Guiding principles of buying low and selling high: introduction. Preface. Guiding principles of buying low and selling high: introduction 1

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1 Guiding principles of buying low and selling high: introduction 1 Guiding principles of buying low and selling high: introduction Profitable stock trading based on patterns and logic It is impossible to know how high a stock will rise and how low it will fall. However, if you know the value of a stock then you know when its list price is too low and the stock is worth buying and you also know when its list price is too high and it should be sold. This is the only way to systematically buy low and sell high, realizing the largest possible profit. Copyright IRvalue.com All rights reserved. Terms of Use on Preface Those who are uninformed on the matter still regard systematically buying low and selling high to be somewhat of a delusion. Until about a decade ago systematically buying low and selling high was effectively impossible because there was no quick and accurate way of calculating the value of a company and instantly processing any changes that influence the value of a stock. In the mid-nineties IRvalue.com s research lead to the development of a computer model that can not only calculate the value of a company quickly and accurately but can also instantly process any change in the underlying, value-determining components of the company. The model allows us to see the value of a stock at any time based on known underlying factors. Each day the website publishes the adjusted value of the stocks that IRvalue.com tracks. When you know the value of a stock you also know to what extent the stock is under or overvalued on the stock market. Based on those facts you can systematically buy stocks that are fundamentally undervalued and sell them when they are fundamentally overvalued. This means that buying low and selling high (every investor s ultimate dream since stock trading began) can now be fulfilled. Of course there are many side notes to consider as discussed below.

2 Guiding principles of buying low and selling high: introduction 2 Introduction When you buy something in every day life, the first thing you do is to compare the value of the product with the price that you have to pay for it. For example, you would never buy a house without having a good idea of its value. However, in the world of investing most people buy stocks without knowing the current fundamental value of the stock. As a result, stock prices are often very different from the stock s current fundamental value. Sometimes stocks list at an inconceivably low price compared to their value and at other times they list way above their value. The under- and overvaluation of stocks is particularly exaggerated by investors herd instinct and the general mood on the stock market. Therefore, in order to do well on the stock market you first need to know the value of the stocks in order to buy low and sell high based on that value. If you know the current value of a stock and have a good idea of its probable future value, then you can also react more calmly when prices tank during a panic or if they climb to inconceivable highs during a market state of euphoria. However, you never know how far a stock will rise or how low it will fall. If you know the value of a stock then you do know when it is listed too low and is worth buying and you know when it is listed too high and should be sold. This is the only basis upon which you can systematically buy low and sell high and realize the largest possible profit. Even when things sometimes happen unexpectedly that significantly alter the value of a stock and in some cases lead to a loss, systematically buying when a stock is listed too far under its value and selling whenever it lists too far above its value still leads to the largest possible profit on the stock market. Such unexpected events that lead to losses should be viewed as exceptions that validate the rule. In order to make an optimal investment you not only need to know the value of the stocks but you also need to bear in mind the patterns, truths and certainties cited below. The emphasis, however, should still be on the intrinsic ability of a company to realize profits in the future. The intrinsic ability of a company to realize profit in the future (the Future Profit Potential) is the most evident basis upon which to determine the value of a stock. It is also the foundation for successful stock trading.

3 Guiding principles of buying low and selling high: introduction 3 Evident truths that matter when investing on the stock market (1) Successful stock trading is achieved when you manage to systematically buy low and sell high. Succeeding on the stock market by systematically buying low and selling high may indeed be a truism but it can only be applied if the value of the stock is known at all times. The value of a stock results from the intrinsic ability of a company to realize profits in the future (the Future Profit Potential). The value of a stock as well as the intrinsic ability of a company to generate profit in the future is calculated on a daily basis using a model developed by IRvalue.com. The up-to-date values can be accessed on the website. A detailed explanation of the Future Profit Potential of a company will be discussed later. (2) The stock market price increase potential increases as a stock lists further below its value. Obviously if the current fundamental value of a stock has not changed, the price increase potential of that stock on the stock market increases as the price declines below its value. When prices decline the herd gets more and more uneasy and at some point a panic sets in. The number of fearful investors wanting to get rid of their stocks at any price increases as the stock price continues to decline. Prices often tank without the current fundamental value of the stock being considerably affected. Investors who follow the current fundamental value of a stock buy at the lowest price. Clearly though, you should only buy once you are sure that there is in fact nothing wrong with the company. If you are unsure then you should wait patiently until things become clearer. You should never be in a rush to buy; there are always new buying opportunities for investors who know the current fundamental value of stocks. (3) Buying during a declining trend increases risk. The biggest risk is buying overvalued stocks during a declining trend. As long as the trend is still going up the investors just fan the flames as they each continue to buy even when the stocks are fundamentally overvalued. There is a mad rush for the stocks because everyone is afraid to miss the upward trend. At a certain point the increasing price trend stops because investors who know the current fundamental value of the stocks begin to sell. When the trend turns it is all over. The fire is put out and the overvalued stocks turn downward. Clearly the biggest risk with a declining trend is overvalued stocks. As described above, there is often panic during a declining price trend and stocks are offered for sale on the stock market no matter how low the price. Each successive decline causes more unrest and provokes yet another decline. The decline doesn t even stop once a stock is listed far under its value. You can never tell how low the price will fall. It is better to just stand on the sidelines until the decline stops. After the dust has settled there are usually plenty of chances to jump in at a low price. Things usually calm down again once the price stops declining. Investors are no longer putting stocks up for sale at any price they can get and more and more investors begin to realize that the stocks are listed far too low. The price then automatically rises towards the current fundamental value of the stock again.

4 Guiding principles of buying low and selling high: introduction 4 (4) The greatest profit can be made by buying undervalued stocks just as a declining price trend has turned into a rising price trend. Once an upward price trend has started there is often no stopping it. At that point everyone wants to buy again and the price often increases to way above the current fundamental value of the stock. There is a regular dip in price during a rising trend but the overall driving upward forces usually stay strong until the price has risen above the value of the stock. Therefore, the best chances of making a profit are after a decline when the price is listed way below the value of the stock and the price trend is starting to rise again. Certainties in price course patterns Most investors believe that nothing is for certain when it comes to the stock market. However, not only do certainties exist on the stock market, they form an essential basis upon which to achieve better results. Success on the stock market rests on knowing the current fundamental value of the stocks but you can get even better results by thinking logically and taking price course patterns into account. Four important conclusions can be drawn from historic price patterns on the stock market. (1) Prices move in waves. Stock market price courses are a succession of rising and declining movements. After a rise, prices decline and then rise again. Stock market price is a constant succession of waves. If you employ a certain amount of good will you can see a pattern in the length of the waves. If you look at the price charts of the Dow Jones from the last 100 years you can see, for example, that there are quite a few waves that are around 4 years in length. These price movements lasting around 4 years are called secondary waves. In normal stock market years with a moderately rising market you can see that most of the stocks have price waves lasting about 3 to 4 months. Price movements that last 3 to 4 months are called tertiary waves. (2) The stock market over exaggerates in both directions. The stock market usually rises way too high and falls way too low. Stock prices are a result of fundamental and psychological factors. Price rises always cause optimism in the investor world. Everyone affected starts to see the fundamental factors that determine the value of a stock through rose-colored glasses. The positive factors are inflated while the negative factors are ignored. The longer the rise lasts the more positive the reports become; favorable economic figures are expected as well as a continuing market rise. Investors start to become afraid that they might miss the market rise. This kind market mood can result in a buying panic. Everyone wants to own shares whatever the cost, yet as the price rises investors loose their grasp of economic reality. Prices continue to rise to unsubstantiated levels. When a price declines the exact opposite occurs. Price declines always cause a certain amount of pessimism. People start to ask questions about the value of the stock. This time, however, there is an air of negativity and the very worst case scenarios are

5 Guiding principles of buying low and selling high: introduction 5 contemplated. People ask themselves what the stock could be worth if the negative predictions come true. This leads to fear of what is to come and more stocks are put up for sale, which in turn leads to an accelerated price drop. Sometimes panic arises whereby investors completely loose touch with reality. Prices decline to unsubstantiated lows. Some investors recognize that the prices are too low but they sell anyway in the hope that they will be able to buy the stocks back at an even lower price later on. (3) Stock prices increase over the years. Results of well-run companies increase over the years. The stock values of such companies increase as the companies profit increases. The price on the stock market simply follows the value of the stocks and therefore, overall, it increases over the years. A price decline follows a price rise and a rise follows a decline etc. The increases are steadily larger than the declines and the price highs and lows form a rising trend line. Therefore, if you buy a basket of relatively safe stocks now you can almost say with mathematical certainty that you will be able to sell at a higher price a few years later. (4) Price constantly swings around the value of the stock. The price of a stock is constantly moving around its value. Price regularly increases above the value of the stock only then to decline below the value of the stock. Sometimes the price is way above the value of the stock and then it declines to unrealistic lows. The price will ultimately move in the direction of the current fundamental value of the stock. In the long term the price simply follows the value of the stock. More explanation of the IRvalue.com method, the Company Reports and the Price Increase Potential Screenings on the IRvalue.com website can be found in the following articles: The intrinsic ability of a company to generate future profit The relationship between a company s results and its stock price The Fundamental Value Indicator The fundamental basis of the Future Price Channel