Stocks seem to be recovering from the end-of-2018 correction. Is this the start of a new upward trend or are we still in for continued volatility? When you believe that a stock, real estate investment opportunity, or any investment is about to go up in value, how do you choose the right time to buy an investment? Although there are a few seasonal predictors of stock prices, choosing the right time to buy or sell typically has to do with intrinsic value versus current market price. Now that stocks are recovering a bit, what are the factors to watch for?
How Do You Choose the Right Time to Buy an Investment?
The best long term predictor of increasing stock value is a good business plan that generates increasing earnings year after year. Earnings are what drove stock prices higher in the years since the 2008-9 market crash and subsequent financial crisis. And decreased earnings are what hurt stocks like the FANG tech darlings in the later part of 2018.
Thus, the prospect of increased earnings makes an investment attractive. Investor’s Business Daily thinks this is currently the case for the FANG stocks.
Despite a sharp drop in the four FANG stocks last year, the outlook for the year ahead looks strong, with Amazon in the best position, said a Wall Street analyst Tuesday.
Canaccord Genuity analyst Michael Graham also maintained a buy rating on the FANG stocks – Facebook (FB), Amazon (AMZN), Netflix (NFLX) and Google-owner Alphabet (GOOGL).
The analyst is most excited about Amazon.com earnings prospects and expects the stock to go up by a third in the coming year. His opinion of Facebook is that recent losses have made it easier to post impressive gains next year. He predicts a twenty percent price jump in 2019. Netflix has raised US prices and the analyst expect a fifteen percent increase by the end of 2019. And, he is also positive on Google, expecting a ten percent increase in the coming year.
You should do your own fundamental analysis before buying back into these stocks but, if your analysis matches his, this is the right time to buy into these investments.
How Long Do You Expect to Hold the Investment?
If we look at the 2008-9 stock market crash and going forward we see a spectacular rise in the S&P 500 from a low of 770 to 2618 today. Ideally, an investor with the value of spectacular hindsight would have cashed out at 1561 when the market peaked on October 12, 2007. But this has more to do with when to sell an investment. Either way the S&P 500 as nearly doubled or nearly tripled in value since that time. We cannot go back in time to change our investments of a decade ago. But, we can learn from experience and come to appreciate how in long term investing the hills and valleys are averaged out and simply by investing in stocks with strong intrinsic value, we can expect to win over the years.
So, whether you are still in the market now, or sitting on cash after having sold in October of 2018, how do you choose the right to buy an investment now? The point of this exercise is that if you believe that Amazon.com or any company will continue to generate profits over the years, it is time to buy. Ideally, this is after a downturn when the price is a bit more attractive. If you are going to hold onto this stock for a long, long time, the precise time you buy it will be less important.
Dollar Cost Averaging
Many investors take money out of their salary for investing on a routine basis. A reasonable approach is to simply invest when the money is available. This approach guarantees that you won’t spend it before you choose the right time to buy an investment. The approach is called dollar cost averaging and is described by Investopedia.
Dollar-cost averaging (DCA) is an investment technique which involves buying a fixed dollar amount of a particular investment on a regular schedule, regardless of the share price. As a result of the approach, the investor ends up purchasing more shares when prices are low and fewer shares when prices are high.
The first advantage of this approach is that it removes fear and greed from investing. Thus you will be less inclined to buy excessive amount of stock at high prices and will naturally buy increased amounts of stock when prices are attractive. This approach may not be as profitable as excellent market timing but, the vast majority of retail investors are not really good at market timing so this approach is a huge plus.
Storm Clouds on the Investing Horizon
Over the long term well chosen-stocks using an intrinsic value approach are one of the most effective vehicles for building wealth. But, there are times when external events can greatly change the ability of a company to make money from its business plan. For example, when China cut off soybean imports as a move in the trade war, investments in agriculture, soybean farmers, grain elevator operators, and shippers were in trouble or in danger of going out of business. When the trade war threatens to become permanent, companies from Boeing to Harley Davidson lose substantial parts of their business.
There is always static in the markets as prices are bid up and down. And, there is commonly a melodramatic quality to analysts bidding for your attention and offering hope of obscene profits or threats of devastating losses. Most of this can be ignored over the long term. But, there are factors that change the face of investing such as world wars, basic changes in the world of technology, or shifts in social and political opinion. A current example is this. Who could have predicted the mess that the Brexit has become? But, now that it is unfolding, very badly, investments in British stocks may be bad choices for years and years to come. Kodak was solid gold until digital cameras arrived. And, if someone does not get control of the mad man in North Korea, all bets might be off.
The only way to deal with choosing the right time to buy an investment when such uncertainties exist is to diversify sufficiently that a single bad event does not destroy your investment portfolio.