Reasons to Buy

Why should you buy a stock? That's a question almost everyone tries to answer at one time or another. Jim Cramer will have you believe that you should buy because of undervaluation and fundamentals. I disagree.

One reason I love Nicolas Darvas' book How I Made $2,000,000 in the Stock Market is because it reads like a journal. He describes all the mistakes he made as an early trader and all of his frustrations. I can relate to that because I had similar problems when I began trading the market. How can this stock go down? It's already undervalued! The fundamentals say it should go up!

Darvas realized that this was an exercise in futility. To buy a stock purely for fundamental reasons is wrong. It won't make you money in the long run. There's only one Warren Buffett but there are hundreds, probably thousands, of stock traders who make money every year by trading the technicals, not the fundamentals. Yet every stock "expert" or advisor, like Jim Cramer, tells the amateur investor to buy the fundamentals. How strange.

The greatest advantage an individual has over an institutional investor is speed. You can get into and out of a stock much faster with only a little money invested than you can with millions. A mutual fund has millions; I have much less. I win the game of speed. I can jump in and out as much as I want. I can sell one day and buy back the next. It costs me the transaction fee. That's it. So why should I buy and hold only to lose sleep at night because the market is tanking? I'd rather sit on the sidelines or, better yet, short the market on the way down. ETFs make that very easy these days. Oh, and so do put options. There are so many possibilities for the individual investor. But to buy for the fundamentals is just plain wrong. Unless you're Warren Buffett, and I know I'm not.