Many economists are finally starting to use the “recession” word to describe the U.S. economy. Almost daily, someone is calling the bottom of the market. And many investors are sitting on the sidelines with their money until this magical moment is actually reached.
Just one problem: We won’t know when the bottom of the market happens until it has already happened. By then, prices will be on the upswing, and the opportunities to buy at fire sale prices will be gone. Kind of like what’s happening with the housing market. Many buyers out there are saying that they are waiting to purchase until prices come down more. What if they have already come down as far as they are going to go? We won’t know for certain where the bottom is until it is months behind us.
If, right now, you have the opportunity to buy a great company at a ridiculously low price, you should be taking advantage of it. Trying to save that extra few dollars a share by trying to perfectly time the bottom doesn’t make sense in the long run.
Take Microsoft, for example. It is currently around $28 /share. If you buy now and sell at $40 /share when the market rebounds, you will have a return of approximately 43 percent. If you wait for it to drop to $26 /share and sell at $40 /share, your return would be 53 percent instead of 43 percent. Great! That is a 10 percent increase in your rate of return. But what if Microsoft never gets cheaper than $28 /share? What if that is the cheapest it will trade for during this “recession”? Then you will have to buy it at $30 /share. Or maybe $32 / share. And then your returns will be only 33 percent or 25 percent.
Instead of trying to time the bottom, you should be buying the stocks of great companies now. Opportunities to buy them at current prices don’t come along very often. Take advantage of it.[Ed. Note: Rick’s takeaway today? Don’t try to predict the market’s bottom. Sounds simple enough, right? Turns out that a LOT of investing rules are just as easy to follow. In fact, Rick’s new KISS trading service relies on principles like this – so simple, a fifth-grader could understand them.]