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The Horrors of Buying Too Early

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This just in: The 2008 Global Stock Sales Event has been extended!

Yeah, I know, you're tired of hearing about the great "opportunities" to be found in the midst of the seemingly neverending market decline. It really is going on and on, isn't it? It seems like every time I cautiously put a toe in the water -- whether with a stock purchase, or by writing an article asking, "Was that the bottom?" -- the market answers me with yet another new low.

If you're feeling like it's getting hard to hold on, trust me: You're not alone.

Like many value-oriented investors, I've been eyeing the "opportunities" in this market for months. We already had a pretty good bear trend going before the global credit crisis blossomed in all of its red-numbered glory, and lots of things were looking cheap back in July and August.

In fact, I loaded up on a bunch of what seemed like cheap stocks late in the summer -- just in time for the big crash. I liked the odds of future strength at companies like General Electric (NYSE: GE  ) and Starbucks (Nasdaq: SBUX  ) -- as long as the economy didn't get too awful.


Good news, bad news
The good news is that my guess that oil prices would fall was right. I sold my holdings in Contango Oil & Gas (NYSE: MCF  ) at a huge profit at the beginning of the summer, along with a few other things, and I hadn't yet reinvested all the proceeds when the bottom fell out of the market.

The bad news is that I, like lots of other folks, have had to rethink my whole investment approach in light of the developments of the last few months. And I, like other folks, have had to refocus on an old market truism: Almost nobody buys at the bottom.

Avoiding discouragement in a sea of red numbers
Did you buy Bristol Myers Squibb (NYSE: BMY  ) crazy-cheap at $24 -- only to see it fall to $20? How about Google (Nasdaq: GOOG  ) at $310? That seemed like quite a bargain -- until it fell to $260 a few days later. Did you grab Berkshire Hathaway's B shares (NYSE: BRK-B  ) at the then fire-sale price of $3,500 -- and wince as they fell below $2,500 last week?

If so, congratulations! You got some great stocks at good prices. In 10 years, you'll look like a genius. Sure, you didn't get the absolute cheapest price, but that doesn't matter.

More to the point, it can't be done with any regularity. Not even by investment superstars.

In the footsteps of giants
Early on in my career in the investment business, I had the opportunity to interview a famous (and very successful) mutual fund manager. He described his strategy as "growth at a reasonable price," and summed it up for me roughly like this: "I look for stocks with growth potential. When they're cheap, I buy them. If they go lower, I ignore that. When they go up, I sell them. If they go higher after that, I ignore that, too. I've made money and moved on."

To me, that advice -- which he attributed to Benjamin Graham -- is profound. Make peace, as he did, with the idea that you won't buy at the very bottom or sell at the very top. Focus on hitching rides from less to more. Hitch enough good rides, and you'll get to a very profitable destination. Whether you bought Apple (Nasdaq: AAPL  ) at $88 or $93 or $104, you bought it for a lot less than it was selling for a few months ago. If the company continues to execute, you'll make plenty of money in the long run.

For what it's worth, that portfolio manager subsequently retired -- in his early 50s -- with an eight-figure net worth. I take that as evidence that his strategy was sound.

Take this with you
Unless you're trying to be a day trader, your horizon is long -- years, maybe decades. Unless the company's story changes -- and you wouldn't buy it at current prices -- there's no reason to sell.

Spend your time and energy doing the research to find the companies you want to buy, not worrying about whether you could have saved a few bucks by buying on a different day.

And if you want to save even more time, let the Fool's Rule Breakers analysts show you the companies they think are strong bets for outperformance over the next several years. Current conditions have delivered some incredible bargains, and the Rule Breakers team has been on their case. You can see their best ideas in seconds with a no-obligation 30-day trial.

Fool contributor John Rosevear owns shares of Apple. Starbucks and Berkshire Hathaway are Motley Fool Inside Value recommendations. Google is a Motley Fool Rule Breakers selection. Starbucks, Berkshire Hathaway, and Apple are Motley Fool Stock Advisor selections. The Fool owns shares of Starbucks and Berkshire Hathaway. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 26, 2008, at 11:41 PM, commonsense1won wrote:

    There is a surplus of millions of housing units in the usa.

    The dropping demand and over supply will cause housing unit prices to collapse to 10 cents on the dollar. This is actual replacement value for a housing unit. Drywall costs 3 dollars a sheet, a bag of concrete costs a few dollars, bricks cost pennies each, copper wire and plastic tube plumbing costs the same as 30 years ago, and laborers to build, jose, costs 7 dollars an hour to put it all together. This makes the actual brick materials labor land and dirt value of housing worth 10 cents on the dollars compared to todays inflated prices. Realtors and appraisers flew across the nation like locusts from the dungeons of 'sooothebees & christies inflate em auction house' and suckers bought in, thanks to dirt cheap no doc loan money. Now the building sector is dead and millions of workers in building sector will have no job. Building is the cornerstone of usa economy and the entire cornerstone of USA economy is and will stay out of work due to changing demographics, more housing units available then needed in usa..

    Rental units will flood the market forcing rental prices lower and lower to compete for the small tenant/renter markets.

    Bank rate is recommending shared housing, 2-3 families in one home plus a stray relative or neighbor or two, all under one roof contributing to pay the inflated tax bills and money pit never ending black hole home maintenance costs.


    The watermelon is passing thru the snake leaving a usa GLUT in the overbuilt surplus unit housing markets.

    No recovery in sight. Look for rentals, land and housing prices to be 10 cents on the dollar of todays prices. Then the corrections will be complete and affordable housing will stabilize and property taxation will be 10 cents on the dollar of todays inflated gouger property tax price. This is reality and the real value of dirt and bricks.

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