Let’s play a quick game that I like to call “Gun To Your Head”. I’m going to show you three stock charts of three different companies, and let’s pretend you are being forced to choose one of them to purchase right now, this instant.
The first chart is of a company that is climbing higher with seemingly no end in sight. The second is one that has crashed and burned the last few months. The third one is drifting sideways with little direction.
An excellent argument can be made for The Climber, as an object that is in motion tends to stay in motion. But buying from these lofty elevations could carry some risk.
The Crasher has gone off the road, but on closer inspections looks like its maybe found a floor, right? It could be a solid contrarian play with lots of upside.
And if you look very closely at The Drifter, it’s actually moving slightly higher with every wave, so it might be a winner-winner chicken dinner if you’re not in a rush.
So which one did you select? The Climber, The Crasher, or The Drifter?
Kind of hard to choose, isn’t it?
The answer is, there isn’t a right answer. They each have good arguments that can be made. Personally, I don’t own any of them, and I’m not making any recommendation that you own them either, but gun to my head I personally would have to select The Drifter. But that’s just me.
Here’s my point. The stock market is really a market of stocks. Though you will see that each of the three companies above are big players in the U.S. stock market, they are still only 3 of 30 companies that make up the Dow Jones Industrial Index, and only 3 of 500 that are part of the S&P 500. Though they are part of the two largest indexes, aka, our “stock market”, there is no doubt none of them are singing from the same song book.
In fact, below is a chart of the S&P 500 Index.
None of the three companies looks much like the S&P. The closest is probably The Drifter, but they are certainly not twins, maybe more like kissing cousins.
Though you will hear the phrase “the stock market” used all the time, don’t fall into the trap of thinking that all stocks move together. Some do and some don’t. Remember that the stock market is actually a market of hundreds and hundreds of individual stocks that move independently of one another. Don’t believe that just because Apple and Amazon are at all-time highs doesn’t mean JP Morgan and American Express have to follow suit (which by the way, they aren’t).
The trick of the trade to making money in the stock market is learning to pick the right stocks. Though you can and should make your investment decisions based in part on the general movement of the overall stock market, do your homework on the individual stocks you want to purchase, and place your bets based on how they are doing.
And by the way, The Climber was a chart of Microsoft, The Crasher was Walmart, and The Drifter was General Electric.
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