The Investor Food Chain
Stockscores.com Perspectives for the week ending November 27, 2005
In this week's issue:
Where are you in the investor food chain?
Are you at the top with the capitalists, those who have the knowledge and experience to start their own public companies? One notch down are the seed investors, those high net worth individuals who finance the capitalists' ambitions. The seed investors are just above the venture capitalists that bring in more significant money to take businesses to the next level. Next, the investment bankers that provide the financing and distribution to take a company public.
Is this where you come in?
Probably not, because you still have the financial professionals who analyze these businesses for the benefit of the big investors, those who generate the most advisory fees for the brokerage houses. Then there are the savvy investors who spend countless hours researching individual companies in an attempt to gain an edge.
Then there are the brokers, who themselves fall in to a number of classes depending on the capital they have under management and their level of experience. The media comes in here, once a story is almost fully priced in to a stock. Finally, at the very bottom of the food chain, are the retail investors. If the capitalists are the king of the jungle then the retail investor is just a squirrel trying to get a nut.
Why are retail investors, people like you and me, at such a disadvantage in the stock market? Simply, it is because information moves stocks and the information we receive is so well examined by the time we get it that it is more or less useless.
Think about the process that information makes to filter down to the retail investor. Suppose a pharmaceutical company is founded by capitalists with an aim to eradicate the effects of the avian flu. The capitalists have an idea and expertise to carry that idea forward, so they begin work to find a cure. Through a research process, they might find something that is effective for preventing humans from contracting the deadly virus. What is that worth? Millions of dollars? Billions of dollars?
Who receives this valuable information first? Information is like the fruit on an apple tree. First the seed investors come in and pick some fruit, then the venture capitalists take some. As each different tier of investors comes to the apple tree, more and more fruit is taken away. That may not leave any apples for the retail investor to pick.
The stock market is not fair.
But what if you could watch what different groups of investors were doing, see what trees they were picking apples from. Without having any information, you could deduce what stocks were going to do well simply by following the action of those that know the most.
The good news is, this is possible. Every time someone makes a trade in the stock market, they leave a footprint that even the lowly retail investor can follow. Looking at stock charts is like following a path of footprints. If you know how to read the trail, you too can find the apple tree before it is picked clean.
The key is watching for abnormal activity, signs in market activity that someone is trading on new information. This simplified form of technical analysis is all you need to identify the right stocks. Go where the action is and move yourself up the food chain.
However, a word of caution. Knowing what stocks to play is only part of the process. Effectively trading the stock market also requires knowing how to size your position, when to sell at a loss, when to sell at a profit and most importantly, having the discipline to not fall in to the emotional traps that all investors encounter.
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Sometimes the simple things work the best. This week I went through all of the stocks that make up the TSX 60 index, looking for those that had a Sentiment Stockscore of 60 or higher (a sign that investors are optimistic) and were breaking through 15 day resistance. I then looked at the charts of those that qualified (there were four candidates) to see which stocks were early in their up trend, breaking from a good chart pattern.
One stock came up, I think it is a good stock to consider for longer term investors looking for a well known name to put in their portfolio.
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1. T.AL
T.AL has suffered a downtrend through almost all of 2005 but seemed to find bottom at $35. The stock has moved from a pattern of falling tops to rising bottoms, and broke through resistance this week at $43. The Sentiment Stockscore has recently crossed above 60, indicating optimism is returning to this stock. Short term support is at $40, I would be cautious if the stock breaks down below that. The stock also trades on the NYSE with the symbol AL.
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References
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Disclaimer
This is not an investment advisory, and should not be used to make
investment decisions. Information in Stockscores Perspectives is often
opinionated and should be considered for information purposes only. No
stock exchange anywhere has approved or disapproved of the information
contained herein. There is no express or implied solicitation to buy or
sell securities. The writers and editors of Perspectives may have positions
in the stocks discussed above and may trade in the stocks mentioned. Don't
consider buying or selling any stock without conducting your own due diligence.
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