Best Time To Buy?

When debating when to enter the stock market, there is no better time to buy than yesterday. Ken Fisher said “Time in the market beats timing the market”. Nobody can predict what’s going to happen next. Buying consistently ensures that you can average down to the best price for your picked stocks.

There may be times when a stock is “overvalued” during these instances it’s when many people want to buy the same stock at the same time. Same thing when a stock is “undervalued” it’s when a company has good financials or profits but the share price isn’t there to match.

The physical real value of a company and the price of a share on the stock market are 2 completely different things. Shares on the stock market are priced on what somebody is willing to pay for a share. The price you see on your broker or online is the last “best” price someone paid for that share. For example if a stock is going down that means that the demand to own it is going down and a lot of people or a large entity are selling many shares. The bidders (the people buying) had set lower prices to buy at and hence drive the price down.

Remember when $GME Gamestop was $500/share? That was because the buy demand was so high, there weren’t enough shares to go around for people to buy (mainly the hedge funds). The hedge fund needed to buy the shares back and were paying the price. This doesn’t mean that Gamestop was a glorious company worth $500/share. It was due to supply and demand.

Fair Value

There are many ways of determining fair value, but ultimately it all comes down to the person investing. One person might find that a company is too expensive for their liking, while another might find that this company has outstanding growth potential and is willing to pay the premium. The easiest way to determine the “fair value” is finding the P/E (price to earnings) ratio. It’s the current stock price divided by the EPS (earnings per share).

The lower the ratio the better, but there’s a catch. When determining P/E ratios it’s good to compare companies in the same sector or of the same type. It wouldn’t make sense to compare $AAPL to $SBUX since their earnings are based on different factors.

For example if you wanted to compare $WMT to $TGT determining which has the best P/E ratio and what to buy based on that. This would be a fair comparison since they are both big retailers.

Making Educated Guesses

After a while you learn fair prices and are able to make educated guesses based on past trends. For example if you have a favorite company and know when it reaches $30 you can make an assumption to buy more than usual that day. When it reaches $50 you know to hold back a little and wait to buy.

There won’t be a time where you perfectly predict the best time to buy, that’s why we use dollar cost averaging. That way we can ride the wave up (if there is one).

52 Week High

A 52 week high is a statistic that tells you the company’s highest sold price in the last 52 weeks. So when you hear analysts or news about a stock reaching a 52 week high it’s big news since the stock is at its highest point in 52 weeks.

This is a reference point for people to know if a stock is making movements. Although it’s a good indicator for growth, it can also create bad emotions like FOMO. When many investors get FOMO it can drive up a price up even more since everyone wants a piece of the pie.

Riding Forever

There will be stocks that you decide to keep forever. These are the ones that you will decide to buy no matter what. There is no best time to buy, so dollar cost averaging will be a great way to create wealth. Especially if it’s a great company with future growth.

Deciding To Sell

There will be many reasons you decide to sell a stock. It could be because you got tired of empty promises, it could be that the CEO changed, or you just decided you need the money for another venture project. Strategically planning your sale can help you earn the most money, or save the most on taxes.

Capital gains taxes have 2 categories, short term and long term capital gains. Short term capital gains are taxed more than long term. This is to prioritize investors to hold investments for the long term. A long term is dictated at a stock held longer than a year.

If you are selling at a loss, and want to be able to claim the loss in your taxes, you are not allowed to buy this stock again for 30 calendar days. If you do it is considered a “wash sale”.

Tax Lots

When you consistently buy a stock every transaction gets recorded on what’s called a tax lot. This is a way to keep track of how much money you made on every individual sale.

For example if you buy a stock a year ago and then purchased again 6 months ago, and are now up. The money you made from the 1st tax lot from 1 year ago will be taxed less than the sale of the most recent one that was purchased 6 months ago.

You can also decide which tax lot to sell. By default all tax lots are sold on a FIFO basis (first in first out). If you decide that you only want to sell the profits from the lot you bought a year ago, you can manually decide to sell those specific shares then wait 6 months to sell the next lot. That way you won’t pay short term capital gains on the shorter term lot.

If you decide to sell all of them, you will still get to keep all the profits, just keep in mind that even though you got the “average” of both lots during tax season you will have to pay different rates for the same sale.

Bottom Line

There is no best time to buy, although some times might be better than others. The best time to buy was always yesterday, since time in the market beats timing the market. You can use other strategies to help make your purchases like finding low P/E ratios to help find undervalued stocks, and using statistics like 52 week highs/lows to help determine a good time to buy.

Thank you for reading and see you again next Sunday,
– Pablo