How To Know When to Buy and Sell Stocks

While browsing through my blog roll this morning, I noticed that someone had written (about themselves) that when picking investments, “I buy and sell at the wrong times."

It got me thinking about timing. When is the wrong time? When is the right time? How can we tell the difference? How can you truly know when to buy and when to sell?

In the world of investing, it seems it's not so much a matter of ‘how much’ as ‘when’; timing can be everything. When you get in, how long you stay in, and when you get out are emphasized. Like alchemists, traders feverishly scream 'buy, sell, hold!' in an attmept to turn lead into gold. But it’s not so easy to figure out when things are going to go down and when they’re going to go up.

Unless you practice insider trading, where you have privileged information about a company or a sector and use that information to your advantage when trading (which is illegal), the fact is that no one can accurately tell you when it's the right time to buy, sell, or hold. It’s all a guessing game, and comes down to trying to predict the future.

If you talk to a hundred investors, you may get a hundred different techniques of predicting the market and profits. Some rely on sophisticated computer programs and mathematical formulas to develop charts and analyze historic data. Some literally look to the heavens, believing that weather patterns play a role; they theorize that stormy weather puts a damper on investors’ moods as much as it does the corn commodities in Nebraska. Some study politics, checking in to see how the latest revolution or war on the other side of the planet may be influencing shipping routes and oil prices. There are even those who peer into crystal balls, analyze dreams, and seek spirit guides for advice. And, you all know my favorite: getting blindfolded monkeys to throw darts at newspaper stock pages.

The monkey with darts theory was inspired by Burton Malkiel’s book A Random Walk Down Wall Street. In 1988 the Wall Street Journal, inspired by the Princeton professor's theory, created a contest to see if monkeys throwing darts would actually work at selecting a profitable portfolio. They used WSJ staffers rather than monkeys due to liability insurance reasons; personally, I think not using the monkeys was disadvantageous. It was quite interesting, the findings were controversial and much discussed.

While some of these methods may be more scientific than others, there is still the element of uncertainty. The fact is that there are an infinite number of influences on the market, risk of loss can never be eliminated, and the unexpected should always be expected. Ultimately, no one can predict the future and, at best, we're all just making guesses. We can't clearly know when to buy and when to sell. Each person has to develop their own strategy with which they feel comfortable. Otherwise you will be constantly and anxiously looking at the market ticker, and never get a good night's sleep for the rest of your life.

The best method I've heard of so far comes from Warren Buffet who is a firm believer in the 'buy and hold' strategy. He is famous for ignoring the day-to-day rumblings on Wall Street and focuses less on 'when' to invest and more on 'what' to invest in. He has a very precise method for picking the types of companies that he puts his money into, and believes that if you pick good companies, you can get in and stay in for a long time without having to preoccupy yourself with timing.

I like this method and use it; however, I'm still known to fling darts at the newspaper stock pages on occasion.