When beginners approach stocks they look for either technical analysis or financial analysis like earnings, cash flow, price to earnings ratio, balance sheet etc.
This is not what moves stocks. If you want to be convinced of your ideas, you need to know what moves your stocks and what the situation might change.
In Jack Schwager’s book, The New Market Wizards, Stanley Druckenmiller said this in response to a question about how he values stocks:
Stanley Druckenmiller
“When I started in this field, I would prepare comprehensive research papers covering every aspect of a stock or industry. Before I could present to a stock selection committee, I had to first present the research paper to the research director. I particularly remember the time I presented him with my research paper on the banking industry.”
“I was so proud of my work. Yet he read it and said, ‘This is pointless. What makes a stock go up and down?’ That comment was a motivator.”
“Then, I focused my analysis on seeking to Identifying factors that were closely related to the stock price movement rather than looking at all the fundamentalsFrankly, to this day, many analysts still don’t know what makes their stocks go up and down.
His first piece of advice is not to invest in the present. The present doesn’t drive stock prices. Change does.
Scott Bessent, who was on the team of George Soros and Stanley Druckenmiller, once said, “People always forget that 50% of a stock’s movement comes from the overall market, 30% comes from the industry group, and then maybe 20% comes from additional alpha from stock picking. And stock picking is full of aggregate bets.”
“When a businessman invests in airlines, he is making a holistic decision on oil. Everything is a holistic bet. If you buy an agricultural company, it is exposed to the prices of soybeans/wheat/corn and so on,” he added.
As a very simple example, you can see below the correlation between crude oil and Chevron stock. In the big picture, the stock price movement is greatly influenced by crude oil prices.
Chevron (blue) vs. Crude Oil (red)
This type of approach is generally called “top-down.” This doesn’t mean you should completely ignore the fundamentals of a stock because there are always unusual risks, but it does show that the overall forces are what really matter in the bigger picture.