No doubt about it, buying individual stocks can be frightening, especially for new investors. I clearly remember the first time I clicked the old buy button at Ameritrade. I don't remember the stock. What I do remember are the symptoms: sweaty mouse hand, jittery trigger finger, dry throat, loss of appetite, uncomfortable clenching sensations in anatomical locations better left undescribed. If you haven't experienced this, then you've got ice water in the veins, or too much money, or maybe both.
I still get nervous when I hit the buy button, no matter how much I believe in the company on the receiving end of the click. But over the years, I've come to understand that the worst cases of the willies come to me for one of two reasons:
1) I'm buying a stock near the 52-week high.
2) I'm buying a stock near the 52-week low.
Ironically, though these are the scariest times to buy, they are often the best times as well.
Buy high? Are you nuts? The voices in my head lay that trip on me all time. This is the stock market! Ever hear of volatility? Wait a few days and you can get it on sale, right?
Not always. That's the problem. For instance, the Starbucks
Riding the crest
There are plenty of reasons for that. One of them is that stocks on continual upward climbs are often attached to businesses that are firing on all cylinders. The Foolish 8 screen that many community members use to ferret out stock ideas includes relative strength for just this reason. Betting on the horse that's leading the race is often the best policy. Stocks tend to go up for a reason.
Of course, it's important to figure out why a stock price is moving up. Some issues, such as traders' playthings Taser International
At the same time, there are other much more boring companies that have long, steady climbs for perfectly understandable reasons. Companies as diverse as Michaels Stores
How about a real moon shot?
But back to Middleby. "Pfft," thought I. "How much further can it go?" By the time it was pegged as an official gems pick last year, it had climbed another few percentage points.
I ran the numbers again. It looked great. But my inner poultry took over, and in the end I said, "Pshaw. Flimflam. I'm not buying this at the top."
Idiot. Since then it's up a paltry 187%.
The moral of this story? Don't overlook premium goods just because they come with a hefty price. In fact, if you've got a company that looks like a real winner, your fear should be a strong buy indicator. If you're afraid, you can bet there are plenty of others out there who are gun-shy. If you can fight the fright before they can, you'll be in at the lower price. By the time the Street's nerves are calmed, the big money will have been made, and you can retire to (insert exotic locale) to sip (pick a fancy beverage) on the beach.
Digging through the trough
The other scary time to buy is when a stock is sliding down the backside of the wave into the trough. "Don't try to catch a falling knife," goes the traditional wisdom. Of course, perennial successes such as Warren Buffett, Peter Lynch, and John Neff made careers by not only catching those knives but also actively seeking them out and even (gasp!) "throwing good money after the bad."
Remember that the stock price is nothing more than a shadow on the wall of Plato's Cave. It's merely a representation of the underlying company. And shadows can be very deceiving, as anyone who's ever folded his hands in the campfire's glow to make a bird, an alligator, or a candlestick chart can tell you.
The key, as with the bottle rockets discussed above, is to take a good look at the goods behind the stock price. When Nokia
I bought some LEAPS (long-term options). My wife jumped on the common stock near the recent bottom. She's up 20% over a few weeks and is collecting a nice dividend at the same time. Phew. The options are doing fine, too. It's nice to get one right (so far).
One that got away was Omnivision Technologies
I knew most of this. But I let the nerves stop me. If I had followed my own advice back in August, I might be sitting on a quick 50% gainer. Instead, we're eating ramen noodles chez Jayson, saving up for the next Omnivision.
Policies for pullets
Still unconvinced that acting on your fear can be good for your financial health? OK, there are a few ways for investors like you ("Bwuk, bwuk, bwukOOOk!") to hedge your bets.
Limit orders: These can be a Fool's best friend. By telling your brokerage that you'll be willing to buy that highflier, but only if it comes back a bit in price, you can give yourself the peace of mind that comes from at least having made an effort. Put in a limit order for a couple of points beneath the current value. Of course, if the stock never drops into your skinflint price range, you're out of luck.
Selling puts: OK, I know we generally don't talk about options much here at the Fool for fear of putting the equity equivalent of matches and gasoline into the hands of nascent stock-market pyros. So here's the requisite disclaimer: Options can be dangerous.
But selling put options is a great way to get paid for waiting for a stock to hit your price range. If you are convinced you would be happy to own a stock at a given price, and you have the money available to buy the shares at that price, you can sell someone puts, which gives them the right to make you purchase that stock when it hits the target price, or strike. If the stock drops to your target, you get it. If not, the options expire worthless and you've gotten a few hundred bucks for your troubles.
Just get over it: This is my favorite strategy. Give yourself a little bit of tough love. If you've got a low-cost broker -- as you should -- buy a small stake in the stocks you fear. As Tom Gardner is fond of saying, nothing forces you to pay attention like having a little skin in the game. Owning at least a small stake in companies you admire makes it much less likely that a stock will drop off your radar screen and give you reason to yell "Doh!" down the road when they're up 187% -- without you.
Seth Jayson is thinking of starting a new, fear-mongers' portfolio. At the time of publication, he had long positions in Nokia but no other company mentioned. View his stock holdings and Fool profile here.