Market movement and your investment returns

Benjamin Franklin famously mentioned that in short-term markets are voting machines and in long-term markets are weighing machines.

Voting machine refers to the demand and Supply situation. If a particular stock is in demand the share price will increase.

Whereas the weighing machine is primarily dependent on the performance of the company. In the long term, the profitability of the company only drives the return.

There are two ways of making money in the stock market. One is you are with the market and the other is you stand against the market.

If you are with the market, it is also called momentum investing. You move along the share price. It's easy to refer to charts and perform technical analysis but it is hard to consistently beat the market over a long period. However, these techniques can be used to time the market.

There are a few technical indicators.

Relative Strength Indicator RSI

RSI indicates whether a particular stock is overbought or oversold.

Bollinger Bands

The Bollinger band is kind of a confidence interval based on the volatility of the stock, it has an upper range and a lower range. This gives a sense of the volatility of the share price.

200 days average

If the current price is above the 200 moving average, the market is interested in the stock, keeping the momentum alive.

You can refer to this picture, which indicates RSI at the end and Bollinger Band (BB) next to the price ticks.

This includes 200 moving average marked in grey color alongside the share price line.

Now, fundamental analysis is the other spectrum of understanding business (less to do with daily price movement).

If you are looking at very large companies, a bad quarter or a generally pessimistic market and hurt the share price. However, there is a chance that fundamentally there is no change in the business.

Similarly, a small company that is not discovered by institutional investors may be very profitable but the share price could be very low.

At any point in time, the market responds to the available information. An analyst can be futuristic and can arrive at the worth of a business more than the prevailing market price.

Those who have a deep understanding of a particular company or industry will have an edge over others. He/she will be in a position to assess current market conditions better.  

Even if you are the best analyst in the world, still you can commit mistakes in valuing companies. You should allocate a higher percentage where the probability of winning is high. You should also have an appropriate number of different businesses to provide optimal diversification.

Whether you use technical analysis, fundamental analysis or a combination of both is no guarantee of investment returns. 

If you are a short-term investor, technical analysis is more appropriate. However, the chances of beating the market are still low.

You increase your chances of investment success when you are long-term focused and fundamentally oriented. Over the long term, if your business performs, the share price will eventually catch up with the performance of the business.