The art of successful speculation consists of thinking in the future, and of thinking contrarily. To be successful in speculation requires:
1. An extraordinary amount of general and specific knowledge.
2. A keen sense of 'money' and, perhaps most importantly of all
3. A temperament that thrives on the strains and tension of speculative money-making (and money losing, be it added!).
When you stop to realise how unprepared most people are when they attempt to speculate you marvel they don't lose more money. Professions require postgraduate education before one is qualified to practice - whether it be as a physician, an engineer, a lawyer, or a certified public accountant.
Yet, you find people who cannot read or understand the simplest balance sheet or comprehend the profit-and-loss system. The significance of static versus ladderlike earnings is lost as they grasp eagerly for tips.
According to Webster, speculation comes from the Latin, speculare, meaning intuition, vision, perception, the faculty of intellectual examination - and especially, reasoning in the form of systematic analysis. To speculate, means to spy out, to observe; hence a speculator is a contemplator and an observer, one who looks ahead intelligently, intutively, and perceptively.
I stess the definitions because the art of successful speculation menas to cast your mind into the future, while observing the present.
The briefer the aphorism, the more likely it is to be so laden with invisible qualifications that it becomes useless. Note, for example, that the book was published in 1998. If one had jumped into stocks that had fallen 50% in 2000 and 2001, he would have found himself in a great deal of trouble.
Yes, stocks that have been pummeled CAN be great buys IF there is a solid fundamental component. But expecting to profit from anything at all simply because it's down, as the aphorism implies, is hopeful, to say the least.
You may also want to look at Neil's book on contrarianism.
Your encounters with the marketplace can be exhausting, both mentally and physically. To remain on top of things, you should regularly take time off, get away, or "vacate." Discovering how to rest and refresh your financial mindset in the midst of the clutter of the modern marketplace is more difficult than it may seem.
'For an astute investor, the worst situation is an "efficient market," in which all information is known and understood by all players and in which prices reflect the information. Not to worry - none of us will ever see that.'
Research gives you the knowledge you need to form opinions.
Contrarians can never spend enough time looking at risk. Since risk can't be eliminated if higher returns are sought, minimizing the effects of risk becomes central to successful investing.
If you're in love with a stock, try making the bear case for it.
Investors should be able to recognise the risk of an investment as easily as the potential return. If they can't, they should not make the investment.
Cash flow is raw power. Cash flow is king.
There are more fools among buyers than among sellers.
Many times, a perfectly good company or reasonably healthy industry sector will become "oversold."
Succeeding as a contrarian demands discipline, requiring us to seek opportunities not being trumpeted by the crowd.
Research shows that people selectively read newspapers and magazines or watch TV, looking for those commentators or programs that reinforce attitudes they already hold - and shun those that might change their opinion.
Each of us is a cauldron of fears and anxieties. So we find comfort when we're in agreement with others.
The essence of contrarian investing is buying when others won't.
Contrarians buy on bad news, and sell on good news.
Stocks are a voting mechanism, pure and simple. They are a collective vote of expectations of each company's future fundamentals. If investors think business will improve, that earnings estimates rise, then the stock is going up. If investors think the end is near, a company is about to roll over, a stock will go down. It doesn't mean that those fundamentals ever happen.