Wow! We've had quite a roller-coaster ride in the markets over the last couple of weeks. In fact, a roller coaster is a good metaphor for the market's movements in general: long slow uphill climbs, followed by fast stomach-churning drops. Of course, unlike a roller coaster, which returns to its starting place, the market has always ended higher up than it started.
But it's easy to forget that sometimes. Last Friday, watching various favorite stocks, I was shocked by the lows that were briefly hit. Nutrisystem (NASDAQ:NTRI), which is struggling with maturing growth rates, fell below $47.50 before bouncing back to more than $53. First Marblehead (NYSE:FMD), suffering from concerns that it may lose its leading customers, hit $31 before recovering to nearly $34.50. And Patterson-UTI (NASDAQ:PTEN), whose fortunes shift up and down with natural gas prices, dipped below $21 before recovering to close near $22.50. Those are some big one-day gaps.
Mr. Market's one-day sale
At least from my point of view, those are all promising stocks with good stories. Heck, I own two of them, and if I'd been looking to add to my positions, last Friday morning would have been a golden opportunity to do so. And there may be other golden opportunities ahead. Despite well-publicized intervention in the markets by the U.S. Federal Reserve and European central banks, there's reason to believe that we haven't seen the last of this rough patch. For savvy value investors, a title to which I aspire, rough patches are great buying opportunities.
But unless you're a professional trader (or obsessed), you can't watch the market all the time. There are meetings and vacations that take us away from our computers, and of course most of us have actual work to do while the market is open. All of those lows listed above happened before 11 a.m. EDT on Friday. If I had wanted to add to my positions, but had been in a meeting or otherwise distracted -- or if I had been on the West Coast, where I might still have been working on coffee and my morning shower -- I would have missed out. What to do?
The ups and downs of limit orders
Well, the first thing that comes to mind is to set a limit order, in which you tell your broker to buy a set number of shares of a specific stock at or below a preset price. Generally, with online brokers, you set these up the same way you make any other trade, but select "limit order" and enter your target price at the prompt. For instance, say you had been hoping to get into Joe's Widgets (Ticker: JOEW) at $42. If it had recently fallen to $45, and you happened to see the next morning that the market would probably open down sharply, then setting a quick limit order to buy JOEW at $42 before running out to a three-hour meeting might work out well for you.
The risks of this approach are obvious, of course -- you might well come back to your desk at noon to find that you bought JOEW at $42, but that it's now trading at $36. (Been there, done that.) You might also find that it hit a low of $42.10 -- a price at which you would have been happy to buy -- but that the market rallied and it's now at $51. (Done that, too.) Or you might come back to find the shocking news that Joe had been hit by a blimp and his company was now trading at $6 ... You get the idea.
The upshot
It comes down to this: For most investors, trying to time the bottom of the market is likely to be as fruitless as trying to time the top. As one smart investor I worked with early in my career once told me, probably paraphrasing Benjamin Graham:
When the price of a good stock goes down, buy. It will go lower. Ignore it. When it goes up, sell. After you sell, it will go higher. Ignore it. You've already made money.
That's great advice. I'd add this: Look for companies that are already undervalued at current prices, and load the boat when you find them -- using limit orders or not, as you prefer. If you happen to get them on sale during one of Mr. Market's bad weeks, great! And if you happen to get in a bit too early, don't sweat it. After all, if your reason for buying was valid at $42, your reason for holding on is just as valid at $39.
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Fool contributor John Rosevear owns shares of Nutrisystem and Patterson-UTI. He does not own shares of any other company mentioned. First Marblehead is a Motley Fool Hidden Gems recommendation as well as a pick of Inside Value. The Motley Fool has a disclosure policy.
