When to buy stocks

When should we be buying stocks?

There are several theories of when to buy stocks..

Listed in a lovely list they are:

1.buy when the next big thing is going to happen
2.buy when a stock's 'hot'
3.buy when the stock is low
4.buy whenever you have the cash
5.buy for the sake of buying
6.buy what others and when others are buying
7.Buying in a down (bear) market
8.buying in an up (bull) market




1.buy when the next big thing is going to happen

This is a very common reason for people to start buying shares in a company. From one perspective, it kind of makes sense. Though, not really. A company needs to be a good company first- have good management structures, a good vision, good financials etc.

So let's take an example. Company X sends you something through the post about the new drug they are producing, how it'll revolutionize the world and have billions in potential profits. The key word is potential- everything and everyone has potential- rarely does potential materialize and I'd prefer to put my cash in sure things than some PR manager's idea of their own 'potential'.

If you do feel compelled- look further into the companies story. Alternatively, wait until some of this 'potential' shows itself- the shares will continue to go up if the products/services keep doing well.

2.Buy when a stock is hot

Buying hot stocks is common. This is most common amongst people that have money to invest, are eager to spend but not to research much.

Hot stocks can mean alot of things, generally though its popular stocks in 'growth industries'. What they means? Who knows and who cares?
I prefer to invest like the best peter lynch's (look him up on this site or on the net) ideas of good stocks are:

1. It sounds dull -- or, even better, ridiculous;
2. It does something dull;
3. It does something disagreeable;
4. It's a spin-off;
5. The institutions don't own it, and the analysts don't follow it;
6. The rumours abound: It's involved with toxic waster and/or the Mafia;
7. There's something depressing about it;
8. It's a no-growth industry;
9. It's got a niche;
10. People have to keep buying it;
11. It's a user of technology;
12. The insiders and buying, and;
13. It's buying back shares.

Such rules led him to buy Automatic Data Processing (payroll processing), Taco Bell (restaurants), La Quinta (motels), Cork Crown and Seal (can and bottle cap manufacturing), Seven Oaks (retail coupon processing), Safety-Kleene (waste disposal) and Service Corporation (funerals).

They were all great buys. Not hot stocks. You decide which you prefer.

when does lynch buy?

Taken from his book 'One up on Wall Street':

"Find the long-term growth rate (your guess is as good as mine), add the dividend yield, and divide by the P/E ratio. Less than 1 is poor, 1.5 is okay, but what you're really looking for is a 2 or better. A company with a 15 percent growth rate, a 3 percent dividend, and a P/E of 6 would have a fabulous 3."

Simple enough.

3.buy when the stock is low

Good companies become undervalued, unfortunately bad companies can be bought 'cheaply' as well. So when do you know which company to buy? PE ratios- the ratio of the share price in relation to how much the company earns- is not always the best way.

Let's see why. Company XYZ sells cds- it was priced at £100(P) a share and made £5 per share in earnings (E). That would give it a pe of 20, on the edge of a high valuation. Suddendly the PE suggests its cheap when the stock falls to £10- giving it a VERY low PE of 2! What happened? People stopped buying cds! Just because the stock is cheap- does NOT mean its worth buying.

So what should we all do? Buy good companies at cheap rates- example? Tesco is at pe of 15 (not too bad), RBS is at a low of 4.5 (cheap!!see previous posts on this)- both good companies at decent prices.
What makes a company good? See lynch's definition above for a start and add good management, a good balance sheet, good prospects, good timing, stable products/services etc and you've got a good investment!

4.buy whenever you have the cash

Hmmm. If you did this then you might not be able to cover the emergences in life- meaning you'd have to sell shares when you had to, rather than when you wanted to- always a bad move. Better to invest when you have spare cash- cash you can afford to put away and forget about for 5-10 years.

5.buy for the sake of buying

No way. Research, research, research my brother!

6.buy what others and when others are buying

Would you go to the doctors when others were ill just because they were going? Would you support a big football team just because they have a lot of fans? If you go in with blind faith (and no research) risk is you will fall over and get hurt(with the rest of them!).

7.Buying in a down (bear) market

Most people think buying stocks in a down market is foolish- then most people are fools. How else will one make big money in stocks? Bear markets are few and far between opportunities to buy great companies at very cheap prices- miss them at your own loss, sell and join the fools' club.

8.buying in an up (bull) market

Ordinarily I'd suggest to buy in bears- though its best not to be out of stocks, as you'll lose the long term growth of good growth stocks. Rule of thumb- make smaller purchases when stocks are expensive, save up, and when a tragedy/crisis/bear market comes around BUY!

9. Buy consistently

To avoid the stress of the extra percentage point here and there- one good strategy called dollar cost averaging- http://en.wikipedia.org/wiki/Dollar_cost_averaging. Although wiki gives it a bad press it has the benefit of making sure you stay IN the market and buy when others are selling- the only way to make big returns and clarify yourself as a true investor (opposed to a foolish speculator).

Dollar/Pound cost averaging means you put in a set amount at fixed intervals(in good companies- dont forget that one!). That way when the market is down, with the small prices, means you buy more stock- and when it rebounds you are rich- hey presto!

Good luck!