Editor's Note: The following article was written by Raymond James Chief Investment Strategist Jeff Saut. It has been reproduced with permission for the benefit of the Minyanville community.


In Stock Profits Without Forecasting, Edgar S. Genstein wrote:
 

"The absolute price of a stock is unimportant. It is the direction of price movement which counts.”

• STOCKS
• RELATED ARTICLES
• ALSO BY...

SEARCH:

Spotlight Stocks: Bunge, Citigroup, Costco, Republic Services
Two Ways To Play: Monday's M&A Train
Answers I Really Wanna Know: Is Google A Victim of Its Own Success?
Two Ways To Play: Genentech's Good Genes
Jeff Saut: Making a Case for the Bulls

Jeff Saut: Don't Worry About the Dollar!
Jeff Saut: Was the Long Position a Bad Trade?
Jeff Saut: A Greater Observation Than Dow's Buy and Sell Signals?
Jeff Saut: 'Tis the Season for Superior Market Performance
Jeff Saut: This Isn't the End of an Era

During major sustained advances in stock prices, which usually occupy from five to seven years of each decade, the investor can complacently hold a list of stocks which are currently unpredictable. He doesn’t worry about the top because he knows he is never going to sell at the top. He knows that the chances are overwhelming in favor of the assumption that he will get far better prices by waiting until after the top is passed and a probable reversal in trend can be identified than he will ever get by attempting to anticipate the top, and get out on the nose.

In my own experience the largest profits we have ever taken have come from stocks purchased while they were making a new high in a market which was also momentarily expecting the top. As I have already pointed out the absolute price of a stock is unimportant. It is the direction of the price movement that counts. It is always probable, but never certain, that the direction of the price movement will continue. Soon after it reverses is time enough to sell. You should sell when you wish you had sold sooner, never when you think the top has arrived. That way you will never get the very best price -- by hindsight your individual transactions will never look daring. But some of your profits will be large; and your losses should be quite small. That is all that is necessary for a satisfactory, enriching investment performance.

I'm leaving for a speaking tour in Michigan and then will be out of the country speaking again, so I wanted to leave you with the above paragraphs to ponder. They're two of the most important paragraphs I've encountered in more than 40 years of studying markets. Don't read them just once; go off to a quiet spot that invites contemplation and read them several times. Then reflect on all of the mistakes you've made in trading and investing. Bells will ring and curses will be uttered if you're truly honest with yourself. My advice is to keep this quote handy, read it over, and study it every time you get ready to make an important buy or sell decision -- especially if your emotions are reigning.

Edgar Genstein’s comments are as cogent today as they were when first written in 1956. The most recent example would be the two-stage “melt up” that began on March 6 from the S&P 500’s (SPX) demonic low of 666. The first stage took the SPX up 39.6% into its first intra-day reaction high of roughly 930. From there, the index “flopped and chopped” around but never gave back much ground. Stage two of said “melt up” began on July 13 and has extended ever since. So far, the second stage has tacked on 24.3% from the July 8 intra-day low of ~869 into the September 23 intra-day high of ~1080.