As each of our editors here at Port Phillip Publishing arrived this morning, we asked them just that question – when is the best time to buy stocks? In fact, we asked everybody in the office.
Here are some of the answers:
‘Stuff the Eurozone, stuff the bailouts, stuff the global debt crisis… NONE OF IT MATTERS’ – Kris Sayce (Australian Small-Cap Investigator)
Kris answered our question in his recent video (he’s away today, so we couldn’t ask our question in person). He doesn’t mean to sound flippant when he says you shouldn’t worry about what’s going on in the world. These are all serious things. But his point is simple; in the small-cap market, it really doesn’t matter.
If you’re speculating on a tiny firm attempting to find oil, a gas explorer scoping the Northern Territory for a mammoth new gas reserve, or an innovator trying to launch an as yet unproven technology (which promises to be a breakthrough), the risk is that you will lose all your stake if that company fails. BUT, if it succeeds, your investment will multiply many times over in almost any market.
For Kris, it’s more about judging whether the potential future rewards are WORTH taking on the risk. For example, one of the oil stocks he’s very excited about today trades for less than 5 cents a share. Right now, it’s attempting to tap East Africa’s vast oil reserves (there’s a reported 71 billion untapped barrels underground).
If this company strikes it lucky and everything goes to plan, Kris believes this stock could climb to $1 or more. But that doesn’t mean you should pay 20, 30 or 40 cents for this stock. Why? Because the more you pay, the more you’re risking and the lower your eventual return.
So what’s the general risk/reward ratio in the small-cap market like right now? ‘Never better’ says Kris. ‘It’s the best time to buy stocks in three years, since the lows of 2009. Right now nearly half the stocks on the entire Aussie market trade for less than 20 cents. Stocks that only one year ago were trading for 80 or 90 cents are trading for less than 20! It’s a punter’s dream.’
Kris’ brand new video report is on this very topic. With all the doom and gloom coming from our other editors, it makes for refreshing viewing. When Dan first saw it yesterday morning he said it was like being slapped in the face by a wet gorilla! ‘I wasn’t expecting it,‘ said Dan. ‘But he certainly got my attention.‘ Take a look yourself. If Kris is right, gains of between 100% and 1,566% are up for grabs. You can watch his brand new presentation, right here.
‘When stocks are cheap’ – Greg Canavan (Sound Money. Sound Investments.)
Greg’s answer, via email from Sydney, was extremely predictable, but it’s also the most difficult to actually put to work. It’s the answer that people like Warren Buffett might give. The idea is that a careful analyst can come up with a valuation for a stock. Then compare your valuation to the market price. If the price is higher than the value of the share, sell it. If the price is lower, buy it.
There are plenty of caveats, qualifications, ifs and buts. But, what’s more interesting is how the valuation is worked out. The concept probably seems straightforward – a company is worth something and you just have to figure out what it is – but actually figuring out what a company is worth is incredibly difficult. How do you price risk? What sort of margin of safety (the gap between stock prices and true value) do you need? How much will the business grow?
Luckily for SMSI subscribers, Greg does the hard work for them.
‘When it makes you nauseous’ – Dan Denning (Australian Wealth Gameplan):
Ever helpful, Dan has come up with another perplexing answer to a straightforward question. He probably means something like this: The time to buy is when your emotions are telling you it’s a bad idea. Another way of putting this is how Callum, Managing Editor of the Markets and Money, answered the question. He quoted Baron Rothschild’s famous maxim, ‘the time to buy is when blood is in the streets.’ Seen Greece lately?
Based on the same idea – that emotions are the investor’s fatal flaw – is this answer:
‘When Aristotle tells you to’ – Murray Dawes (Slipstream Trader)
Murray has done a pretty good job picking optimal buying points over the last two-and-a-half years. If you’d followed his trades over that time you could be up 114%. That’s in a falling market, and without using leverage.
Murray revealed his secret to trading a flat or falling market last week. And he’s revealed the remarkable place where he got it from. Rather than reading about it here, why not watch this video of Murray explaining his unique trading methodology.
It was inspired by Aristotle. And it’s based around a dead-simple principle: what if you could detect mistakes made by OTHER investors in price charts… and trade AGAINST these mistakes for consistent profits? It’s an ideal method for a frustrating and range-bound market. To hear more about it – and the $500,000 event that made him go looking for trading advice in such an odd place – click here.
‘When emerging countries are emerging, exploration companies are exploring and central bankers are printing’ – Dr. Alex Cowie (Diggers and Drillers)
Dr. Cowie is working from home today, so we had to make a best guess at what he might say. And his answer would probably be that there are always opportunities in resources. You’d think a portfolio restricted to resource stocks would be quite limited in its reach.
Not so. There are companies that serve as macroeconomic plays on long-term commodity trends, companies that are calculated punts – like those Kris Sayce favours – and companies that are steady earners. The time to buy each of these differs depending on what kind of stock they are.
But what makes commodities and the companies that are looking for, digging up and selling them, so worthwhile in times like these are their tangibility. They’re involved in something real. Something that doesn’t change its nature. In uncertain times, when everything else is changing, including the value of money, tying yourself to a rock can be a good idea.
Our favourite answer we got this morning was from Slipstream Trader’s Product Manager Jess. Her answer to the question ‘when is the best time to buy stocks’ was ‘in winter’. When pressed as to the nature of her remarkable stock investment philosophy, she replied something about keeping your feet warm.
By far the most enlightened answer came from our Compliance Officer Tristan. He said, ‘it depends what you’re buying for’. Gold buyers should be familiar with this thinking. Gold is about insurance for extreme events and for preservation of wealth in the face of steady inflation.
That means it’s a long-term strategy, not a short-term trade. The price you buy at matters far less. That’s why many of the world’s biggest gold advocates buy each month or quarter regardless of price. At the opposite end to this thinking, we have short-term traders who care only about entry and exit prices.
What about our answer? When should you really buy? Well, all of the above answers are undeniably true. But each of them comes into their own at different times. And for different asset classes. (The most common answer to my question was ‘buy what?’) For example, it’s not much use trying to value a stock that you intend to jump in and out of for a quick buck.
By the time you’ve done the analysis properly, the opportunity will be gone. And while Bernanke, Draghi, King and their fellow central bankers are spewing cash into the world, normal market behaviour is suspended anyway. But commodity stocks can ride the liquidity wave particularly well.
In times like these, our answer on when to buy is one we explained a few weeks ago. It’s called the perception gap. You buy when people perceive things to be worse than they are and sell when people perceive them to be better than they are.
So find the asset so beaten down nobody is bothering to criticise it anymore… and buy it.
Editor, Money Morning