Tuesday, 19 January 2016

When to Buy? Economic forecasting business trends cannot be safely used as a basis for your investing action. Stay with superbly selected growth stocks.

The heart of successful investing is knowing how to find the minority of stocks that in the years ahead will have spectacular growth in their per-share earnings.

Is there any reason to divert time or mental effort from this main issue?

Does not the matter of when to buy become of relatively minor importance?

Once the investor is sure he has definitely found an outstanding stock, isn't any time at all a good time to buy it?

The answer to this depends somewhat on the investor's objective.

It also depends on his temperament.

The consequence of buying just before a big stock market crash.

An example of this would be the purchase of several superbly selected enterprises in the summer of 1929 or just before the greatest stock market crash of American history.

In time, such a purchase would have turned out well.

But 25 years later, it would provide a much smaller percentage gain than would have been the case if, having done the hardest part of the job in selecting his companies properly, an investor had made the small extra effort needed to understand a few simple principles about the timing of growth stocks.

In other words:

  • if the right stocks are bought and held long enough they will always produce some profit.
  • usually, they will produce a handsome profit.
  •  however, to produce close to the maximum profit, the kind of spectacular profit one hoped for, some consideration must be given to timing.

The conventional method of timing when to buy stocks.

This is just as silly as it appears on the surface to be sensible.

This method is to marshal a vast mass of economic data.  From these data conclusions are reached as to the near- and medium-term course of general business.

More sophisticated investors will usually form opinions about the future course of money rates as well as business activity.

Then, if their forecasts for all these matters indicate no major worsening of background conditions, the conclusion is that the desired stock may be bought.   

It sometimes appears that dark clouds are forming on the horizon.  Then those who use this generally accepted method will postpone or cancel purchases they otherwise would make.

The objection to this conventional approach.

The conventional approach is not unreasonable in theory.  

The objection is that in the current state of human knowledge about the economics which deal with forecasting future business trends, it is impossible to apply this method in practice.

The chances of being right are not good enough to warrant such methods being used as a basis for risking the investment of savings.

This may not always be the case.

Economic forecasting business trends cannot be safely used as a basis for your investing action.

It might not even be the case five or ten years from now.  At present, able men are attempting to harness electronic computers to establish "input-output" series of sufficient intricacy that perhaps at some future date it may be possible to know with a fair degree of precision what the coming business trend will be.

When, if ever, such developments occur, the art of common stock investment may have to be radically revised.  Until they occur, however, the economics which deal with forecasting business trends may be considered to be about as far along as was the science of chemistry during the days of alchemy in the Middle Ages.

In chemistry then, as in business forecasting now, basic principles were just beginning to emerge from a mysterious mass of mumbo-jumbo.  However, chemistry had not reached a point where such principles could be safely used as a basis for choosing a course of action.

Rarely, economic forecasting is useful or safe.

Occasionally, as in 1929, the economy gets so out of line that speculative enthusiasm for the future runs to unprecedented proportions.

Even in our present state of economic ignorance, it is possible to make a pretty accurate guess as to what will occur.

However, it is doubtful if the years when it is safe to do this have averaged much more than one out of ten.

They may be even rarer in the future.

(Read:  Year 2008 - Buffett Calls The Market Again...And He's Never Been Wrong

If, then, conventional studies of the near-term economic prospect do not provide the right method of approach to the proper timing of buying, what does provide it?

The answer lies in the very nature of growth stocks themselves.

Common Stocks and Uncommon Profits
Philip Fisher

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