Investors have always tried to bend the market to their will. Many have tried, but only a few of them have been successful. But can this success be attributed to their strategies or just how the market corrected itself?
Here are a few “Controversial Investing Theories” that will make you think –
Fifty Percent Principle
The principle says that an observed trend will have a price correction amounting to half or two-thirds of the value of the change in price. In simple terms, if something gains 20% there is a chance that it will fall back by 10% before it rises again.
It is used to see short-term trends and many traders buy and sell with them. A natural correction is expected with every rise in price. But if the correction exceeds more than 50% then that means a reversal of the trend has come prematurely.
Efficient Market Hypothesis
This model incorporates all the given information about the stock and assigns its value until a future event changes the value. This is because the future is uncertain, and the theory promotes diversifying your investments.
But a great contradiction to the theory is Warren Buffet. He and many others have been able to beat the system and rake in profits from irrational prices.
Odd Lot Theory
An interesting theory where the bigger investors wait for the smaller investors to sell their stocks. This is when the more prominent players in the market buy their stocks. It relies on the assumption that the smaller investor is usually wrong and exits the market at the wrong time.
But even if you follow this method, make sure to check the fundamentals of the company before you decide to invest.
Greater Fool Theory
It hinges on the fact that there will always be someone that will buy the product from you for a higher price than you got it for. This theory works in general and if you have an overpriced stock, you can easily sell it to someone else.
But at one point you will run out of people who are willing to buy from you. Ignoring data might be risky but playing it too safe might also cause problems for you in the later run.
Short Interest Theory
High interest for a short amount of time in a stock means that the price of the stock is going to rise for some time. It can be hard to spot it but when you do, you should invest in it. It assumes that many people and traders are scrutinizing every piece of data that comes their way and not all of them can be wrong.
In the end
With a lot of theories going around, it is best to see them as “Theorie” trying to make sense of the market. It can be hard to read and take advantage of the market but in the long run, you will find something that works for you.
It is best to see these “Theories” as structures that are trying to impose rules on the free market and make sense of the recurring trends.