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Stock buying lessons all investors need to know

Stock lessons ever investor should know. Source: Getty

People often ask me when the right time to buy stocks is. Instead of giving advice, I prefer to educate them on share price history and repetitive market trends.

A lot of really good companies have spiked since the world became less scared of the Coronavirus. People asked me if it was safe to buy stocks when the market hit rock bottom on March 23 (and every day after), and they’re still asking me. But the answer has become increasingly harder to get right.

When a great tech company such as Xero hit $58 when the stock market was really spooked, I said to people who asked me: “Well, it was a $89 stock on February 19 so if you are prepared to wait a few months, it is bound to rebound.”

Xero is now an $87 stock so my few months have ended up being three months and I have to say it has come home faster than I thought. By the way, that was a 47% gain on a great quality company, which is a lesson for anyone who’s interested in how to play stock market crashes.

Of course, there often is a second leg down with crashes so you might have a second chance to have a go at Xero. Your wait might be a lot longer, but it will eventually deliver.

You see stocks can be like gambling but provided you invest or ‘bet’ on businesses that have really great operations with solid cash flow and not much debt, then these stocks are great deliverers.

My favourite way of investing is to wait for crashes or big stock market pullbacks or corrections and I simply buy a great business at a great price.

In 2000, when the US Nasdaq market crashed (that was called the Dotcom Crash), Jeff Bezos said his Amazon’s share price fell from $100 to $6 virtually overnight. But he told an interviewer that his company had not changed a bit! He was still selling the same number of books, CDs and DVDs that it always sold but only the share market’s view on the company’s value had changed.

The $100 share price tag was probably wrong but so was the $6 one too. It’s taught me that stock markets can get crazy in overvaluing a company over time but then can go crazy-mad when a crash is on.

So should you pile in now? My best guess is that this market will creep higher so long as no scary second-wave outbreaks send economies, especially the USA, into lockdown again. However, if we see second-wave problems that don’t result in lockdowns but do worry Wall Street, stocks will fall. But I can’t see it being worse than the one we saw in late February to March 23.

If you buy now, the big gains could be six or more months away and you might get a chance to buy more if stocks fall again. I’d do that if that happens. 

History says the first year out of a stock market collapse sees the market go 30% to 80% higher, but history also suggests a second-leg down happens.

I think history will be proven wrong, provided no serious second-wave outbreak happens and Donald Trump doesn’t do something provocative with China or even his own population.

Buying now could deliver short-term stress but in the long term today’s share prices are below where many great companies share prices should be.

CBA stock prices. Source: Yahoo Finance

This chart of our best bank shows you over time the trend is an investor’s friend and after big dips there are big recoveries. In February this year, CBA was a $90 stock and I bet over the next few years, that share price will be given a good old nudge.

This is not advice but it’s a bit of share price history education you should all be aware of.

Yahoo Finance Breakfast Club.

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