What Stock Should I Buy?
(c)2000 TLC
may not be reproduced without permission
I find it interesting that the most common stock market question I get is, "What stock should I buy?"
I know I’m going against the grain here, but the way I see it, that’s not the most important question to ask. I know that all the books and all the advisors and all the brokers tell you that the entry point is not as important as the stock. I’m just not so sure they are right.
Don’t get me wrong. The right stock is important. It’s very, very important. But, as I’ve said before, if you bought a stock ten years ago, were planning on holding it for 10 years, and still own it, you did pretty well on just about anything that was not a scam, a crazy small cap, or Bulletin Board warrant deal. It’s been a heck of a bull market so far. It will go down in history. But most of the people I talk to were not in the stock market ten years ago. Most of them were not in the stock market five years ago.
For them, for the majority of people I talk to, choosing a "good" stock is almost impossible. If it were not, there would not be so many advisory letters, get -rich -in -the -stock -market tapes, and mutual funds.
It’s hard to pick good stocks and make money off of them. It’s really hard. That’s the truth. That’s why people that can do it consistently get paid very well to do it.
There are certain guidelines one should follow when choosing a stock to invest in. Most people don’t have the time or the inclination to do the extensive research necessary to cull the good stocks from the ones that may not be as good. I’ve spent years trying to learn how to do it, and I still consider myself a rookie. There is so much to look at, so much to study, that choosing a stock can easily become an overwhelming task. Even then, once you’ve done the work, made your decision, and bought your dream stock, it can seem that you have about a 50% chance of being "right" - roughly the same odds as throwing a dart at the Wall Street Journal.
Why is it so frustrating? Why aren’t the odds better? I believe that it has to do with your entry point.
I think your entry point is the single most important factor in your overall decision to buy a stock.
Let’s look at it logically. There are only two real ways to address this question. Either you just "buy and hold" the stock without regard for the vagaries of the short term price moves - you hold it through thick and thin, or, you have to make some effort to try and "get a good price". That’s just the simple truth.
"Buy and Hold" is not a bad way to go. If you are confident that the economy is good, that the market is strong overall, that things will be better in 5 years or in 10, and the stock or fund you want to buy is a good one, then you should buy and hold. You don’t have to be overly concerned with short-term price fluctuations and the accompanying mental gyrations. That’s why a good mutual fund may be the very best way to go. (I said "good", remember. Not all mutual funds are good. "Good" to me means the fund outperformed the S&P 500 over the last 5 years cumulative.)
So, what about this "get a good price" idea? I believe that the majority of stocks traded in the United States are "good stocks". I don’t buy Bulletin Board stocks, and I don’t buy stocks that look goofy to me. I try to look at things in a sensible way. For example, Bill Gates is the richest man on the planet, and has been for several years. His company appears to be doing well, and has for several years. That seems to me to be a sensible starting point for my due diligence. I’m not saying you should buy Microsoft, I’m simply saying that Bill Gates appears to be doing something right, and that’s a sensible starting point. The company is making money. A lot of money.
Essentially, "get a good price," means one thing: the stock goes up after you buy it. It does not go down. There is no reason to "explain" why your dream stock is "still great even though it got crushed" if it goes up. You were right. You bought it, it went up, and you are a genius, end of story.
All the pain, all the heartache, all the nail biting, that all happens as a direct result of the stock going the wrong way. Nobody I ever met complained about the mutual fund that went up the day after he bought it and never came back down. You don’t have to justify your decision to anyone if you were right. You don’t have to "average down", you don’t have to decide how much of a loss to take if you sell, you don’t have to figure your tax write -off, you don’t have to take aspirin, you don’t have to make up the loss with another stock, you don’t have to diversify, and you don’t have to cry. You don’t have to do anything but smile. You got a good price.
I’ve been fortunate. I’ve gotten a lot of good prices. I’ve also had my share of write -offs. But I also have a peccadillo - I hate to lose money. I really, really don’t like it. I accept the unpleasant reality that not every stock I buy will go up right after I buy it and never come back down, but I don’t like buying something and watching it fall off the edge of the earth the next morning at 9:30 a.m.
"So, Mr. Smart Guy," you ask, "What’s your point? What can I do to get a good price?"
Glad you asked. The answer is Technical Analysis. Go to the library, ask your broker what he uses, surf the Internet, do whatever you want, but find out about Technical Analysis.
What brand of Technical Analysis?
Whatever brand of Technical Analysis that makes sense to you. I’m not being flippant. I really mean it. Whatever kind makes sense to you. If it does not make sense, keep looking. If it makes sense, pay attention to it. Pay attention when something goes right. Pay more attention when something goes wrong. If you think that getting in at the right price is luck, then I guarantee you that somebody luckier than you will take your money. Mr. Lucky knows a little Technical Analysis.
You don’t have to know a lot about Technical Analysis. You don’t need to spend five grand for some fancy course. You can find out all you need for free. Keep it simple. Keeping things simple is a great way to go. Learn a little about trend lines, learn a little about supply and demand, and learn a little about support and resistance levels. You'll see people who claim they understand TA try to hypnotize you with flashing lights and multi-colored charts with lots of straight lines and lots of wavy lines. They are mostly morons. Sorry. They are.
A really good chart reader looks at simple charts. Not complex. I know a guy that is so good that he doesn't even look at charts at all! He's a technical trader, and he keeps the charts in his head! If you see somebody trying to dazzle you with a complex explanation of what a chart says, I guarantee that person has not figured out how to read a chart. Either that, or he wants you to pay him to interpret the chart, and the more confused you are, the better he likes it.
There is a theory floating around that the stock market is just a series of random events - that there is no way to predict the future movement in a stock’s price using Technical Analysis. I’m here to testify that that theory is wrong. I can predict which way a stock will go sometimes. Not every stock, and not any time. But I can do it. I do it every day the market is open. I get clues about the future from the past. You can get clues about the future from the past, too. You can learn to make educated decisions about entry points. You can increase your potential for success with the use of Technical Analysis. It can help you. It’s not the easiest thing you ever studied, but I honestly believe that it is worth your time and effort.
If somebody claims that "nobody understands the market" all you have to do is realize that he doesn't understand it, and he wants you to agree that since he doesn't, nobody else does either. That's manure. You can understand it. It is possible.
Study some basic Technical Analysis. Then, the next time you find the best stock you ever did see, take a look at the chart before you buy it and draw your own conclusions about the best place to enter your order. Consider your entry point - consider your risk, consider the loss potential, consider what will have to happen for you to know you were wrong, consider how much reward is available compared to your risk.
Plan your entry, and plan your exit if it goes the wrong way. You can do it, and Technical Analysis can help increase your odds for success.
And please remember this: it costs less to miss an entry point and stay out than it does to blindly throw your money at a stock your barber’s dentist’s gardener’s stockbroker really likes, watch it go down, gnaw off your fingernails, and then take a loss. |
