Now listen carefully because you do not want to mess this up.
I truly believe that buying at the "Best Price" is what makes the difference between a great investor and lots and lots of good investors. The simple factor is, if two investors are equally as good at picking the "Best Stocks", the investor that more consistently buys closer to the "Best Price" is going to win the performance stakes.
Stop - do not go any further
If you have not already got your list of "Best Stocks", stop right now and go and find what you believe your "Best Stocks"are. Read these articles to help gain an understanding of what I look for when searching for my "Best Stocks".
Why - because buying junk is still junk no matter how little you pay for it. So unless you are in the junkyard business (some investors are - Benjamin Graham called junk "cigar butts") go and do your homework and come up with a list of what you believe your "Best Stocks" are - no matter how short or long that list is.
The Pendulum Effect a.k.a. Mean Reversion
I am a big believer in the Pendulum Effect. Most people refer to it as mean reversion - but I just find the visual image of a Pendulum swinging back and forward helpful. As I watch in my mind's eye - I know I want to buy when the stock has well and truly passed center and is swinging towards the "low price" extreme or ideally has just started its return journey. If I miss it on this swing, I know I just have to weight for the pendulum to swing back - so there is no pressure to buy now and pay more than I should.
So here is what I do - step by step
To be honest, it is not rocket science - but here is what I do and it seems to work for me. I am very transparent with my Portfolio Performance and have published the results showing the performance dating back to 2016 versus the S&P. If your performance does not match mine, than this might help you refine your own process for determining the "Best Price" to buy your "Best Stocks" at.
Put my "Best Stocks" into a spreadsheet along with their:
- Price Earnings Growth Ratio (PEG Ratio) using today's price and its long term growth rate (make sure the earnings and growth rate are no higher than you believe the company can reasonably sustain for the next 10 years)
- 52 Week High
- 52 Week Low
- 52 Week Price Range (52 Week High - 52 Week Low)
- Calculate the % from the bottom of the 52 Week Price Range today's price is
If I had 100 stocks on my "Best Stocks" list, I would delete the 80 with the highest Price Earnings Growth Ratio. The lower the Price Earnings Growth Ratio, the cheaper the stock. So this gives me the 20% of my "Best Stocks" that are best value on that day.
Than I sort those remaining 20 stocks by how far today's price is from the bottom of the 52 Week Price Range. Out of that list you will see there are 2 or 3 or 4 or 5 that are a lot closer to the bottom of their 52 Week Price Range than the others. It is those 2 or 3 or 4 or 5 that I focus my buying on.
How far from the bottom of the 52 Week Price range?.
The answer is it depends on the market conditions and how desperate you are to buy. But here are some guidelines:
- Definitely cannot be any higher than 50% of the 52 Week Price Range - because you want to be on the side of the pendulum swing treading towards the 52 Week Low.
- You definitely do not want to be just average, so it probably should not be any higher than 30% above the 52 Week Low
- Ideally you want it to be within 5% to 10% of that 52 week low.
How desperate are you to buy?
Sound like a funny thing to say. But what you find is depending on where the market is, you may find several stocks at or within 5% of their 52 Week Lows and other times you will be lucky to find any within 20% or 30% of their 52 week lows.
I can tell you I have done best when I have started buying when stocks were within 10% of the bottom of their 52 Week Range - but I am only human and sometimes have felt like money was burning a hole in my pocket and bought when they were within 20% or 30% of the bottom of their 52 Week Range and still done ok.
It comes down to self discipline - if they are more than 30% higher than the bottom of their 52 Week Range - you need to walk away and find something else to do - anything but buying stocks.
How much to purchase at once
Well there is a little bit of science to that and I will write a post about how much I buy at a time and when - but usually my initial purchase is about 10% of what my ideal holding size is. Stay tuned.