Buy or Wait? How to Decide When to Buy Stock( Part1)

There are tons of research papers on what the best hours of the day, days of the week, weeks of the month and months of the year to buy stocks are. For example, it is commonly believed that the best hours to buy stocks are between 9:30 am and 11:30 am EST or GMT-4. It is also said that on average, the best day of the week to buy stocks is on Monday. The middle of the month is considered the best time to buy stocks while the best month to buy stocks is in September. This is because based on historical data, these times, days, weeks or months have marked periods when major stock market indices have seen more losses on average when compared to other periods.

 

Remember the simple principle of buying and selling; you want to buy at a low price and sell at a high price.

While these statistics might be good to have at the back of your mind when thinking of buying or selling stocks, you would find that there are often days when the market or your chosen stock defies these estimates. What do you do then? Should you go ahead blindly and follow these estimates? Or wait on the sidelines?

Timing the Market

Have you ever looked at a stock and thought to yourself "if I had bought this stock at this low point and sold it at this high, I would have made so much money". Here's an example

If you had bought $1,000 worth of Apple shares at the close of market on the 23rd of March, at $56.09 or even at the exact moment when Apple hit its 52-week low of $53.15 and sold on the 1st of September at $134.18 or at the precise moment when Apple hit its 52-week high of $137.98, you would have more than DOUBLED your money in just 5 months! Sounds interesting, right?

But here's the problem with that assumption: for this to be possible, you had to have decided at the exact moment when Apple's share price hit $53.15 or at the close of market on the 23rd of March to buy; and also decided to sell all you had bought when Apple reached $137.98 or at the close of market on the 1st of September.

Let's take a trip down memory lane to see how likely it would be for you to have made this decision. 23rd of March: it was the 12th day after the WHO declared COVID-19 as a global pandemic, fear and uncertainty were rife, scientists were saying it would take around 18 months to come up with a vaccine, positive cases and death toll were rising daily, stock prices were falling steadily, and an end did not look anywhere near. Let's say you did see this as a great opportunity to buy, what are the odds that you would choose the exact moment when the market bottomed out at $53.15 or at the close of market on March 23rd to buy in? Very slim.

1st of September: the coronavirus was still rife, unemployment numbers in the US were still high, but tech stocks had seen a huge bump. Stocks were hitting new high after new high, and it did not seem like they were going to slow down anytime soon. Assuming by some random stroke of luck, you bought $1,000 worth of Apple shares at its low in March, when do you think you would have told yourself, this profit is enough? Time to quit while I'm ahead and go with my winnings? Or do you think you would have waited just a bit more to see if the price would go a bit higher so you can make a bit more money?

This is generally the problem with thinking that you can accurately time the market all the time. The best trading days/moments when stocks reach great highs typically last from a few seconds to a minute. You would have to be watching the stocks and be very decisive at these moments. You would have to manage your greed and uncertainty and make tough decisions when the stakes are incredibly high. In reality, almost no one can accurately time the market all the time. The phrase hindsight is 20-20 comes to play here. It's always easier to see great opportunities after they have happened. But while things are happening, it is quite difficult to determine the exact moment when to cash in on that great opportunity.

Although day traders of stocks use technical analysis indicators like pivot points, lines of support and resistance which can help set limits for trading and notice patterns; they don't exactly make you psychic. Even with those tools, you can't accurately time the market to know the exact high and low of the market to determine the best entry position and exit position that we would see if we are looking back.

Are you thinking of timing the market? Don't. You would likely not succeed, and quite frankly, you don't need to time the market.

Source @Oghenerukevwe Odjugo | LinkedIn