FOOL SCHOOL
When's The Best Time To Buy Shares?

February 4, 2002

The stock market can seem like a tricky place. At any one time, for any individual share, there's likely to be as many people urging you to buy it as are claiming that you shouldn't touch it. It has to be like that since that's what makes a market. If everyone thought that a share was cheap at a given point in time, then they'd all buy it and push the price up. If everyone thought that a share was expensive, then they'd sell it so that its price fell. The upshot is that, at any point in time, a share's price reflects the combined view of all investors about its value.

Don't get overexcited, then, when you read the newspaper and find that so-and-so is recommending that you buy such-and-such a share. Your immediate reaction should be, so what? For every investor that thinks that such-and-such is cheap at a given point in time, there'll be someone who thinks it's expensive. Just because you happen to have come across one of the people on one side of the fence does not mean that you can ignore every one on the other side.

Ahh, I hear you say. No problem, just work out whose advice is right the most often and do what they say. If only it were so simple. Bear in mind that everyone is just as capable of doing just this as you are. As a result, as soon as our chosen guru makes his proclamation on a share, the price will move to reflect how much the market thinks his gets it right. In fact, the real answer is that very few people seem to get things consistently right. Sure, some people look like they're getting it right for a while, but it's impossible to tell whether they're just being lucky or whether they have some genuine insight. The trouble is that just as you think that they might be worth listening to, the have a habit of losing their touch. By all means take on board what people are saying, but use the information to reach your own conclusions. Don't rely on others.

Share pundits have to come up with a story of some sort. Journalists have to sell newspapers and stockbrokers' analysts want to encourage people to buy and sell shares, giving them commission. If you place too much reliance on these stories, then you're likely to end up buying your shares, selling them, buying them back again. The only person likely to benefit from this is the stockbroker who gets the commission from each of the trades. No wonder they like to come up with interesting stories about where they think shares are headed.

Let's return to the original question, then. If share prices are fixed at what the overall market thinks is a fair price, when should I buy them? The answer is that there's never a specific good time or a bad time. Numerous studies have shown that if you selected shares randomly and held on to them, the chances are you'd match the market average. But then if you were going to do that, you might as well do a proper job of it and buy and index tracker.

We've decided to invest in shares directly because we want to try to beat the market average. On that basis, we need to develop a strategy that we think will help us do so. So, we buy shares when our strategy dictates that we should. It's as simple and as hard as that. Develop a strategy and then follow it through. What we don't want to do is buy shares because someone else thinks that they "look like a stonking buy at the moment" or "it's not a good time to buy". It's more important to get the valuation right rather than the timing. If you're not prepared to back your own strategy and judgment, then you'd be better off having another look at those index trackers.

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