by Jorge Malo
Everybody wants to know if it is time to buy stocks and financial advisors, brokers and analyst are quick to say Yes because stock prices are cheap. If you are one of those investors asking if it is a good idea to buy stocks right now, then please take into consideration the following points before investing any money:
1. - The stock price is not a reason to buy. Most people see a share price going from $50 to $10 and they jump in thinking that it is cheap and it is going back to $50. Stock prices don't have an obligation to repeat themselves. Most of the times, when you see a price going lower it is because of a reason; it could be related to the company, its industry, or the World economy. Before jumping into that stock make sure you understand the reason for its current price and also have a good reason or argument of why it should go back up. Always remember that a $2 stock does not mean the stock is cheap, it could go to zero.
2. - There is no direct relationship between time and stock profits. Investors and analyst believe that you should buy stocks and whatever happens with the price of the stock does not matter because you as an investors are "for the long run". The Buy and Hold technique does not guarantee a better return on your investments, and even can become a very risky proposition. First of all, if you want to really be successful with a "buy and hold" strategy you really need to make some market timing. If you follow investor's psychology, you will realize that small investors are usually the last one to buy into a bull market and also the last ones to sell into a bear market. This means that usually small investors will tend to buy stocks at higher prices only to see them turn into a loss during down markets. Also, it is safe to assume that if you are one of those investors that put money into a 401K or stock mutual fund every month, then the longer the markets go higher, the more money you are going to be willing to put into those type of products every month. So if you really want to be successful on a Buy and Hold strategy, you need to buy stocks during down markets when everybody else is selling. In order to do that, you need to accept the risks involved in playing against the crowd.
As mentioned before, stock prices don't have an obligation to go higher over time, and eventually the market goes South and people start to see their investment going lower and lower everyday. If you are one of those investors that purchased shares years ago thinking on keeping them for the "long term" you might see your portfolio down 40% or more and worst of all you have a very good chance that you own stocks that will probably never recover. Think about Yahoo trading over $150 during 1999, or GM trading at $50. Those stocks will probably never recover to those prices; there is more probability for those companies to disappear.
Buy and Hold is not the answer because it leaves out the most important part of the investment process, selling the stock. You will never make money on stocks if you don't sell them. It is so absurd, that people sometimes prefer to get a loan from their bank using their stocks as collateral instead of just selling their shares. I know what you thinking, what about taxes? You tell me what is best for you: paying taxes on your gains, or risking all your net worth to a down market only in order to avoid paying taxes?
So, if you want to know if it is a good time to buy stocks, my advise to you is to look for companies in well establish industries, and start investing little by little over time, but always have in mind an exit plan in order to take your profits. Look for the best-positioned companies in industries that will perform during the next administration and stay away from broken industries such as automobiles and airlines.
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