It's clear at a glance that stock charts look like ocean waves. But are they really like ocean waves?

In the sea, you'll have a thousand waves, one after another, that are mostly the same height and depth. Isn't the stock market quite irregular, compared to that? Sure, it's easy to find several similar waves in a row, in charts, but then prices move to new levels, either up or down. The patterns don't hold up.

But think about this: If you were on the shore, and you measured each wave for a whole day, your chart would go up and down and up and down, but then it would start to go down more each time, so, really, your chart would go down and down and down, until, actually, the tops of the waves might be below the bottoms of earlier waves. We're talking about tidal action, here. And you could tell when low tide was reached, because the waves would start to all be about the same height, and the same depth, instead of each one being lower than the last. The bottom of a big wave - the tidal cycle - is sort of round and flat.

OK, you've measured waves for a whole day. Your chart shows wave heights and depths going up a little, and then going down down down, rounding off, then going up, up, up, and now they've rounded off in to a top and started to go down again. Where are you going to look for the next low tide? You know that tides, too, vary in height and depth. The next tide is likely to be slightly different from the last one. But, pretty much, you can predict the level of the next low tide, and, when it arrives, you'll see the evidence of it, the rounding off of it.

And you'll see bottoms in the bottoms, the bottoms of waves at the bottom of a tidal cycle. You're riding in a little boat, and the waves are going up and down - ever heard of a stock letter that makes you sea-sick before? - up and down. You can feel the boat going up a wave ... ah, we're coming to the top, whee, down we go, boom! That's the bottom! Well, you know it's low tide, so your job is to buy at the bottom of a wave. You've now bought at the bottom of a bottom.

So, look at the charts. The illustration is quite typical. In a ten year period, there's been a big wave, up and down. That's your tidal cycle. It's quite convincing. It's pretty easy to see the bottom rounding off. We just need to buy and wait for the next high tide.

The wave is rounding off at the bottom, and the bottom seems to be at 8. You can clearly see the low of an earlier tidal cycle, seven years ago, also at 8. You might note that that low was sharp and sudden, not rounding off like this one is. That's evidence of where we are in an even longer cycle. Does it affect our decision-making, here? I'm inclined to say it doesn't. It could be a useful thing to think about, though. If you can learn when to expect a sharp-bottomed wave, by analyzing longer cycles, you might be able to buy at some of those sharp bottoms.

Right, now, though, we're in a rounded bottom type pattern, at an established longer cycle low. This looks good. Buy at a bottom in a bottom, that's the rule. Look, the long term cycle high is 34. The recent and past long term cycle lows were 8. We're just past the top of a wave in the long term cycle bottom, and even headed down a little. Let's say we're at 12. Even if the next long term cycle tops out well below the last one, it only has to go to about 25 to double our money ... after commissions.

I equate this with Graham's margin of safety. The next long term wave is likely to go to 34, and we only need to ride it to 25 to achieve our goal in the trade.

Don't buy higher than the last price on this chart, though. There's no sign of a bottom in the short term wave we're in, yet. It's a safe bet you can easily buy it at the last price, and not higher.

See, the key mistake everybody's making is, they see something going up, and say, oh, I need to buy it now!. No! You need to buy when something is going down!

Are these long term cycles rooted in legitimate business? Yes! The stock is available at a bargain price. The company is run by purposeful experts, determined to succeed. Succeed they do. The price of the stock goes up. The early investors are well rewarded. They are interested in selling. The company's successes give it legitimacy as an investment vehicle. Larger players decide to cash out some of those early investors. But then more and more of the early investors cash out. The market starts to say "uh uh uh". We're not cashing out any more of you guys. It's time to get some new investors in here. We're dropping the price. So the stock becomes a bargain again.

Another worry is, is this company going out of business? You can really look at the chart and tell. Is trading robust. At this long cycle low, is the stock moving up and down with vigor? At its earlier long cycle lows, was it vigorous? Did it produce a strong price surge, and a sustained top? But you can take a look at the fundamentals, too. Is the company selling $100,000,000 worth of something, or, on a regular basis, $10,000,000 worth? Is it making some money, too? Or is it in a very dynamic industry (i.e., drugs)? Ten million dollars of sales every year is worth a lot of money, and getting there took a lot of doing. The people running these companies have a lot at stake, and they're good, too. They're going to work hard, and produce another wave of successes, and of profits for you.

Just kind of an odd note to wrap up with: I'm sort of suggesting buying and selling near the bottom. Maybe that's silly of me ... in fact, almost certainly it is ... why not ride a cycle to near it's top, then sell right away when it gets there, and look for something at a cycle bottom to invest in anew? ... but the idea of going for a double, cashing out, and looking for another one, is kind of fun. What I'm wondering is, what kind of role would we be playing in the markets? You're like a wholesaler. Through astute buying, you got a bunch of this stock at a really good price. Now, a retail buyer realizes a long cycle bottom is in place, and wants to get in on it. You say "I'm getting a good profit, I'll sell you some shares." You're a retailer. That's a service to people.

The people selling at the bottom are like the earth in which the crops grow, that sustain us. Innocents, sheep. Mostly they toil and accept a small reward, a decent life of some kind. Their happless wanderings into stocks haven't hurt them too badly, and haven't helped them either. Now, you're there, offering a little money for their shares, and they say "ok". Mostly, they are there, saying, "will anybody give me anything for these shares?" You happen to be there, and you offer them something, and they take, and say thank you. It's a bit hard hearted of you, but you've got a job to do, and you're not being evil about it. You're just harvesting the bounty of the earth, which would lie in the fields rotting, if you didn't.

No? You're not sure you agree about the ethics of this? What about if you think about it this way: What if you are doing it for a great reason? I mean, I think enjoying yourself and being secure and free is a great reason to do something, but, if that's all you do, you may land in trouble, eventually. You've got to bring lots of people along for the ride, when you hit the big time. Do something interesting with a lot of your money. Be ambitious. Be somebody. Be a scholar. Be a philosopher. Find people doing crazy, out there things to help lots of people have great lives, and invest in their projects. Be a leader and promote ideas. Build wonderful things and give them to people, or sell them cheap. Become someone who can sell things cheap and make a lot of money doing it. Host wonderful parties for thousands of people. Or for dozens. Or for your grand kids. Learn the value of frugal living - the absolute terrificness of it - too. Keep the same house for years and years, and truly make it your own. Plant trees in the garden. Turn off the stupid ac and suffer the heat in the summer, and, in the winter, make a herculean effort and heat your house with clean burning kindling in a Rumsford fireplace. Collect a set of dishes and cookware to last your whole life and delight everybody. Choose your furniture well and then keep it for 20 generations. Meditate on everything that's old and beautiful. Teach these methods to others.