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FOOL'S EYE VIEW
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The stock market is a powerful force. It has the ability to make grown men cry. In extreme cases, it can force people to drink or even to suicide. Not pleasant thoughts, and perhaps not the most engaging way to begin a Fool's Eye View. Nevertheless, I urge you to read on. The story will get better! The collective knowledge of the stock market is much more powerful than the knowledge of any one individual. It is very informed (sometimes illegally so) and a great forecaster of future trends. To be a successful individual investor, these are two must-have qualities. Few people have them. But the market has them. Respect! This is the main reason why most individuals (including professional fund managers) find it very difficult to beat the returns of the market. On their own, they are not as informed as the market and not able to forecast future trends as well as the market can. Being Informed Why is this? It's simple really. Collective knowledge is stronger than that of one individual. We see that on the Motley Fool discussion boards every day. Take a fictitious company called TechTasticChips plc. An engineer can share his knowledge about the technical details of a company's latest product. An accountant can share her knowledge about the state of the company's accounts. An experienced investor can share his knowledge about the company's valuation. On their own, these individuals don't have the full picture. But together, they are a long way along the path to making an informed investment decision. The stock market has collective knowledge. It often sees things before the individual investor. Have you ever bought shares in a company thinking "they can't go much lower than this" only to see them do exactly that, and with interest? Have you ever bought shares in a "cheap" company, only to see it issue a profit warning and suddenly become "expensive"? In each instance, the market knew more than you -- the shares were cheap, but for a very good reason. The market was informed. Respect! Over the long term, the stock market is very efficient. The good and great companies are valued highly. The poor companies are valued lowly. Those simple dynamics are one of the reasons why, over the long-term, the stock market rises. The strong get stronger, and the weak either slowly wither away or are acquired. The market is harsh, but fair. Respect! You may have heard of Efficient Market Theory. In short, it says that shares are priced correctly and almost immediately reflect all information and expectations, giving investors little chance of outperforming the stock market. Respect! The Good News The stock market has a short memory. It can only forecast 18 months ahead. The market can and will get it wrong. Some Bad News The market only gets it wrong occasionally. Respect! Reality Even when the market does get it wrong, it is still very hard to spot those mis-pricings. It involves going against the crowd, which is never easy. There's more chance of you getting it wrong than the market getting it wrong. Respect! The Really Good News On the odd occasion when the market does get it wrong, and it temporarily mis-prices companies, individual investors can prosper. There are opportunities. Opportunities Potential Investment Opportunity Number 1 I read with interest recently of a downgrade by ABN Amro on the UK media sector. On the first trading day of this year, I said that media companies were overvalued. But I did conclude that "over the long term, the media sector remains attractive, provided you buy at the right price." ABN Amro was looking 6 months into the future. There's no doubting many media companies will have a tough next 6-12 months. But the great media companies, the ones who continue to have a strong competitive advantage, will continue to prosper over the next 6-12 years. ABN Amro and in particular the stock market never look that far ahead. That sort of vision is the private investor's competitive advantage. A Fool Says: Most good media companies still look too expensive. Do your homework now, and get ready to pounce should the valuations become attractive. Potential Investment Opportunity Number 2 Profit warnings are flying. Some will be the first of many such warnings -- BAE Systems plc (LSE: BA.) may be an example. Some will be the last of many -- Future Networks (LSE: FNET) may be an example. Some will be one-offs -- Matalan (LSE: MTN) may be an example. Individual investors can profit from profit warnings. It's a dangerous game, but there are opportunities. The market is often acts irrationally when a company issues a profit warning. That is the time to prosper. A Fool Says: Of the above three companies, the latter two may appear to offer the better investment opportunities. But, do your homework first, and buy when the price is right. And remember. Respect! Where Next? Let us know your thoughts on the Fool's Eye View discussion board. Respect!