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| Photo credit: www.cookerlypr.com |
It's been a rough few weeks and months for those who like to "play" the stock market. With the volatility in China affecting most of the major markets, it's a good time to discuss some of the basic questions that everyday folks might have.
Question 1: When is it time to sell?
This is a question that in my opinion has no right or wrong answer. The answer basically boils down to your strategy as an investor. The stock market works in such a way that gains and losses are not realized until you give the order to sell. This is called "paper profit" or "paper loss".
Thus, if you can stomach the paper losses and red colored font in your basket of stocks, and you invested in a stock not for speculation but because you think the stock has a fundamentally sound business, then holding on to the stock will make more sense rather than realizing and absorbing the paper loss.
However, if you bought the stock because of it's potential and the business is grounded on nothing more than pure speculation (think: a company with only mining rights and no active mines), a legitimate bubble might have just been burst and it would be wise to get out as soon as possible.
Question 2: When is it time to buy?
The flip side of question 1. And again it will depend on what type of investor you are. A conservative investor will wait out the lows and buy during an up-swing while more savvy investors might see low points as opportunities to bargain hunt.
Conventional wisdom dictates that you hold on to cash while in a bear market and sitting on a cash pile has it's advantages, the biggest of which is that you can jump on bargains when they present itself. Of course, it is easier said than done to identify bargains. As I learned from my professors at IE Business School, stock markets rarely behave rationally. The earlier you learn this, the more you are able to hang on to your wits and sanity.
I like to follow in the example of the great Warren Buffett whenever I buy stocks for my own portfolio. Mr Buffett was never afraid to buy companies that he felt were fundamentally sound but undervalued experts. He understood that markets are irrational and he replied on his own valuation and assessment. I may not always move in the same direction as the market, and I am by no means always successful. But I am able to sleep soundly at night, with no regrets and no one to blame bu myself, because I made my own decision based on my own knowledge and analysis.
Conclusion
I hope to be able to share more of my own experiences in the stock market in future posts. I started investing when I started working and I would advise people to give it a try only if they fully understood the risks and opportunities that exist. I will also strongly urge new investors to have a clear strategy before playing the stock market.
The roller coaster picture I shared above is a great representation of how emotionally thrilling playing in the stock market is. And just like a real roller coaster, the risks are real and those with severe heart conditions better not attempt to get on the ride. :)
Disclaimer: I am not a professional investor and only invest my own personal savings. The above are my opinions and I am happy to hear opposing opinions.