The Alchemist: When To Buy

Posted in Money Matters on December 2, 2002

The following is this week’s installment of The Alchemist, a column by Mensan Al Thomas, author of If It Doesn’t Go Up, Don’t Buy It. Click ‘Read More’ below for this week’s article, “When To Buy.”

The Alchemist: When To Buy

by Al Thomas


You first have to decide what you want to buy. I can’t tell you that, but will only say to pick a stock or mutual fund that is in a sector where all similar issues are advancing. There is something in the market called sector rotation and if you want to make money consistently you must move from a weak sector to one that is advancing. When the technology sector is strong that is where you want to own stock; it is be best to own a bank stock when the financial sector is going up.


Finding the strongest sector is relatively easy because all you have to do is look in Investor’s Business Daily newspaper where they rank 197 categories every day. Choosing a stock from one of the strongest groups is your homework. Obviously, if it isn’t in an advancing sector you will not want to own it.


Now that you have picked your stock you have to pull the trigger – buy it. When is the best time to buy? You want to pick the best price for the time period you have in mind. If it is a day trade I can’t help you, but if you want to own it while it is making this next leg up you want to squeeze the best entry price possible.


If it is possible to draw a chart of the stock on your computer (www.bigcharts.com) this will give you a picture of the price action for the past year. You can then draw in a trendline connecting the last 3 bottom prices and you can then wait until it comes close to that line again and buy it. If the stock has been going sideways for a while you might want to wait until it breaks out of that trading range to make a new high. Both of these methods are good, but no method is infallible.


The emotional trader will buy it at any price and most of the time see it sink back before going up again. Some people like to buy on the opening of the market and others like to buy near the close. There is no “best” time of day.


For those who say “I’m buying for the long term so it doesn’t make any difference” I will tell you that you are a loser. Don’t buy anything. That philosophy has lost more money in the past 3 years than anything I can think of. It is stupid. No general goes into a battle without a retreat strategy and so no savvy stock buyer should ever buy without a sell plan. The secret to success in the stock market is not buying it is selling. The first rule is to protect your capital and the simplest way to do that is with a permanent stop-loss order. As your stock advances the stop should be moved up until some time in the (hopefully) distant future you are out with a nice profit.


When to buy is not as important as when to sell.


Copyright Albert W. Thomas. All rights reserved. Author of “If It Doesn’t Go Up, Don’t Buy It!” www.mutualfundmagic.com. Comments to al@mutualfundmagic.com.