Have you ever bought something and then had buyers remorse? Or realized after the fact that you over-payed? Of course you have! All of us have at some point or another. But if this type of thing happens to you consistently or repeatedly, you might need to be extra careful trading stocks.
My approach to selecting and buying a stock is to choose the company/stock that I like first, and then watch and wait to see if/when the stock reaches a price that I like. In that sense, it’s easy for me to look at a stock purchase as a negotiation. I’m the buyer, and I have a price I’m willing to pay, and the market is the “seller,” actually composed of thousands of individual sellers. When I decide at what price I’m willing to buy a stock, I set a buy order that will remain open until my price is met. In other words, I am haggling with the market every day. “I see you’re asking $17 per share for Bank of America, Mr. Stock Market,” I said to myself in my mind like a lunatic in March of this year, “Would you take $15?” And of course, as is the case with many of the conversations that take place inside my head, a deal was not reached that day. So I walked away from the bargaining table.
But a couple of weeks later, in April, I came back! “I remember you were asking $17 for those BAC shares a couple of weeks ago? Have you re-considered my offer of $15?” And lo and behold, the market had made me a counter-offer: $16 per share! “Still too rich for my blood, ” I said to the stock market in my head, as my condition remained undiagnosed, “Would you take 15?” As I said, I’m a tough negotiator.
Finally, on April 28, the market caved and sold me my Bank of America shares for $15! And now that those shares are trading at about $16.80 only five months later, the market must be kicking itself for giving in to my demands so easily.
Of course, I’m being silly about all of this because it’s a Friday and because I’m a silly fellow. But at the core of this issue of “negotiating” the right price is discipline. Many, many times I’ve set a price at which I want to buy a stock. I set a limit buy order like setting a game trap, then I wait for whichever stock I am hunting to come to me. Sometimes it takes a day, sometimes it takes six months, and sometimes it never happens.
When Facebook went public last year, I discussed with my friends how I didn’t want to touch that stock with a 10-foot pole. There were too many inexperienced shareholders with sky-high expectations. The trading would be too unpredictable, and the company was too new to get a decent valuation. Sometimes the best move is no move at all. Sure enough, after Facebook traded as high as $45 on the day of its IPO, the stock began to tank soon thereafter. But as the share price started to tank, the risk/reward balance started to shift. When Facebook finally reached $20, I felt it was getting close to a level where the possible reward would outshine the risk. I put a buy order in at $15. Unfortunately, Facebook made it as low as $17.55, and the rest is history.
This is a perfect example of what you are giving up by being disciplined. You are giving up a certain amount of flexibility. Often in negotiations, there is a concept of “meeting in the middle.” This would have worked nearly perfectly in this case when Facebook was at $20 and I wanted it at $15, although I might have still barely missed the $17.50 mark by 5 cents.
But that example in itself is one of the problems with “compromising” on your own rules. It’s a slippery slope. You might start out thinking that a $20 stock is a buy at $15, but then convince yourself that you’ll “meet in the middle” at $17.50. But then you worry about what will happen if the stock doesn’t quite make it to $17.50, so you might as well make it an even $18. Then you think, “If I’m gonna pay $18, I might as well just buy it at $20 and get it over with.” And then you end up paying 33% more for the stock than you initially decided was a good price.
But that’s why it’s so important not to fall in love with a stock. From my book:
Whatever the reason, traders feel an obligation to own a stock because it gives them a good feeling… trading based on feelings is never a good idea. You should always buy the best stocks, not the stocks that you like most or the stocks of companies with which you do business.
This might not be the system that works for everybody, but this is my approach: find some stocks that you like, and put in some low-ball limit buy orders. Then sit back and give the market some time to mull over your offer. Sometimes the market is willing to negotiate, and sometimes it is not. But if you are a good negotiator, you should be able to get a great deal on all of the stocks you buy.
Quick note for all the other Bank of America shareholders- this is pretty exciting:
Should make for an exciting week next week, especially with the Federal Reserve meeting coming up…
Want to learn more about how I determine what price is the right price to buy? Or maybe you just want to be able to look sophisticated in front of your coworkers when they ask you what you are reading on your Kindle, and you’d prefer to tell them “Oh, I’m just reading a book about stock market analysis,” rather than the usual “Oh, I’m just looking at pics of my ex-girlfriend on Facebook.” For these reasons and more, check out my book, Beating Wall Street with Common Sense. I don’t have a degree in finance; I have a degree in neuroscience. You don’t have to predict what stocks will do if you can predict what traders will do and be one step ahead of them. I made a 400% return in the stock market over five years using only basic principles of psychology and common sense. Beating Wall Street with Common Sense is now available on Amazon, and tradingcommonsense.com is always available on your local internet!