Is Now The Time to Buy Stocks? Read This Before Backing Up The Truck
By Dr. Steve Sjuggerud, President, InvestmentU
Lured by the prospect of fantastic riches, one of the smartest people I know quit his job to join an internet startup company. He was going to be filthy stinking rich . .
It was back in early 2000, at the height of the technology boom. He was extremely successful in his previous job with a stable company. But his new company offered him stock options that, if things worked out, would have made him very wealthy man.
Why not take that job? Everybody was getting rich in the stock market back then – it almost seemed easy. And few even considered that the bubble would burst anytime soon.
This was a New Era after all – it was different this time.
Let’s Learn From The Mistakes of Others
Today my friend is not filthy stinking rich. In fact, he has already left that company. And far from making millions on his options, he didn’t make a penny.
Looking back, we all thought we were going to be rich. We would just buy stocks, and if we didn’t become rich over the short term, we would be rich over the long run. But reality turned out to be much different. $100,000 invested in technology stocks in early 2000 is worth less than $40,000 today.
By buying stocks when it seemed like they were a sure thing, many investors got clobbered. So how do we keep from getting clobbered going forward? And when is the right time to buy?
A Simple Answer to the Age-Old Question: “When Should I Buy Stocks?”
In Investment U Power Principle #1, we give you the answer: “buy when value and growth are in your favor and the price is rising.”
That’s actually a lot of concepts in one sentence. So let’s explain the last one first, “buy when the price is rising,” because it’s very easy to understand.
Since early 2000, stock prices have been falling. The Nasdaq has lost 60% of its value. So regardless of how badly you wanted to buy a stock, it has been a bad idea-buying over the last 18 months has been like trying to catch a falling knife.
We recommend letting that knife hit the ground first. Then we can buy. And, to us, it seems clear that the knife hit the ground about 10 days after September 11th.
Today, the market action is now good. Based on the last part of the previous quote from the course, “buy when the price is rising,” it’s finally okay to buy again. But remember, that’s only one part of the lesson. The very best time to buy is when both value and growth are in your favor.
Right now, value is not in our favor. Stocks are expensive by any measure. But, since our economy is reviving, growth is getting back on track (particularly the ability of companies to grow their businesses). Two months ago, the market looked bad: stocks were expensive; the economy was contracting; stocks were falling.
But today, prices are rising again, and there are the first indications that companies are back on the road to profitability. Instead of three strikes against us, now there’s only one – stocks are still expensive.
Good investing,
Steve
Today’s Investment U Crib Sheet
- Power Principle #1 tells us to “buy when value and growth are in our favor and the price is rising.”
- Clearly, “price is rising” and “growth” is in our favor . . . but stocks are still expensive by any measure. Two of the three components of this principle are in our favor . . . but the third – value – is still against us.
- So, based on Investment U Power Principle #1, it’s time to consider buying stocks again . . . albeit cautiously for the time being.
- What to Make of the Rising “Fear Index”
- Why Great Traders Average Up, Not Down
- Momentum Investing: The Secret to a Red-Hot Stock Portfolio
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