Monday, May 01, 2006

Long Term Investing and Fighting the Tape

Left: 7' 2", 450lbs, wrestler Andre the Giant. b.1946 d.1993

There's a saying in the stock world, that goes, "Don't fight the tape." What it means is that when there's powerful selling going on against a stock, only the foolish step in and start buying, because the price is likely to continue to decline.

While there's obviously some point at which the selling will stem, and the "tape" may turn (provided there's some underlying positives to the stock), the short-term investor is well-advised to take note. To some extent, it would be like trying to fight Andre the Giant.

While I generally pay very little attention to "fighting the tape" in my own investing over the short term (hey, if I'm willing to buy the stock at the price offered, I don't particularly care whether I've bought at the precise bottom anyway), it makes sense to pay attention to "fighting the tape" over the longer haul.

Where I think one has to be very careful "fighting the tape", is when powerful long-term forces are at work against your investment. In my opinion, an example of this includes things like the computer industry, where costs keep getting driven down, as do margins. Investing in businesses in the midst of commoditization are situations where above average caution is warranted. That's not to say don't do it, just be aware of the forces at work, and be cautious.

I think that this is something to particularly keep in mind these days, as commodities themselves have risen from the ashes, to become a very popular asset class - and commodity oriented companies - and their stock prices - have thrived.

One day this tide will turn (probably when inflation is seen as a benign future factor - unlike today), and commodities and commodity-oriented company's stock will "return to earth". In the interim, some careful thought is warranted, to ensure that you're happy with your level of exposure to any situation based on a commodity product.


The Confused Capitalist

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Trent said...

The trouble today is, the tape has been going up along with the Fed. I am not supposed to fight the tape, but I am also not supposed to fight the Fed. No wonder I have been staying on the sidelines - just trying to avoid a fight that will be tough to win.

Jay Walker said...

Remember, "patience is a virtue", sometimes you need to be very patient, a story I tell over here:

(It sounds like you have some patience though)

Good luck
Jay Walker