{"id":63028,"date":"2014-11-03T19:13:48","date_gmt":"2014-11-04T00:13:48","guid":{"rendered":"http:\/\/countingpips.com\/?p=63028"},"modified":"2014-11-03T19:13:48","modified_gmt":"2014-11-04T00:13:48","slug":"three-reasons-to-buy-stocks-in-this-market","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex\/2014\/11\/three-reasons-to-buy-stocks-in-this-market\/","title":{"rendered":"Three Reasons to Buy Stocks in This Market"},"content":{"rendered":"
November 3, 2014<\/div>
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By MoneyMorning.com.au<\/u><\/a><\/p>\n

The stock market<\/strong> is enjoying a fresh head of steam. <\/p>\n

Despite the best efforts of the mainstream financial press — which, let’s face it, consists mainly of backward-looking pundits — stocks<\/strong> have spent the past three weeks ripping upwards.<\/p>\n

In fact, the US benchmark S&P 500 [INDEXSP:INX]<\/strong> index just closed at a record high. <\/p>\n

Most shareholders enjoyed a great end to the month. So much for the cretins who insisted that October would always be a bad time to own stocks. We put paid to those jokers four weeks ago<\/a>.<\/p>\n

So does that mean the coast is clear? Should private investors plough back into stocks<\/a> now?<\/p>

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Not so fast…<\/p>\n

At times like this, many financial commentators suffer what you might call a knee-jerk reaction.<\/p>\n

As surely as your leg kicks out after your doctor swings the reflex hammer, these reporters change the tone of their articles.<\/p>\n

After having spent the past four weeks shooing investors away from the stock market<\/a> — they’re currently flip-flopping. They will advise investors to pile back into this market.<\/p>\n

We have a problem with that attitude.<\/p>\n

Let us show you why. Just look at this 12-month chart of the S&P\/ASX 200 [ASX:XJO]<\/strong> index.<\/p>\n

\"\"<\/a>
\nClick to enlarge<\/em><\/a>
\n Source: nabtrade<\/em><\/div>\n

It has been a good year for stocks. But look at how they tend to perform straight after an explosive upswing.<\/p>\n

Stock prices don’t move in straight lines for long. That provides opportunities for the short-term tactician.<\/p>\n

More often than not, stocks give up some of their gains after a quick rise — like the one we’ve seen in the past three weeks.<\/p>\n

It’s staring us in the face — but most members of the mainstream financial media either choose to ignore it or simply don’t understand it. They’ll tell you to throw fresh money into stocks now because the trend has been<\/em> positive. But that kind of rear-view mirror investing won’t make you rich.<\/p>\n

The time to buy stocks was when those commentators were wailing and gnashing their teeth. <\/p>\n

It takes guts to buy when there’s ‘blood in the streets’. Few commentators back themselves strongly enough to advise it. And now that the middle-of-the-road pundits are flipping to ‘positive mode’, you should think twice before you take their advice.<\/p>\n

If your finger is hovering over the ‘buy’ button and you’re about to throw $50,000 of cash into this market — stop for a moment.<\/p>\n

We can see three reasons why now might be an appropriate time to buy stocks<\/a>.<\/p>\n

But after a short, sharp share market rally, you should ask yourself these three questions about the company whose stock you’re considering…<\/p>\n

<\/p>\n

1. How surely can you evaluate the long-term prospects of the business?<\/h2>\n<\/p>\n

This is where a little common sense goes a long way.<\/p>\n

Put simply: does the company meet needs that will persist into the future? And is it hard for competitors to duplicate its success?<\/p>\n

Investors can fool themselves into thinking brief advantages will persist over the long term.<\/p>\n

But companies whose size gives them an advantage are a good place to start. We call that an ‘economy of scale’. <\/p>\n

You should also think about what it costs a customer, in time, money or hassle, to switch from one company to a competitor. <\/p>\n

If you find a company with economy of scale and high switching costs, you might be onto a winner.<\/p>\n

<\/p>\n

2. Can you count on managers to channel rewards to shareholders?<\/h2>\n<\/p>\n

This is a simple one. Company managers hold unique power. But their incentive is usually to personally squeeze as much money out of a company as possible while holding on to that power.<\/p>\n

When a CEO gets cosy with a board, the directors can become blas\u00e9 about making sure shareholders get value for money.<\/p>\n

Look for stocks where ‘insiders’ — staff and directors — make up substantial parts of the shareholder register.<\/p>\n

We call that having ‘skin in the game’. It’s a good way to weed out greedy CEOs and align the interests of the company’s stewards and owners.<\/p>\n

<\/p>\n

3. Is the stock trading at a fair price?<\/h2>\n<\/p>\n

It’s hard to judge a company’s fair price.<\/p>\n

Most investors use a common metric: the price-earnings (P\/E) ratio. That’s the price of a share divided by the annual earnings to which the investor is entitled.<\/p>\n

As a rough rule of thumb, most companies deserve to trade on P\/E ratios in line with the rate at which their earnings grow. <\/p>\n

Many factors influence a stock’s fair price. But here’s a helpful tip: keep an eye out for companies with a disconnect between the rate at which they’re growing earnings per share, and the P\/E ratio that the market has assigned them.<\/p>\n

If the former is much higher than the latter, then you might be looking at a screamingly cheap stock.<\/p>\n

If the market blows off some steam, stocks like this tend to outperform the higher-fliers.<\/p>\n

A word to the wise<\/h2>\n<\/p>\n

By the way, these questions are more of a guide to investment rather than successful speculation.<\/p>\n

If you’re looking for speculative stocks with a chance of gaining several hundred percent<\/a>, you should ask a different set of questions. And certain sectors — like resources — offer more opportunities to play that game<\/a>.<\/p>\n

But if you ask yourself those three questions before you buy a stock in this market, you’ll find yourself making smarter decisions — and your investing<\/a> could become much more profitable.<\/p>\n

Cheers,<\/strong><\/p>\n

Tim Dohrmann,
\n Editor, Money Morning<\/em><\/strong><\/p>\n

The post Three Reasons to Buy Stocks in This Market<\/a> appeared first on Stock Market News, Finance and Investments | Money Morning Australia<\/a>.<\/p>\n

\n<\/img><\/a> <\/img><\/a> <\/img><\/a>\n<\/div>\n


\nBy MoneyMorning.com.au<\/u><\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

By MoneyMorning.com.au The stock market is enjoying a fresh head of steam. Despite the best efforts of the mainstream financial press — which, let’s face it, consists mainly of backward-looking pundits — stocks have spent the past three weeks ripping upwards. In fact, the US benchmark S&P 500 [INDEXSP:INX] index just closed at a record […]<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-63028","post","type-post","status-publish","format-standard","hentry","no-post-thumbnail"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/63028","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/comments?post=63028"}],"version-history":[{"count":0,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/63028\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/media?parent=63028"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/categories?post=63028"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/tags?post=63028"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}