Whether we are buying a house, a car, or an investment instrument, we strive to save money by purchasing at the lowest possible price. Alternatively, we would make a sale at the highest possible price. The problem that we have is that we don't know exactly when prices are at their lows or highs.
In Canada three years ago, the share price of Nortel Networks was trading above $120 per share. Investors were continuing to hold on to their share positions or were buying more shares in the hope that the share price would continue to climb, which many stock analysts were predicting. Recently the share price traded below $1.00 per share and most investors had no interest in buying Nortel.
There is a fear factor that drives this behaviour in a lot of us. When prices are falling, we are afraid to buy, as prices may keep dropping. Conversely, we don't sell when prices are rising, because prices may continue to rise and we don't want to give up the potential extra profit. Unfortunately there is no exact science that allows us to pick highs and lows. There are many types of analysis that attempt to gain an advantage when making investment decisions. A lot of times historical patterns are used to predict the future, but we all know that history does not necessarily repeat itself.
If an investor is looking to own a balanced portfolio of quality stocks, purchase opportunities arise when high quality companies experience temporary difficulties. The initial stock market reaction is a price decline in the stock, which is an opportunity to buy the shares at a lower price.
Usually these companies resolve their difficulties and the share price rebounds over time.
Another purchase opportunity arises when a stock's dividend yield (annual dividend / share price) is comparable to other fixed income securities.
Investors can earn an attractive level of income, as they wait for the anticipated share price appreciation. Companies may reduce or eliminate their dividends, but the chances of this happening are reduced with a high quality stock.
A good sell discipline for a balanced portfolio, is to pare down any holding that has increased to a disproportionate size relative to the other holdings. This creates a gradual selling of stocks that have performed well.
The proceeds can then be used to purchase better value stocks that have better upside potential.
It difficult to outguess the market over time, but a simple buy and sell discipline will help investors avoid 'buying high" and "selling low".
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Investment advice #7: Buying and Selling
Archived Articles | 11 Mar 2003 | Rein LeeEWR
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