The Buying Process Part 2 8 comments

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Given that buying a stock that one has been watching for a long time induces an adrenaline rush, a feeling that something has been "achieved", it is important to guard against impaired judgments resulting from this, especially since it is such an inevitable part of our psychological makeup.

I always make sure that I am psychologically prepared to write off the effort that I have put into research for any one stock, however much it might have been and however long my interest might have been. It will be extremely foolish if one rationalises oneself into buying a stock because "a lot of effort has gone into researching it"; it is a classic case of taking oneself too seriously in the investment process. If the research shows that the stock might not be as good as originally thought, then let go and seek elsewhere. The market doesn't care how much effort you have put into reading up on the stock before you bought it. George Soros is well-known for being able to change his opinions on his portfolio and take immediate action depending on his assessment of the market.

It is also wise not to track the stock prices real-time on the computer screen/TV screen, for those who are lucky to afford the time to be doing so. It is ok to look at prices at the end of the day, because there is no way to trade anyway and make mistakes due to sudden impulse. There are professional traders who make a living out of watching real-time short term price/volume action and trading in and out; however they are the exception rather than the norm. Generally, I think it is better to spare a moment to consider carefully the pros and cons of the company one plans to buy; somehow the flashing ticks on the real-time stock screen imbues one with a sense of urgency which impairs such a necessary SWOT (Strength, Weakness, Opportunities, Threats) analysis and accelerates the buying decision. Not only might it prove a bad buy, but the buyer often has less conviction in the stock because the initial buying was triggered by fear (of not catching the price move) rather than measured judgment.

What else should one consider just before buying? Think beyond the first level about the buying and selling action. Think about the reasons why the buyers are buying and why the sellers are selling, in particular the latter. When one is looking to buy, he will naturally think along the lines of the buyer and consider the stock's strengths and potential. But why is the seller then willing to sell at that price? If it is a big seller, then things might be dangerous for two reasons: firstly, institutional holders are likely to be in possession of more reliable and more updated information, and secondly if they continue to sell in their characteristic high volumes there will be further downward pressure on the price. Why then should the small investor take over the stock from them? It would be fair to say that when the stock looks so good and yet its selling is accompanied by distinctive volume and price collapse despite its overall outlook being bullish, it is a clear danger sign. Less risky situations for buying in might be in cases where sellers are selling to take profits (after a previous price rise), or when they assess the underlying trend for the stock differently from the small investor, the latter having a clear conviction that he is right.

The long and short of it is that the investor should pause and think clearly before buying, and he should not let himself be rushed into making the purchase.