Expert: Dr. Joseph de Beauchamp - 9/25/2004

Question
Hi Dr. Beauchamp,
I have just recently been starting to learn about stock market trading, I have a small amount of money to play with so I have been learning  about investing in small cap companies.  I have been learning to read income statements and balance sheets, but have also been learning to read charts.  I have found it relatively easy to find information on the internet as to what some of the trend analysis information indicates, but I am trying to get a better picture of just what how conclusions about what these lines indicates are arrived at.  For example with an accumulation and distribution line I understand how the calculation is done: stock closes up 1 * Volume, stock closes down -1*Volume and anywhere in between gets a value from between 1 and -1.  I also understand that a trend upwards indicates a likely rise in the stock or a continuation of the trend, and a trend sideways or downwards indicates a trend reversal or decrease. But it is not crystal clear how this data would lead one to these conclusions.  It seems to me that if the accumulation/distribution is rising what we are seeing is that current stock holders are willing to sell at this higher price, and that new buyers are anxious to pay at this price. Is this a fair conclusion to draw from this?

Answer
Trends do not indicate the future. After 30 years, and teaching doctorate levels in three universities, there is no fact to base a purchase on a stock. Quantative information appears to indicate the future, however, stats tell us otherwise.

I would recommend ordering the financial information from each company your are interested. When they do not send the information or communicate, I have found this as a better indicator of future price performance. 1/2 of the 6000 companies I order, never respond, and therefore I have learned to not bother with those companies.

After this, I look at the debt to equity. I like to see 5 parts of equity to one part of debt in the balance sheet.

Hope this helps get you started on the best successful direction.

Dr. Joe de Beauchamp