Every Wednesday, we publish our “Investor Toolkit” series. Whether you’re a new or experienced investor, these weekly updates are designed to give you our advice on successful investing, including productive stock trading advice. Each Investor Toolkit update gives you a fundamental piece of investing advice and shows you how you can put it into practice right away.
Tip of the week: “Investors who go out of their way to buy stocks at lower prices often find themselves with stocks that are headed in the wrong direction.”
For some investors, buying a stock is a two-step process. First they decide which ones to buy, and then they decide what price they want to pay. Many investors aim to buy a stock at, say, 5% to 10% below current prices.
You can’t negotiate a favourable purchase price for stocks
Investors who “bargain shop” for stocks explain that they are simply looking to buy stocks like a smart consumer would buy a car. But they overlook one 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. You can’t negotiate a favourable price for a stock. To get a lower price, you have to wait for the stock’s price to come down.
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Shopping for price leaves investors open to a double risk
Two-part investing exposes you to a double risk. Seemingly attractive stocks can drop for months, or even years, before a hidden flaw comes to the surface and explains their weakness.
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. These stocks will 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.
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, 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 slips into its next 5% to 10% setback, after all, it may first go up 50% to 100%.
COMMENTS PLEASE—Share your investment experience and opinions with fellow TSINetwork.ca members
Does the current share price figure prominently in your stock-buying decisions? Have you bought stocks at prices higher than you liked, yet been rewarded when the price went up? Or have you bought stocks “on a dip” only to see them get significantly cheaper?
Note: This article was previously published on June 13, 2012.
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