In this post, I will be going over my personal attack strategy when it comes to buying stocks for a long term position. We will look at what a good entry position is, what stocks should you buy, and how to decide how many to buy. It is also important to note that this is just a template and you can adjust these ideas to your liking. Also, you will make mistakes throughout your trading career. Don’t panic, learn from your mistakes. Bonus! I will go over the recent mistakes I have made.
When to Buy a Stock
In the figure below you can see a two-year graph of our favorite ETF, the SPY. This graph will be used to demonstrate the ideal times to buy a stock. You can see on the left of the graph in December 2018 we had a correction, and then in March of 2020, we had a COVID related recession.
I’ve recently been asked by teammates and friends “How do you know what price is a good price to buy a stock?” I send them this picture above with the labels 1, 2, 3, and 4. I then ask them at what point do you think its best to buy a stock. They answer saying 1 and 4 are the best prices to buy a stock. This is because the stock is “on-sale”. The key to investing is PATIENTS. The market will continue to produce great opportunities for you to buy stocks “on-sale”. You must master your emotion and wait. In a two year span, you could have bought the SPY at ~230 dollars on two different occasions when the SPY was trading at ~330 dollars max. Crazy, 100 dollars on sale.
Sure, 2 wouldn’t be a bad buy either. Especially on long term bases 2 and even 3 are a good buy if you’re holding a stock for 6-8 years. That being said you want to also purchase stocks in a company that will be around in 6-8 years otherwise your making a bad investment. Which leads us to the next section.
How to Decide What Stocks to Buy
Now that you are knowledgeable in when to buy a stock the next step is to decide what stock to buy and how many shares. Below you can see a personal breakdown of an investment I made on August 23, 2019. I choose Disney, Facebook, Microsoft, and Proctor & Gamble as my four stocks to purchase. Now how did I decide these where the stocks I wanted to buy? Simple, as a beginner investor I strongly recommend holding positions on a long term basis. So step 1 is to select companies that you know will be around in the next 10 years. Step 2 is to pick a company with LOW DEBT and LOTS OF CASH. You can get this info by googling current financial statements for the company in question. The third is to pick companies that create products you use on a daily basis.
First off all the following companies have great financial statements and have been around for years. They are money-making machines and have deep roots engrained into the economy.
I chose Disney because they are a movie-making machine and their theme parks are every kids dream to visit. I loved Disney World as a kid and now enjoy their movies such as the Marvel Universe. This was a buy for me
I chose Facebook because they have a huge roll in social media. Facebook is filled with parents and grandparent users. Facebook also owns Instagram which has all of the younger generations. AND Facebook owns Oculus which is a VR Headset company. The future of gaming will require VR Headsets. This made Facebook a buy for me.
Microsoft was a clear buy after experiencing my first internship. All companies run on Windows 10 software. Microsoft also creates the Xbox gaming system which is loved by millions of kids across the world. They are an undervalued company and will remain a beast in the tech sector for many years to come.
Lastly, P&G is one of the top-grossing companies in sales revenue. They sell all kinds of products such as Tide, Febreze, Vicks, Duracell, Head & Shoulders, Crest, and many more. For me, I chose P&G over J&J because I personally use more products from P&G. This made P&G a buy for me.
Once these stocks where decide the next step was simple. As shown in the figure above you need to take into account how much money you have available for purchasing and then decide how many of each stock you want to purchase.
SIDE NOTE!!! It is important to NEVER buy more stocks then you can. This happened to me once. What happens is your bank will loan you the money and start charging interest!! AND they won’t blatantly tell you so you might not realize… Very bad. Be careful.
Long Term Mindset
I made a recent mistake on selling my stocks, I am a hypocrite. I advocate holding the long term but when the COVID pandemic hit I sold my stocks on 4/9/2020. Yes, this is a mistake, but it’s important to turn your mistakes into opportunities. Now I can only be patient and wait for the right opportunity to hop back into the market and STAY LONG TERM.
Now building off that its okay to make a mistake. I should have never sold my stocks. Honestly, I realized I am happy with my decision, the market is extremely volatile so being 75% cash is not a problem.
I then realized that everything would change once I graduate and get a full-time job. When you get a full-time job long term mindset is perfect. You can consistently invest in the market with your weekly paychecks, growing your account every week. You can also slowly stockpile cash and wait for the next correction or dip. This will maximize your returns. Once you’re in the market you don’t have to pull out. Sure you can try to time the peak and sell when profits are at their highest then time the dip and rebuy your stocks. This is a possibility if you use Simple Moving Averages (Post by Tunaman). Or you can just pump your portfolio week after week with your weekly paychecks. Keep all your stocks in and just pump your paycheck into the market. At least that’s my plan when I get there.