Stocks investment strategy – buying on weakness

Dow goes down 400As I mentioned before I have been considering my options as far as preserving savings is concerned. The investment time frame is around 1-2 years but may potentially be much longer. This is so called emergency savings.

Theoretically these should go into a cash account and some of it did, however since I consider the probability of an emergency as fairly low, I am willing to take certain risk with investing a part of these savings into a riskier accounts that potentially can benefit higher yields down the road.

Investment alternatives

At some point during my search I seriously considered investing into commodities, in particularly silver, however looking at it further I decided that at this point it is too late for me to jump in. The commodities prices have lately seen very good gains partially from higher demand and partially from people using commodities as a “safe heaven”. If the economy rebounds, and I believe it has a good chance of doing so later this or early next year, a downturn in commodities prices is inevitable.

In addition I considered CD’s as an alternative. I even took advantage of a few offers last year, just about the time when I was doing those regular roundup on best banking offers. I gave up on these. With where the rates now and with constant threat of inflation, it makes less and less sense to look into savings accounts as an option. So as more funds become available, I have been slowly re-balancing my portfolio into… stocks.

Stocks as an investment

I believe right now is about time to start looking at certain companies that had disappointing developments of short term nature yet a very strong long term outlook. This strategy is called value investing - a favorite of Warren Buffet and the likes.

There are thousands of books written on the subject, and you might want to read one or two before you sink your hard earned cash into value stocks. In a nutshell however there are two types of analysis that people apply during the decision making: technical and fundamental. One looks at the stock price dynamics as a function of time and attempts to spot certain trends. Another one looks at the company balance sheet and financial prospects of the business and attempts to predict the future.

Both of these approaches have legs and I suggest using a combination in your research. My biggest problem however has not been analysis. I have always had problem with stock ideas. At some point I even considered joining one of those investment clubs where people get together to discuss stock tips - never had the time to follow through with it.

Buying stocks on weakness

Recently I discovered an interesting resource. It came from nowhere else but The Wall Street Journal. It is a daily list of stock symbols which had a down trend in the previous day and yet enjoyed a greater number of trades resulting into a stock price up-tick during that day, as opposite to a down-tick.

Technically it means that the people who were buying the stock have been perceiving it as a bargain and are willing to pay a few cents premium to meet the seller ask price rather than wait to see if the price can go lower during the day. And it makes sense to some extend. If say Google goes down from $710 to $420 during the past 2 months, what difference does it make for you if you pay $420 or $420.05 today? The investors are basically willing to pay a few cents more, because the price is already so low, that they don’t care if they are buying on an upward movement.

Since the list is of a daily nature you can’t really make any significant conclusions about the companies you see, and I would really like to see a weekly or monthly version of this list. Yet, this list is a great source of stock ideas if “Buying on Weakness” is what you consider as an investment strategy. At least it has been for me.

What kind of stock investment strategy is your favorite? Where do you go to look for stock ideas? Please share your tips in the comments.

Photo courtesy of William Wilkinson @ flickr

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9 Responses to “Stocks investment strategy – buying on weakness”

  1. 1 Alex Apr 16th, 2008 at 11:22 am

    I don’t think Google is a good example (although they do make great stuff) – there’s too much hype around it and the $700 price per share is(was) inflated. I personally think that large diverified companies stocks have a nice potential for a long term investment. Say Ford’s shares dropped to around $6 lately, but I just refuse to beleive that Ford is going to go out of business or that it will sink even further. maybe a dollar or two but in the long term it will figure out it’s way out.

  2. 2 Mike G. Apr 16th, 2008 at 9:11 pm

    Hi Alex,

    I hear what you are saying about GOOG, but I think it is a great investment. Google is the dominant search player, no one is even close. Looking at a lot of website referrer logs, you can see this domination even more clearly. So I think Yan’s strategy was to buy a winner on weakness, not a loser. Ford may not go out of business, but I don’t think anyone would classify it as a winner. Or if you think Ford may still come back, what kind of growth possibilities does it have? I don’t think you can compare that to Google either.


  3. 3 Yan Apr 16th, 2008 at 9:17 pm

    Agree on Ford, in fact it is going up very nicely today. It is the prospects for future growth and fat margins of online advertisement industry that make Google stock so expensive, not so much the hype.

  4. 4 Yan Apr 16th, 2008 at 9:24 pm

    Exactly Mike, the winner is who you want to bet on in the long run. Although I accept the that Ford may rebound in a short term as well.

    I personally like companies that enjoy virtual monopoly in their market niche. Search for “moat stocks” and you will see what I mean.

  5. 5 Mike G. Apr 17th, 2008 at 3:22 pm

    Looks like you were right..

    SAN FRANCISCO (Reuters) – Google Inc (GOOG.O: Quote, Profile, Research) on Thursday posted a 31 percent rise in net profit on 42 percent revenue growth, defying predictions the company is having trouble converting Web searchers into advertising viewers.

    They are up 11% in after hours trading.

  6. 6 Yan Apr 17th, 2008 at 5:54 pm

    Already 17.26% up. Good I wasn’t just talking. ;-)

    My last year IRA contribution went entirely in Google stock

  7. 7 Mike G. Apr 24th, 2008 at 1:00 pm


    Looks like Ford is rallying too! Why are you guys wasting your time with deals :)


  8. 8 Alex Apr 24th, 2008 at 3:33 pm

    searching for deals is my sacred cow… it makes me feel good. ;)

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