Perhaps you have heard the adage: Buy stocks when there is blood in the streets.
Well, there is certainly blood on the streets. Europe is a mess and that has spooked the stock markets globally, including in the US. You might agree philosophically that buying stocks at the time of great upheavals is a solid profitable strategy. But if you are like most rational investors, you are probably still afraid. After all, there is probably more bad news down the line that we do not know about today.
So how do you know if this is a good time to buy stocks?
Bad news is that you don’t know
Implicit in this question is another question: How can I time the market to buy at low and sell high? Timing the market does not work. The reason is quite simple. Investors who focus on timing the market are essentially short term focused. The problem is that in the short term, the stock market is essentially random. Once in a while an investor might get lucky, but it is equally likely that an investor ends up losing to the market. On a sustainable basis, this is a strategy that does not work. If you want to be successful in investing, you will need to change your orientation from short term to long term. That brings us to our good news.
Good news is that it does not matter
Provided, of course, that you are a long term investor and willing to be patient. The key is to look for stocks to buy in the right sectors and niches depending on what is going on in the economy. For example, in today’s environment, we may worry about the effect of the European debt contagion. This is a distinct possibility. So one way to insulate your portfolio is to buy stocks that have little or no exposure to Europe. If you find companies that do not have any material debt on their balance sheet, all the better.
Still, if the overall market crashes, there is a possibility that the stocks you picked may go down with the market as well. The best way to protect from this possibility is to look for stocks that are already down so much that their downside is very limited. Believe it or not, there are so many undervalued stocks in the market today that a value investor is now spending more time trying to find stocks with the greatest profit potential. When the stock market was performing well, it was difficult to find good value stocks and most of my time was taken up in screening 1000s of stocks to find one or two good values that I could invest in. Today, my screens usually give me 100s of potential investments and than I spend quite a bit of time filtering these stocks for the ones that I feel offer the best potential rewards with as little risk as possible.
To summarize, if you concentrate on stocks that are already selling at a discount and do not have much exposure to the expected macro economic shocks, you are well on your way to out performing the stock market and a wide majority of the investors. The key is to invest and have patience.