Learn from Buffett's error --- Don't focus on charts and Technical analysis!!

There's one stock-picking strategy many people have tried. In fact, Warren Buffett spent eight years working with it before discarding it as worthless. What investment strategy is that? Technical analysis.

Invest like a lemming
Technical analysis is the practice of predicting where stocks will trade based on charts of historical pricing and volume information. Technical analysts look at the past charts of prices and different indicators to make inferences about the future movement of a stock's price. It is the polar opposite of fundamental analysis, and there's a certain logic to it. Stocks trade based on supply and demand, which is greatly influenced by investors' attitudes about the stocks. The charts should reflect those attitudes and might predict where the individual stocks will go.

It's an attractive idea. Clorox (NYSE: CLX) has bounced between $55 and $65 quite a few times in the past few years. Why not buy at the low, and sell at the high? Or look at Green Mountain Coffee Roasters' (Nasdaq: GMCR) chart. Clearly, investors love the stock. Its rise from $24 to $48 seems unstoppable. Why not jump aboard and profit?

Technical analysis is a simple yet compelling strategy. You can see why Buffett spent years early in his career trying to master it.

An expensive mistake
But Buffett discovered one small problem. Technical analysis didn't work. He explained, "I realized that technical analysis didn't work when I turned the chart upside down and didn't get a different answer."

After eight years of trying, he concluded that it was the wrong way to invest. Then he focused on the teachings of Ben Graham, which stressed business fundamentals, finding a strategy that both made sense and, more importantly, worked.

Three simple rules
The billionaire discussed that strategy at the 2008 Berkshire Hathaway (NYSE: BRK-A) general meeting. When he was asked how to avoid the crowd mind-set, he said he simply followed Graham's three most important lessons:

1. Buy stocks with a margin of safety.
2. A stock is part of a business.
3. The market is there to serve you, not instruct you.

The first lesson usually makes the headlines. It means that you should buy stocks for less than they're worth. But when Buffett talks about the second and third lessons, he's basically admitting that he wasted eight years of his investing life.

Buying a business
After all, thinking about a stock as part of a business is the opposite of what technical analysis is all about. Technical analysis focuses on trading securities. It doesn't matter whether the security is a share of Suncor Energy (NYSE: SU), with its oil sands, natural gas, energy marketing, and refining segments; or whether that security is a derivative promising the delivery of three tons of Italian meatballs. It's all the same because technical analysis doesn't care about the business -- or the fundamentals.

In Graham's second lesson, stocks are far more than just pieces of paper or lines on graphs, and to understand them, you need to understand the business. If you're looking at Under Armour (NYSE: UA), ignore whether the stock has been up three days in a row, and focus instead on how the company plans to address its inventory management issues.

Ways to serve man and woman
Similarly, when Buffett says the market isn't there to instruct, he's saying the movements in the market aren't telling you how to invest.

When Wells Fargo (NYSE: WFC) fell under $2 per share in 1990 (adjusted for splits and dividends), the market was saying that poor-performing California residential loans would sink the company.

When McDonald's hit $13 in 2003, the market was announcing that the Big Mac would end up in the Museum of Neat Ideas Gone Wrong, alongside the tapeworm diet, land wars in Asia, and Paris Hilton's home videos.

But in both cases, the market was wrong.

So, instead of listening to the market, Buffett seeks to take advantage of it. Sometimes, the market will offer to buy a stock for far more than it's actually worth. Other times, it'll offer you the chance to buy shares of a great company for far less than its fair value. An investor who understands the true value of a business will be able to profit when the market offers great companies on sale.

The Foolish bottom line
You can learn from Buffett's error -- don't focus on charts. Instead, understand businesses and seek excellent stocks that the market offers at low prices. These days, the market is particularly treacherous. Some stocks that seem cheap will turn out to be very expensive. Others that are simply beaten down by negativity will post amazing returns.

How to Spend Money In a Recession

It's important to save where you can, but it's just as critical to spend where you should.

When times are tough, most people think they should spend less and save as much as possible. That's good advice in many situations, but there are exceptions. Maybe we can call it spend money on the right time at the right place. Here are seven of them:

Home improvements: A recession is a great time to do work on your home. Materials will be discounted, since demand will be low. Labor is plentiful and cheap. And if the work increases the value of the house, spending extra money to get them done when times are tough makes financial sense.

Your health: Your health is always important, but it is even more crucial during dour economic times. You can't afford to miss work for an extended period without placing your job at risk. Preventive measures, even if they cost extra, are important. In addition, you need to quickly address ailments so they don't turn into something major later on.

Quality food: Food tends to be one of the few budget items that can be juggled to save money here and there. The problem is that people often choose to buy poorer quality food, which isn't as healthy. The food you eat will determine your energy level and resistance to colds and illnesses. Also, learn the tricks of the coupon trade so you can get quality food and save money at the same time.

Retirement: If you have the money, now's the time to buy stocks and other investments, especially if your timeline for needing the money is decades away. While people feel more secure when the stock market is rising, that's when equities are more expensive. Stocks today are less than half of what they were at their peak -- a bargain.

Products that save you money: More than ever, it makes sense to spend money on appliances and gadgets that will save you money in the long run. Price tags and labor are cheaper, and the extra efficiency will pay off in the long run.

Costs to relax: When the economy turns sour, it brings on stress. Stress is not only bad for your health, it can ruin relationships, cause a decline in job performance and affect decision-making when it comes to finances. The key is to know what reduces stress and figure out a way to keep or increase that activity in your budget. For example, a gym membership may seem like a luxury when there isn't enough money to go around, but exercise is a known stress reliever. Perhaps painting is your stress relief. Whatever the activity may be, don't scrimp.

Repairs and maintenance: Lengthen the life of what you have and avoid spending money on brand-new equipment. The amount you spend may be a fraction of the replacement cost.

Source from: thestreet.com

Stocks Basics(5): the ways to Buying Stocks

You've now learned what a stock is and a little bit about the principles behind the stock market, but how do you actually go about buying stocks? Thankfully, you don't have to go down into the trading pit yelling and screaming your order. There are two main ways to purchase stock:

1. Using a Brokerage
The most common method to buy stocks is to use a brokerage. Brokerages come in two different flavors. Full-service brokerages offer you (supposedly) expert advice and can manage your account; they also charge a lot. Discount brokerages offer little in the way of personal attention but are much cheaper.

At one time, only the wealthy could afford a broker since only the expensive, full-service brokers were available. With the internet came the explosion of online discount brokers. Thanks to them nearly anybody can now afford to invest in the market.

2. DRIPs & DIPs
Dividend reinvestment plans (DRIPs) and direct investment plans (DIPs) are plans by which individual companies, for a minimal cost, allow shareholders to purchase stock directly from the company. Drips are a great way to invest small amounts of money at regular intervals.