Tuesday, May 25, 2010

When to Buy and When to Sell

"Buy Low, Sell High"
Try ask anyone on the street, that's what they'll tell you. That's the strategy, they say.

Back in secondary school when I was first introduced to the concept of supply and demand in Economics class, I told my teacher "To make money in market is so easy ma, just buy when the price is low and then sell it when the price is high lo". Yeah right, it is that simple. Then my innocent mind think again "If it is really that simple, why do people lose money? If everyone does that, everyone would have been a millionaire. But someone has to lose somewhere..but why and how?"

There are thousands of answer to that question but that's not the topic for today. Today's topic is about when should we buy and when should we sell........rationally. The following comment is not only mine - well not all of them. Its is from all my readings and what I've learned plus what I think so far that I wish to share.

When to Buy
1 hour later? Tomorrow? The week after?........ I don't know. I don't what the price is going to be later, tomorrow, next week, next month or even next year. IF you know, shhhhhh...please email me, my email is at the end of this post and I promise to share with you 80% of my profits. Seriously, 80% or even 90% if you want to. The answer is there is no way to know future emotions or better known as stock prices. It baffles me when someone uses time to decide whether to buy or not. There is no right time to buy but there is right price to buy. You can buy at anytime as long as the price is right. If the business is good and the price is right, the rationale is one should buy it.

(My previous post states now is the time to go shopping. But I did say buy cheap and do your homework first. Well, normally this time around, during the bear market, things will go cheaper but not necessarily cheap)

When to Sell
I've heard of few advices on this:

  • Sell when you make maybe like 20%-50%? - What if I have gain 50% and it is still cheap versus the valuation? - Aiya, don't be so greedy la - O~kay~
If I have follow this advice, I would have lost 100 percentage point gain. Remember, if you buy 1000 units of Public Bank shares in 1967, you would have be a millionaire today! Erm...not a very good idea.

  • Sell when it is overvalued?
What exactly is overvalued? You see, before I buy, I make an estimated valuation which serves as a guide for the price I should pay most before putting my investment at risk. Remember, my valuation is done on a conservative manner because I am risk averse. "It is easier to stay out of trouble than get out of trouble", Buffet. What if I knew the business I owned has the potential to grow more than what my valuation expected. I definitely would not project business growth of 30% annually for the next 5 years, that is far too risky. What if the business really could. It'll appear overvalued that I would sell it and I'll end up selling a good investment. No, that's a risk that I'm not willing to take either.

"The best time to sell is never", Buffett
Yes, never. Okay, you might think I'm a Warren Buffett fans, I am. But what he says make sense. Why would you sell a good business? The time when you should sell a business is when the reasons you buy it no longer exist. Or, you need the cash to buy a bigger house or something. Ah Beng might ask "You crazy ah, if you never sell how to earn?". Then, my question is what are you going to do with the cash. I bet you more than 50% of the time, he'll say "Buy other shares lo". Don't get me wrong, what Ah Beng says does make sense - If he has found a better investment. Honestly, I don't get the rationale, to sell just because its price has gone up.

It the price offered is too high, for me, I might sell a portion because it'll look risky. Eh...didn't I just say that it is risky to sell? Yes, that's why I would just sell a portion lo. I do not want to risk losing a great business and at the same I would not want to risk missing a delicious offer price. What kind of price then? The kind of price that would take 50% to infinity annual growth rate to achieve.

This comment is based on my personal thoughts, opinions and my risk tolerance. It should not be considered as an investment advise. Please consult your financial advisor or do some research of your own before making any decision. You might have your own thoughts. I would love to here from you. You can always place your comments here and or email me privately at luzeeker@gmail.com

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