Ask Colin

Is there a simple way to decide which stock to buy before the price moves to far?

The detailed question was:

Every weekend I use certain criteria to look for breakout opportunities. The criteria were tested and have a reasonable good record, ie, that part is reasonably ok. However, my problem is that it usually comes up a couple of candidates, say 5 to 6 stocks. I do not want to action on all of them but I am not sure which one or two to choose.

 Sometimes I go to the detailed levels to compare them. In most cases, the outcomes are not very useful to help me to choose – it simply confirms that they are good breakout candidates with some marginal difference on fundamental / technical aspects but still not able to conclude which one is exactly better than all the others.

 However, the time spent on the detailed analysis causes extra delay and in some occasions, I miss all of the opportunities due to the delay to action (as if the stocks break out, they can all run away quite quickly).

 After a few misses, sometimes I just feel if they all past the essential (main) criteria, why border the details resulting the delays. May be I can simply buy all of them (with reduced positions for each of them – but broker will be happy) or simply randomly pick one (use a coin), it is still better than the delay of making a decision.

 However, having said this, I know they are not professional way to make decision. I wonder if there is a logical way to help me to choose (make a decision) in the above situation.

Your question seems to me to raise important issues.

  1. Why are you in a hurry to buy? You seem to be taking a trader’s approach instead of having the all-important mindset of an investor. I referred you in another question to my presentation Peering into the Crystal Ball. In it I showed in detail the difference between trading and investing. I think you need to decide what you are – a trader or an investor. They are both valid approaches to markets, but they require very different mindsets. Timing is critical for traders. Traders need to have a very clearly defined trading system with iron-clad rules. The system needs to have been tested on hundreds of different stocks – paper trading ideally. Then it needs to be proven with real money in small lots until you are confident you can execute trades without hesitation and emotion. From what you are saying in your question, assuming you are a trader, then you are nowhere near where you should be trading real money in the markets.

  2. However, if you are an investor then you will have the mindset of an owner of the business. Why are you concerned so much about the price of the stock? And why that the price might move away from you quickly? If you are thinking of becoming an owner of the business, you should first and foremost be concerned about the business. You will want to know a lot about it and to analyse it closely. Then you will want to know whether the value of the business seems to be a lot more than the price you need to pay for ownership. The price of the stock is used to find a set-up, but after that it is only of relevance compared to value in making a decision to become an owner. Day to day and week to week price fluctuations have little if anything to do with your decision to buy or not to buy. If the price runs away from you, you just need to sit and wait for it to come back to you over the next weeks or months. Or you look for other opportunities where you can buy at a good price.

So, if you are an investor you will spend many, many hours sifting for good opportunities. Patience and discipline are the keys. Just think – if you had a million dollars to buy a business (the whole business), would you be more concerned about daily movements in the price or about the business itself and that you do not pay too high a price relative to its value?

If you are a  trader, forget all of that and have a well-researched and tested method you can carry out repeatedly without hesitation. Then price is your prime focus.