Our stock trading advice: When you buy good stocks, don’t expect to pay below market prices

For many investors, the stock trading advice they follow is to decide which stocks to buy, then they decide what price they want to pay.

For many investors, buying stocks involves a two-part decision. First they decide which ones to buy, then they decide what price they want to pay. Most want to buy, say, 5% to 10% below current prices.

Stock trading advice: why haggling over price doesn’t work with stocks

These investors often explain that they are simply looking to buy stocks like a smart consumer buys a car. But they overlook a key difference. Car prices do vary, and some buyers do pay less than others, because they have better bargaining skills and more time to spend shopping around.

However, the stock market is more efficient than the car market, as an economist would put it. To get a lower price on a stock, you have to wait for its price to come down.

Two-part investing exposes you to a double risk. That’s because seemingly attractive stocks sometimes drop for months or even years, before a hidden flaw comes to the surface and explains their weakness.

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For that matter, little-noticed stocks sometimes rise for months before the reason for their strength becomes apparent. In a lifetime of investing, you’ll choose both kinds of stocks.

If you always try to buy below the market, you’ll always get a “fill” on stocks with hidden flaws. They’ll always come down into your buying range … and they’ll keep on falling.

But you’ll never get to buy the other kind of stock — the kind that keeps going up. They’ll always seem too expensive, and they’ll go on to get even more expensive. But you need a few of these ever-more expensive stocks to offset the losses from those that get cheaper and cheaper.

The current market’s key positive and negative factors

No one can say for sure what the market will do next. Some people say it is “due” or even
“overdue” for a setback after its sustained rebound since 2009. But stock prices don’t operate on any sort of regular schedule.

My best guess is that the market will keep rising for some time. But temporary market downturns are sure to come along unpredictably.

Here are the market’s key positive factors:

First, stocks are still attractive in relation to measures such as dividends, earnings and earnings

Second, interest rates are low. A small or creeping rise in rates might inspire some investors to buy stocks. They may take it as a sign that the economy is gaining momentum. They may think rates are going up because businesses are competing against each other to borrow funds for expansion.

….and the market’s key negatives:

First, there is always a risk that we are headed into an economic slump. I see little if any reason
for this to happen. But we have to accept the possibility.

Second, the debt problems in Greece, Italy, Spain and other European countries have lead to the devaluation of the euro. With any luck, however, this turmoil will put a scare into key western European countries that leads them to clean up their own spending and balance sheets before they are forced to do so. To do that, they’ll have to cut back or dismantle programs and structures that have made much of Europe a bad place to invest.

If you take reactions of EU leaders at face value, it’s easy to assume that the UK Brexit issue will drag down growth for years.

France and Germany seem to hope that Brexit will help them supplant the UK as the EU’s main financial power. However, the City of London (the three square-kilometer area in the centre of the city of London) reached its position of worldwide trading and financial prominence over a period of centuries. It will take more than bureaucratic edicts to force EU financial interests to move their business to Frankfurt or Paris.

More to the point, a free trade zone is possible without a political union. For years, Canada has been trying to forge a freer trade agreement with the EU, comparable to NAFTA (our trade agreement with the U.S. and Mexico). Key EU members have just assured Ottawa that CETA (the Canada/EU free-trade treaty) will be ratified, regardless of Brexit.

I think we can safely disregard the tough anti-Brexit talk from EU members. In fact, Brexit could speed up that movement toward freer worldwide trade. My advice is to remember that “A rising stock market climbs a wall of worry.” Brexit is just another brick in that wall.

I look at these positives and negatives and see reason for optimism on the market outlook, at least for patient investors. The worst risk I see is a lengthy sideways move. But if that happens, we’ll have today’s high dividend yields to help investment gains, against the backdrop of low interest rates.

Our stock trading advice? Investment quality is the key to finding stocks with gains ahead

There’s no easy answer to the buy-now-or-wait dilemma. At times it may pay to hold off — for instance, a company’s stock will often rise when it announces a stock split, then fall after the split takes effect.

In the end, our stock trading advice is that if a stock is truly worth investing in, you should be willing to buy it at current prices, even if that means you run the risk of having to sit through a 5% to 10% setback. Before it puts on its next 5% to 10% setback, after all, it may first go up 50% to 100%.

Let my stock trading advice help you zero in on stocks that offer strong growth potential with less risk

When you become an Inner Circle member you always have access to me and my investment team. Whether you’re looking for investment strategy or a trusted second opinion on whether you should buy, hold—or sell—a specific stock, my trusted advice is always a mouse click away.

In addition, you’ll not only receive the answers to your questions, but you’ll also get to see all other members’ questions, and our answers (of course, we eliminate any personal information).

Even if you don’t ask questions yourself, you’ll be surprised at what you can pick up by reading answers to questions posed by other investors just like you.

And that’s not all. You also get subscriptions to all 4 of my newsletters, The Successful Investor, Stock Pickers Digest, Wall Street Stock Forecaster and Canadian Wealth Advisor.

I urge you not to miss this opportunity. Give yourself an advantage over other investors and join my Inner Circle today.

How do you invest? Share your strategy with us in the comments below.


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