Trade Like a Stock Market Wizard summary

You’ve probably encountered the phrase, “buy low, sell high.” If so, you may have thought that 2009 was the chance of a lifetime to snap up shares in then-blue-chip companies like Citigroup, Lehman Brothers, General Motors, and American International Group (AIG) as their prices dipped to historic lows. 

But then, it could have also been a sign that the value of those companies was dropping. The financial crisis saw AIG crash from $103 to 33 cents in the span of two years; it was struck from the Dow Jones Industrial Index in September 2008, as was Citigroup in 2009. The price of GM sank 95 percent in 2009, too – a loss that brought it back to its 1933 worth and also warranted its elimination from the Dow Jones Industrial Index. 

There’s an important lesson to be learned here: the stock market doesn’t care about pedigree, only track record. The measurement in the marketplace is growth. Don’t let yourself be persuaded into investing in a sinking stock simply because of its name recognition or reputation. In many cases, such stocks belong to the past; the future may belong to companies with names you’ve never encountered. 

Ever heard of the cockroach effect? If you live in New York City, you might know that once you see one, it’s game over – there are bound to be others, too. But this principle can be flipped to the positive. If a company’s quarterly earnings are unexpectedly greater than analysts had predicted, there is likely more good news. If a breakout company seems to be on the upswing, it might mean you should pay attention to that industry as a whole. 

Such surges of attention and prospective success may lead to an influx of institutional investment in a stock before the actual numbers even come out. This can be a successful earnings-boosting strategy. And if the speculation is well-founded, that probably means the numbers will keep going up the next quarter, too.

Guess what? This contagion effect is just as applicable to less sunny surprises. Companies that fail to meet their estimated profits will often continue to disappoint in the next cycle. So when you’re starting to put together a roster of potential companies to invest in, focus on those that have exceeded their earnings expectations in the last few quarters. To put it simply, avoid those that have a negative mirror effect, and invest in those that have had positive signs of growth. 

This might seem like obvious advice. But in the next section, we’ll see why it’s more counterintuitive than you’d think.