Is It Possible To Time The Market: Buying and Selling At Just the right Time
The ideal would be to find some form or system to be able to detect the minimums (and the maximums) of stock movements. But, alas, it’s not realistic. Some tools try to detect the minima (and maxima) of each movement, such as graphical and technical analysis, analysis of cash flows, etc. But no tool is infallible and sometimes they give false signals.
Many investors are hoping to get advice from someone more experienced to tell them how far and for how long the stock market is going rise or fall, therefore enabling them to buy the shares they are planning at a better price and thereby increase their profitability. But in order to perceive the real difficulty of the task, the theme must be put in perspective:
That investor who was able to know the highs and lows would become a billionaire in a short space of time. With little money to count on, thanks to the leverage of derivatives as options and futures, the results you would get would be absolutely spectacular.
Therefore, realistic strategies must be designed taking into account that you will most likely not be able to time the market such that you are only buying during the absolute lows, and selling at the highs. A good solution when it comes to entering the stock market is temporary diversification, which consists of spacing purchases over time in a premeditated way.
Two possible ways to space purchases are:
1.Regular time intervals: Consists of buying a fixed amount of money each week / 15 days / month . The interval chosen depends greatly on the amount of money available. Someone with great liquidity who can split into several dozens of small purchases could make a purchase a week. However, a person who has a splittable amount in only 2 or 3 parts could make 1 purchase each month, or even every quarter, depending on whether he expects a more or less rapid recovery.
2.Using technical analysis: You can also use graphical and technical analysis (or any other tool) to make purchases whenever a value makes (or seems) some figure of return or continuation of the uptrend. This option should be used by investors with experience in these types of tools. In this case, there is no fixed number of days between each purchase, but avoid concentrating purchases in too short of a time period for prudence. No tool is perfect and they could cause the sudden depression in a series of false signals close in time. To avoid this, some temporary spacing should also be established in purchases, although in a more flexible way than in the first option
When selecting the values in which you should invest, the ones that have fallen the most, and are the cheapest ones should not be chosen. Value is not cheap simply because it has fallen a lot. To analyze whether a value is cheap, you shouldn’t study the company’s balance sheet, its income statement or both. Studying the balance sheet consists of valuing the assets that make up the company; Factories, land, trademarks, subsidiaries, etc. When studying the income statement the most common is to look at the PE ratio and the dividend yield, although there are more variables.
It’s important to keep in mind that not only must the PE ratio and the dividend yield of the previous year be considered, but also the future prospects of the company. In general, for the average investor, it is easier to analyze the profit and loss account and its evolution than the balance sheet o companies, although both are complementary and the ideal would be to analyze them together. Keep in mind that these strategies are valid only for very long-term investors, not for short-term traders.