Saturday, November 5, 2016

Buy Low and Sell High

It is simple but most retail investors just do the opposite: Buy High and Sell Low. The flow of money to/from money market funds turns out to be a reliable contrary indicator.

The Early Recovery in 2003 and 2009 and the later part of June, 2012 could be the best time to buy.

The above represents buy at low prices and sell at high prices. Considering P/E (positive ‘E’ only), buy at low P/E of a stock, a sector and the market (via an ETF) and sell them respectively at high P/E.

Here are some hints when to buy and sell with this strategy:

·         Sell when everyone including your silly mother-in-law is making good money and all participants think they're financial geniuses. It could be the riskiest time. The high interest rate (my yardstick is over 5% for Fed Discount rate, the best rate the Fed lends to the banks) usually confirms this as folks falsely expect better return even they pay more on interest to borrow money to buy stocks.

·         Do not buy the stocks that were the bubble-forming stocks such as the technology stocks in 2001-2002 and the bank stocks in 2008-2009 as some 'optimists' think it is time to return and usually they're wrong.

Do not think the stock is a good deal when it loses half of its value. Buy them only when the root problem has been fixed. The best time to return to the market after a market plunge is usually two years after the market plunge (2003 for the market plunge in 2000 and 2009 for the market plunge in 2007/2008). Many bubble stocks never recover and many of these stocks take more than 3 years to recover. Their prices appear to be low, but no one can predict the bottom unless it goes to zero.

·         Be careful on the sector or group of stocks that have winning streak for more than two years. Most likely they will correct. Use stop loss to protect your profits if you want to keep them.

You could have saved a lot if you use this strategy on tech stocks in 2000. As of 2015, dividend stocks could be the next sector to burst but only time can tell. Do not fall in love with a stock. Yesterday’s winners could be tomorrow’s losers, and vice versa.

‘Buy and hold’ is dead since 2000. We have two market plunges with an average loss of about 45% from their peaks.

·         Do not buy dividend stocks solely for their dividends. Most of them are matured companies; most have less growth and hence less appreciation potential. They usually lose less value in a recession after dividends. Income investors are chasing them for higher dividends than bonds.

Except from Roth accounts, when you withdraw from your retirement accounts, your dividends will be treated as income. Check the current tax rates for income and dividend from taxable accounts.

·         Buy value stocks that seem to be bottomed. It is hard to identify the bottom. When the appreciation potential outweighs the risk, it could be a buy.

·         No one can predict consistently the market bottom. However, use your better judgment with educated guesses to gain an edge. Refer to the exit point using the 350-day SMA from the chapter on detecting market plunges.  

·         Buy the stocks that have been losing money but their burn rates can last for the entire recession. They're risky but the potential profits are great. There were many in 2003 and 2009. Even in a bad economy in 2012, a few corporations had historically low P/Es.

·         Buy value stocks with a turnaround sign such as when the SMA-50% is positive.

Buy against the experts who have unconvincing predictions. They usually exaggerate the rosy outlooks of the companies in order to sell the stocks they own. This is one of the few times you should bet against them. Use your better judgment to ensure how false their predication is.

This is part of one chapter of my book "Complete the Art of Investing". If it helps you, envision how 820 pages will help you. 

For more of my reasoning, check out the book described next. The Kindle has 850 pages (6*9) for $9.99. It could be the best $10 you ever spend. Paperback is also available.

The above is an abstract from my book "Complete the Art of Investing" which is available from Amazon.

I challenged to have the best-performed article in Seeking Alpha history, an investing site, for recommending 5 or more stocks in one year after the publish date. The concepts for that article are discussed in this book.


No comments:

Post a Comment