(As published on Biznews)
As soon as people hear what I do for a profession, the common line of questioning goes something like this;
“Given what you do, is now a good time to buy?”
“Is now a good time to sell?”
“Given all that is going on in the world, should I be in the stock market at all?”
And no matter what you say, people aren’t really listening, the response is inevitably some version of the following;
“I think I’m just going to wait it out until things turn around!”
Although frustrating, I can understand this emotional reaction, as investing isn’t easy and involves so much uncertainty. PLUS, we are talking about your hard-earned money, which you most certainly do not want to throw away. But trying to find an answer to “when is the right time” is the equivalent of reading tea leaves for signs of the future. It is simply unknowable. But perhaps if you take the view that I do and that so many of the Greats have expressed that the stock market is a place of madness, it will help simplify your decision-making.
Let me prove this insanity with an anecdote;
Buying a House
Let’s say you want to buy a house…
You spend time thinking of the type of house you want, the neighbourhood you want to live in, what you can afford, etc. After much thought, you draw up your wishlist. You then go house hunting, looking for your dream home.
Now, you don’t buy the first house you see. Finding houses that interest you may take days, weeks, or even months. When you do eventually find one that matches your wishlist, you look at houses in the neighbourhood and the price they are selling for to determine how much you want to pay. Finally, you decide you want the house, and you’re prepared to pay R2.5 million and make an offer, and… “HOORAY” the seller accepts your offer! You now own a house. It’s Monday, by the way.
On Tuesday, after you move in (quick transfer!), there is a knock at the door. “Hi, I want to buy your house and am prepared to pay R1.5 million”.
“You’re crazy!” you respond and close the door.
On Wednesday, there is another knock at the door. “Hi, I want to buy your house and am prepared to pay R1.4 million”.
“Leave me alone!” you reply, slamming the door harder than the day before.
And on and on, this goes day after day until you stop answering the door.
Then, one day, you hear a knock and for whatever reason, YOU decide you would like to answer, “Hi, I would like to buy your house and am prepared to pay R7.5 million.”
“You’re crazy! SOLD!” you shout, not believing the price you got.
I know it is a silly story, but this is what millions of people are going through daily. But this isn’t happening with houses; it is happening with companies listed on stock exchanges.
Buying a Company Is The Same As Buying a House
Instead of a house, I decide I want to buy a company…
I spend time thinking of the type of company and after much thought, I draw up my wishlist. I then go company hunting, looking for my dream company/investment. The best place to go shopping for businesses, especially when I can’t afford to buy the whole business, and which is the most accessible to both you and me, is the stock market.
(A quick word about the stock market….The stock market is an open market where individuals can buy and sell companies and other instruments (but that is for another discussion). You cannot buy the entire company on the stock market, but you can buy one share at a time, allowing you to become a part owner of that business. When you buy a share, unlike buying a house where a transfer takes weeks, a share transfer takes seconds.)
Now I don’t buy the first company I see. Finding a business that interests me may take days, weeks, or even months. When I do eventually find one that matches my wishlist, I look at the offer price, and I look at companies in the industry (neighbourhood) and the price they are selling for to determine how much I want to pay. Finally, after much research, I decide I want the company, and I’m prepared to pay $13.00 per share. I make an offer, and… “HOORAY” the seller accepts my offer! I am now part owner of a business.
I am sure you see the similarities between shopping for a company and a house. Now, where this differs from buying a house is the speed of the transaction; it takes seconds to buy a share, so unlike our unrealistic example of the daily knock on the door of someone wanting to buy your house, within a second, I get an actual knock on the stock market door.
“Hi, I would like to buy your company (share) and am prepared to pay $12.00 per share.”
A second later, I have another knock on the door, “Hi, I would like to buy your house for $11.99 per share.”
A second later….
And on and on this goes second after second, minute after minute, day after day.
This is reality; this is the actual mechanics of a liquid stock market. It is meant to be there for our convenience, nothing more and nothing less, but where the insanity comes in is instead of saying “Get lost” to every knock on the door, we say to ourselves,
“Why do they want to pay $11.99 per share? Perhaps I should sell!”
“I’ve made a mistake!”
“The whole market is down, so I think I’m going to sell and wait until things turn around!”
We have the option not to answer the door. However, we choose to not only open to every knock but stand at the door all day, looking to see who will knock next. In other words, we sit there watching the market and the prices second by second. Insane!!!
If you are still reading hopefully the point I am trying to make is clear!
The stock market is a fantastic mechanism that allows us to buy and sell shares/ownership of companies easily, but it is nothing more or less than that. It is not something we are meant to watch every minute of every day with panic or exuberance when our company’s share price ticks down or up. It is simply there for us when we WANT to buy a company and, therefore, there for us when we DECIDE it is time to sell.
So…
“Is now a good time to buy?”
“Is now a good time to sell?”
“Should you just wait it out until things turn around!”
Hopefully, now you can see that the above questions are irrelevant to your investing decisions. Investing is about becoming part owner of a business, so take your time finding the right business to buy. When you find it, BUY it if the price makes sense to you, and ONLY answer the knock at the door when it suits you to SELL.
Investing takes time it takes experience, but most of all, it takes discipline and patience. We know you are busy following your passions. Investing is ours, so let us do the hard work for you.
Investing in a nutshell
If you decide to invest in companies and decide to invest in companies listed on the stock exchange simply because of the ease of transacting, you then need to do the thinking and research behind what kind of company you want to own, why, and how much you want to pay, just like you would if you were buying a house. Invest in a company ONLY when it matches your wishlist and is at a price that you believe is attractive.
When to sell
The market is going to go up, and the market is going to go down, but just like selling a house, there really should only be a few reasons to sell your shares;
- When you find a better company to own (upgrading your better house).
- The company you own deteriorates in quality (Similar to your house leaking and you don’t want to fix it)
- Someone offers you a price that is too good to turn down.
and then