Editor’s note: This article was first published in April 2011; the Banco Popular share prices it uses as examples, including a current price of €4.20, and the fears of a financial bailout in Spain reflect that time. Banco Popular, which this article asks about as a possible stock to buy, failed in June 2017 and was sold to Banco Santander for one euro; its shareholders lost their entire investment. This article is kept as a historical record and is not investment advice.
Since more and more people are taking an interest in stock market investing and, above all, are starting to take some of our advice seriously, we’re going to try to explain how to invest and what you need to know to invest in the stock market. I’ll give you a few examples of real people, and basically we’ll explain how to use common sense when you analyse a stock and decide to buy into it.
Take the price history of one stock, specifically Banco Popular, although we could have picked practically any stock, since when the crisis arrived, all the IBEX stocks fell by more or less the same amount, with the odd exception. That gives us our first lesson: the stock market reflects the economic situation of a country. Some people say the market gives warning of economic problems a few months in advance, which I doubt, and we’ll see why later.
To begin with, many people ask what they need to study to be able to invest in the stock market. My answer is that to predict when a stock will go up and when it will go down, you don’t need to study anything, because even the people who have studied for it don’t get it right even 30% of the time. In reality it’s impossible to know, as Warren Buffett rightly says. The rises and falls of a stock, and of the IBEX itself, depend on a number of external factors beyond our control:
- The market itself and investors. After an unpredictable natural disaster, it’s normal for the market to fall, and nobody can foresee that. Nor can we control when thousands of investors decide to sell their shares, which also pushes the share price down.
When a major market fall approaches, we find two types of investors, or rather two types of situations that investors have to face.
- The investor who is pleased: this investor is obviously pleased because they had no money in the market at that moment, and now they’ll have their chance to buy in at a lower price.
- The one who despairs: this investor had money invested, and when the markets fall considerably, they know they have only two options: either sell the shares before they fall even further, or hold on to them and wait for the “storm” to pass. One way they’ll lose money; the other way they may lose even more in the short term, or recover their position in the long term.
Knowing this, you don’t need to study anything, but you do need to follow the companies you want to invest in and the financial market news. You should know how government measures can affect some IBEX companies, and that fear of a possible financial bailout can cause any unexpected movement in the market. But above all, you should know that the stock market is moved by only two things: investors’ fear and greed.
Going back to Banco Popular’s share price, after the huge drop in Banco Popular’s shares, which stood at €16 in 2007, they began a downward run until they reached about €9.
In 2008 a short climb began. Analysts started saying that Banco Popular was in an upward trend, and a resistance level was expected at €11.50–12. Well, when analysts talk about a bull market, the rise has already begun, so you’ve already missed the first points of profit.
If the information about the resistance level comes from a source that is closely followed by big investors or by lots of small and medium investors, you can be sure that speculators will buy and sell the stock before it hits the resistance level. One question that comes up is… would there be a resistance level if nobody talked about it? This is often said: some people’s advice doesn’t predict what is going to happen; they create it themselves with that advice.
The most recent example is Inditex. Technical analysis said nothing, but logic told me that if the Japan earthquake had hit Inditex’s share price, the moment the news came out that it had reopened the closed shops, the fall should end. And so it did. In just 5 days, the return was already above 7%. Afterwards, analysts advised investing in Inditex because an upward trend had begun, but the “green light” from technical analysis brought no more than a 4% return, since the initial 7% had already been missed. Information about and knowledge of the company beat studying a chart that doesn’t really point to anything, apart from green, blue and red lines with a few little circles.
A share has no value or price of its own, and it isn’t expensive or cheap; it’s worth as much as investors are willing to pay for it. We investors are the ones who put a price on a share.
The fact is that this Banco Popular share began a downward run, and investors’ fear of losing money did the rest, taking it down to a low of €3.34. It is currently trading at €4.20.
My questions are… what do you know about Banco Popular? Do you think it would be a profitable stock to make money with today? Will it go up, go down, stay where it is? Would it be a good option for the long term, or the short term? At what point would you decide to invest in it? What does technical analysis tell you? What do logic and common sense tell you?
Thinking about these questions may surprise you, showing how logic and common sense prepare you to invest and to understand stock market investing.
In the next article I’ll explain my opinion and give some more data so that you can understand the path I’m taking and where I’m trying to get to. Let’s call this a theory and practice class at the same time.
Further reading
- Warren Buffett’s talk on business and investing
- Warren Buffett’s advice and guidelines for investors
Featured image: Luis García, CC BY-SA 3.0, via Wikimedia Commons.
_01.jpg){kind=link}