Loving the Limit

If you've been around Fooldom for any amount of time, you know how we feel about timing the market. It's bunk. Anyone who says they can do it is lying or delusional.

Benjamin Graham, mentor to Berkshire Hathaway's (NYSE: BRK.A  ) (NYSE: BRK.B  ) Warren Buffett, coined the term "Mr. Market" to describe the manic depressive nature of the stock market. Graham piled up pages of statistics and anecdotes in his classic work, The Intelligent Investor, to prove that timing the market is a fool's errand. Graham instead showed the profits in buying stocks when they're cheap and holding them till fully valued, an approach we now know as value investing.

But therein lies the paradox in Graham's argument. If you should only buy stocks when they're cheap, but the market is prone to wild mood swings that make stock prices anything but predictable, how can you possibly buy at the right time? Don't you need to learn to time the market? Nope.

Contrary to popular belief, you can name your own price when buying stocks, a la Priceline.com (Nasdaq: PCLN  ) . Seriously. The trick is to use a brokerage device called a limit order. You name the price per share you wish to pay, and how long you want the order to be open. It can be as little as an hour, till the end of the day, or until the darned order is filled. Limit orders effectively tell your broker -- whether it's Ameritrade (Nasdaq: AMTD  ) , Charles Schwab (NYSE: SCH  ) , E*Trade (NYSE: ET  ) , or another -- to go bargain hunting for you. Your order is filled when someone agrees to your terms.

Now contrast this to the more common approach to buying stocks, through what's known as a market order. With market orders, you name the stock you wish to buy. Your broker determines the price. This can be dangerous when buying shares in a company whose stock price moves back and forth like branches in the wind. (Amazon (Nasdaq: AMZN  ) and Yahoo! (Nasdaq: YHOO  ) come to mind.) You could end up paying several cents or dollars more than you anticipated in your rush to get a hold of the shares.

Which to you sounds more Foolish? Here's a hint: Tom Gardner and our Foolish analysts recommend placing limit orders for Motley Fool Hidden Gems picks at or below their buy-in prices, the theory being that each pick could double from the buy-in target. Buffett has also practiced this strategy for years, which he has called waiting for the perfect pitch.

Of course, you don't have to be Warren Buffett to profit from the limit. You need only be a Fool.

Confused by brokerage lingo? Don't be. You can find out everything you need to know and more at our Broker Center.

Fool contributor Tim Beyers has also learned to love the limit, except when it applies to pizza. He can't get enough of that. Tim owns no shares in any of the securities mentioned, and you can view his Fool profile here.


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