Avoid Head Fakes: The Fundamentals Will Drive the Stock Market

As an investor and portfolio manager in the stock market for quite some time now I have seen what kind of things seem to throw off investors who are just getting started. One of the biggest mistakes made by amateur investors is to put too much faith in a short-term move in the stock market. The truth is the stock market doesn't always make a lot of sense and sometimes there are large moves made in a short period of time simply because of a comment made by someone with a lot of money. If you really think about this kind of situation you should realize that comments or short-term news stories often have no long-term effect on the market, but investors often react in a big way when they first occur. This is because people are fickle and they are looking for a quick buck, which can often get them into trouble.

Though things such as a comment from a particular famous investor may make great news sound bites, but they do not alter the state of the economy or the corporate profit picture. I strongly believe that investors would do well to try to invest or trade based on the fundamentals of the economy and corporate balance sheets rather than what the news bite of the day may be. Stocks may react in a big way to other issues, but in the long run it will always be valuations, earnings, and the health of the overall economy that drives the stock market.

These short-term moves are often called "head fakes" by experienced investors. It is almost as if the market is trying to shake out weak hands or trick new investors into thinking the trend is being established just as the real long-term trend is actually about to occur in the opposite direction. Watching business news and financial television is good for you, but make sure you don't start getting too trigger happy and trade on things that you know deep down aren't what will drive the market in the long run.

Keep a close eye on things like the labor market, consumer spending, valuations, corporate profits, and the overall health of the economy. Tune out the "short-term noise" that occurs frequently in the stock market and keep your eyes on the prize. You will be much better off if you can be disciplined in your investing and the first rule of discipline in investing is keeping your eyes on the goal.