While I still have plans to post some about themes from a couple of other books in the not-too-distant future, I decided today to address a question I received yesterday. A good friend, Steve, shared an older article with me, yet an article that is no less relevant today than when written. Go here to read that article.

The article addresses machine-driven stock trading. Steve concluded that there really is no trading strategy that can compete with this kind of machine-driven, “high frequency” trading. Steve queried me “Do you believe there is an appropriate time to sell for a profit if you have good reason to believe a stock will take a turn for the worse?”

In light of the article Steve shared, his question is an especially interesting one. After all, if machine-trading on some type of built-in algorithms play a larger and larger role in the stock market, where will it leave you and me if we attempt to compete by using rational analysis to ascertain the probable worth of an equity security at a given time?

In fact, I don’t even think the adage, “if you can’t beat em, join em” has any real meaning in a landscape not dictated by the pursuit of true valuation. I mean, how can you join what you can’t understand?

Fortunately, my investing experience reveals to me that a deeply undervalued company that is performing well usually gets found out, given enough time and migrates toward a deserved higher equity price. Note the combination of deep value (determined by proper analysis of balance sheet) and solid performance (the catalyst for discovery of deep value). This combination still reaps desirable results overall today even amidst active momentary machine trading.

Yet, is there a way to invest for that discovery of value (takes some patience) and yet participate in inevitable price swings over the shorter term at the same time? That is, can we assign some meaning to Steve’s words “if you have good reason to believe a stock will take a turn for the worse.”

I’ll share several possible meanings of “a turn for the worse” with regard to taking a profit in next week’s post.

Have a great week.