You identified a stock and want to buy it. However if you are a discount shopper (you know who you are), buying stock outright may not be for you. Here are some factors to weigh when making a decision on how to buy that stock:
- Forecast accuracy: do your picks immediately rally after selection?
- Market fluctuations: is the market overbought (it can stay that way for long) and a pullback may get you that stock for cheap
- Opportunity cost and name your price: if you have a minimum threshold return (mine is 6% cash on capital), is it acceptable to capture that return without getting this stock?
- Accuracy: Most retail forecasts for mid to large cap stocks are inferior to the price set by the market. So if you rush to buy that favorite stock, odds are likely against you. Well don't take my word for it, do some testing. If you have a systematic process to come up with stock selection, go back and look at how low the stock went from the close of the price on the day before you identified it during your holding period.
- Market fluctuations: is the market trading close to a mid period (lets say 20) on the timeframe you trade. Typically market will cycle between -2 to +2 ATR (average true range) of the 20 period moving average. If you are trading closer to -2 ATR, it may make sense to pull the trigger before the market goes back over the moving average
- Opportunity cost: If your process generates more trades than your account can handle, waiting may not be prudent. However if you hold between 10 - 15 stocks (typical for sub 1M portfolio), and your process generates 3 - 4x opportunities in a year, you can wait for better prices even at the cost of missing some good ones.
In the next blog, we can review how to identify buying levels once you have identified the stock and use options to get into it
- Mukesh Masand
No comments:
Post a Comment