Friday, May 14, 2010

Buying low

This is the time when it seems like the carpet is being pulled from under you. The market seems to have taken the whole Euro bail out like a big lump that just wont go down. Tough every one out there is calming everyone else things seem to be on a slide. The market is now off more than 10% and though I have added to some position this week, I haven't really been on a buying frenzy yet.

Last time the market crashed in 2008/2009 I was reluctant to add to my positions. I was not sure where the market was going to end up. But I did buy pretty aggressively in late 2007 when the markets had started falling, resulting in added pain as the market continued to go down. So this time I am going to sit out the slide. Either the market hits doldrums before I start getting in again or I sit this one out and enjoy the upside that will follow with whatever I am already holding

The key to buying low is to actually by low and not buy on the way down - when you "think" it is low. From my experience you are better off buying 5-10% above the bottom than buying 5-10% on the way down to the bottom. Psychologically it is much better for an investor. If you end up buying a lot of stuff on the way down then you are cash strapped all the way to the bottom and are unable to participate on the way up. This does a lot of damage to the investors confidence as he nervously waits and hopes to regain lost ground.

The key is not to get a twitchy finger and pull the trigger just because you are nervous about the falling market. Find a price point you will add to the holding no matter what and wait for the slide to do the rest. If it doesn't come to it, well then you can enjoy the upside of whatever you are already holding.

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