Stock Trading Formula's are they worth using?

Published: 05th March 2006
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Whether or not any particular investor should use a stock market trading formula is, of course, a matter of individual judgment. Some trading formulas, such as the Genstein Plan, require a fair amount of calculation, and many people are unwilling to discipline themselves to set aside time to manage their investments.
At the high points of big bull markets, many investors are ready to scoff at trading formulas. It is true that any portfolio containing bonds is at a disadvantage during bull markets, but how many individual portfolios perform as well as the Dow-Jones during a bull market? Besides, who is to predict that the market will always be one big bull market after another? A trading formula is power-less to take maximum advantage of a straight-up price rise, but the more normal pattern of stock prices is to undergo frequent periods of decline also. The "ideal formula timing plan," as summed up by one authority "is not that which secures the greatest gain for a given assumed pattern of security-price fluctuations but one which achieves the greatest gain for a degree of risk appropriate to the circumstances of the investor."
Undoubtedly, the prestige of formula investing is at its lowest ebb during periods of steadily rising prices, but after every decline a new revival of interest occurs, simultaneous with the discovery by many investors that they are not the analytical geniuses they had previously thought themselves to be. In 1949, for example, formula investing had proved itself superior to the average investor's judgment, and Business Week reported: "Despite the steep hills and valleys on market price charts, formula-investing during the past two decades would have produced far better results than those achieved by most individual money managers."
One subject that has not been touched on so far is the question of how to select the common stocks for a formula-managed portfolio. In the examples examined in the book "HOW TO PROFIT FROM FORMULA PLANS IN THE STOCK MARKET", one or another of the popular stock averages has been used to indicate movement of the stock portion of the account. Obviously, in-vestors do not buy stock averages.
Most commentators on formula investing suggest that investors buy stocks of above-average volatility. This would include most of the relatively high quality "growth stocks." It is not necessary to concentrate only on such stocks, however. What is important is to buy only those stocks which are actively traded, of good quality, and subject to at least average fluctuation.
As noted previously, there is no necessity for the investor to give up his prerogative of selecting the stocks he feels suit his requirements best. Whether he concentrates on conservative blue-chip stocks, growth stocks or wildly speculative issues, he can get the same benefits from a formula. The purpose of a formula—even if the investor using it does not always follow its dictates with precision—is to provide a touchstone for adjusting one's portfolio against probable market moves and maintaining a strong financial position under all circumstances. And this purpose will be fulfilled no matter what stocks the investor selects.
In speaking of the indications given by formulas, it is not intended that the investor necessarily retain exactly the same stocks at all times, even though the formula specifies that a certain proportion of stocks be held. The formula investor should pay careful attention to his portfolio and switch his stocks around somewhat as their outlooks change.

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