic-depressive" behavior creates the opportunity
for us to pick up companies that are selling for far less
than they are worth :))

This leads to a fundamental belief among value investors
that although the stock market may,in the short term,
wildly depart from the fundamentals of a business,in the
long run "fundamentals are all that matter".This is the
basis behind the famous Ben Graham quote..in the short
term the market is a voting machine,in the long-term,a
weighing one.Sadly some reject this basic principle of
the stock market.

[Then we have the utter madness of naked short selling]

HM.