There’s an old saying on Wall Street that when you start getting stock tips from cab drivers it’s time to sell. The theory goes that if the market is doing so well that everyday people are buying into it, it’s probably overvalued and likely to fall. The opposite is also true. Though I haven’t ridden in a lot of cabs lately, everywhere I look I see people saying how risky the stock market is right now.
As people get scared and sell out of their positions, buying opportunities get better. I’m not saying that now is necessarily the time to buy, and we could see even more declines in the days ahead. Right now the Dow is only about 12.5% off its 52 week high and people are already giving doomsday forecasts. What will they do if it drops another 30%? Even with the possibility of further falls, I am already buying into this market. The fact that most of what I read online, in magazines, in the news, and hear on the street is talking about fear and selling makes me want to buy more and more. I believe that the best way to make money in the stock market is to buy when everyone else is selling, or at least too afraid to buy. If the market continues to decline, I’ll put even more money into it.
I like to use a modified combination of value and dollar cost averaging. Instead of getting more shares for the same amount of money (DCA) or marginally more shares for marginally more money (VCA) when prices are down, I prefer to buy much more. So if I bought 10 shares at $100 I might buy 15 more if the price gets down to $90 or 25 more if it gets down to $80. That amounts to spending 35% more when prices are down only 10% and 100% more when they get down 20%. These numbers are just an example. The actual numbers I use vary with each investment.
Using such a method means that I’ll have bought the largest stake of my shares near the lowest price if prices do eventually recover. The risk, of course, is that prices could continue to go down. Unless I have a large enough bankroll and things eventually improve, I could be out a lot of money in that case.
As it stands right now, I’m putting medium amounts of money into the market. If things turn around, I should make some decent profits. If they get worse, I’ll invest even more heavily. Unless things get much worse or the decline lasts for a long time, I suspect that I’ll look back on my current investments and be glad I had the courage to make them.
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June 9th, 2008 at 7:02 pm
[…] Are You Investing Now? …is necessarily the time to buy, and we could see even more declines in the days ahead. Right now the Dow is only about 12.5% off its 52 week… […]
June 15th, 2008 at 9:37 am
Nice article….I am a huge fan of value investing and hopefully help my readers understand the basic of the financial statements…This is something that I would encourage every long-term investor…I also think we should always be invested, it just depends on how much of an allocation to the equities portion of your portfolio…