When is the Right Time to Buy a Stock?

This is one of the two most vexing questions that the stock investor has to deal with.  The other one, of course, wrestles with the right time to sell a stock.  Some investors will struggle more with buying than selling, some vice-versa, whereas others will struggle with both, and the super-human investor will have no problem with either!

This post is more concerned with when to buy a stock, so I will emphasize
timing more than price.  For example, there’s this huge misconception that if a stock’s price has jumped, then you’ve ‘missed the boat’ on that investment.

If this was true, then people should not have bought shares of Berkshire-Hathaway (BRK.A) when they were outrageously over-priced at over $2,000 per share back in the 1980s.  Those who both bought and held onto those shares have returned their initial investment over 100 times as it is now trading around $217,000 per share for their original, Class A stock!  (You can buy their Class B stock, BRK.B, at under $145 as of this writing.)

Now that I’ve given a much longer introduction than I intended (in order to hopefully get you over a stock’s current price!), let me finally give you some ideas about when to buy a stock.  I will give them in order of increasingly bad stock and/or stock market conditions, starting with our current choppy, up-and-down market:

Buy only if you have a long-term time frame

So, what’s your reason for even buying a stock/stocks in the first place:  To get rich quick?  To make a fast buck?  Sorry, you’ll have to try that elsewhere, say at your local casino.  Or by gambling with penny stocks.  Good luck with either, by the way – statistics prove that you’ll desperately need it.

The consensus about the minimum time you should be invested in any stock is at least 3 to 5 years.  Warren Buffett states that you should not invest in shares of Berkshire-Hathaway unless your minimum time frame is 5 years.  I guess that saying, “Slow and steady wins the race” applies here.  Gambling by day-trading, etc. rarely wins anybody anything.

So, contrary to popular misconception and ignorance, stock investing should not be attempted by anyone who doesn’t want a greater risk of losing their money within the first few years.  Statistics prove that time has a way of smoothing out the bumps and moving the price of a quality stock ever higher.  (More about this later.)

Buy once the price is at or below the 50-day moving average

Although a quality stock’s price may be irrelevant in the long term compared to today’s, it’s still wise to try to get a lower price if you can, but just don’t be nit-picky.  Like the person who thought $2,000 for Berkshire-Hathaway in the 1980s was too expensive.  Or, like some people I’ve known, who won’t buy because they insist on paying no more than $30 per share but nearly lose their sanity because it just won’t dip below $30.05 before shooting up to over $40 per share.

I’ll tell you right now that I’ve never been a big analyzer of stock charts.  I guess I like to think more about future potential than past performance.  About the only reason I look at the past is to compare a stock’s price history in comparison to the S&P 500 index as one way to try to assess a company’s current strength:  if it’s beating the S&P 500, it’s a high performer; if it’s lagging the S&P 500, it’s having some problems.

However, something I’ve learned about recently that also considers past performance is also something that can help you today, namely with finding an attractive buy price.  It’s the idea of looking at a stock’s current price in relation to the 50-day moving average of that stock’s price.  Here’s an example of Markel Corp. (MKL), dubbed by some as potentially the “next Berkshire-Hathaway”.

MKL 1-year Apr6-15
MKL 1-year stock price chart as of Apr. 6, 2015

First of all, to get a funky-looking chart like this, I used the website for the self-directed investing account that I use to trade stocks, in this case a leading Canadian one called RBC Direct Investing.  However, I’m sure you don’t need to pay for an account in order to find a chart like this about a stock’s price history.  Try an online search for a tool that will also allow you to super-impose things like the 50-day moving average (the red line above) and the S&P 500 index (the light blue line inside the gray-shaded area above).

When a stock’s price (the dark blue line) dips below this 50-day average, it means the price has cooled-off a little bit, or had a bit of a “dip”.  It’s “on sale” at a bit (or a lot) of a bargain.  So one line of reasoning is to buy a stock you’re interested in at these “dips”.

For example, I’ve been tracking MKL since last summer after one of the stock-investment-advice services recommended it, but I’ve had other stocks on my priority list to buy.  In dismay, however, I’ve watched the price go up nearly $150 per share since.

Right now, MKL’s price is about 6% above it’s 50-day moving average, which means it might be a little expensive.  I can also look below to see whether this particular site thinks it’s “overbought” or “oversold”.  Because it’s creeping up toward “overbought” territory, I could wait for a market dip or correction or I could jump in and hold on.  However, I don’t put too much faith in this secondary “overbought/oversold” indicator because the chart shows some past “overbought” indications at prices waaaay lower than the current price!

My choice would be to jump in and hold on because the 5-year chart of MKL is incredible, indicating to me that it probably won’t be slowing down any time soon, seeing how the consensus I’ve heard among several analysts is that this bull market is still occurring for the foreseeable future.

Buy when overall market sentiment is low

By this, I mean look at the reaction of your stock’s price to bad economic or political news that has nothing to do with anything about that company.  This is a ripe environment for an overall “market dip”, where your stock might drop maybe up to 10% or even more for no justifiable reason beyond emotion.

This was happening with Under Armour’s (UA) stock price from the middle of last November to the middle of this past January.  I was looking to top-up my position (i.e. buy the remaining amount that I wanted to invest in it), but scratching my head at its dip in price when all I could find were reports swirling about its continued incredible prospects for 2015.  All I could attribute this price dip to were gloomy economic forecasts and world events that had brought down the overall market but had absolutely nothing to do with the red-hot performance of Under Armour.

UA 1-year Jan20-15
UA 1-year stock price chart as of Apr. 6, 2015, vertical line at prices on Jan. 20, 2015

With absolutely nothing justifying this downward trend in UA, in mid-January I transferred money to make the purchase when it got irresistibly around $63 per share.  Based upon the above chart, you can see that the price had taken a nice, juicy dip below its 50-day MA!  (See the vertical line on the day I bought it.)  My instincts were right as just after I bought, the price spiked upward and has remained on an upward trend (versus both the 50-day MA and the S&P 500) based on a great quarterly report that has it at around $80 right now.

Buy when everybody else is selling!

Baron Rothschild, an 18th century British nobleman and member of the Rothschild banking family, is credited with the saying, “The time to buy is when there’s blood in the streets.”  (This great article has more on this contrarian way of investing.)

In other words, a major market correction or crash is the absolute best time to be scooping up bargain-basement deals on your favorite stocks.  This is where several stocks can have a drastic plunge in price up to 50%, perhaps more.  However, this only happens once every several years and so you need totally unusual and incredible patience to wait for such an opportunity.  The best strategy near the peak of a bull market, then, is to have some cash ready for the fire-sale.  The fact is, it will happen again within the next few years.  If you don’t believe me, then look into market history!

But for now, do yourself a favor and look at any quality company’s stock chart dating back to The Great Recession of a few years ago.  What have the Apples and Starbucks’ and Under Armours all done since?  How about the lesser-knowns like the Markels?  Imagine the smug satisfaction of those few investors who decided to buy in when nearly everybody else was selling in a panic!  I sure wish I had been one of them!

Another thing you might notice is the that the companies in the best financial condition recovered the fastest.  The stock price chart for Disney (DIS) is interesting.  After its low in late 2008, it only took about a year for it to recover and move above its pre-crash levels.  Some companies are just too good to stay down for too long!

I hope these ideas will not only take the fear out of clicking the “Buy” button, but also give you compelling reasons to hold onto your buys for the very-long run.

One last thing:  be sure to click the Follow button near the top of this page.  Also, if you’re a brand-new stock investor – or still thinking about it – then I highly recommend starting with my 5-part Stock Starter Series.  To new beginnings!

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