The best time to act on a trading tip

Last week I showed you the Co-operative bank 5.5555% subordinate bond. At 68.5p, it looks like a useful addition to my portfolio for the reasons I outlined.

But, of course, no sooner had I spoken than the price started to shift upwards. One reader reports “Hey Bengt, it’s getting difficult picking up that bond for 68.5p now!”

It’s one of the biggest problems when following tips… other people come in at the same time and push the price up. If the market gets a just sniff of demand, the price starts to move.

And that brings up a critical point about investing – you should never rush into buying a share.

Today I’ll show you exactly why that is. Because you might be surprised at what is actually happening behind the scenes.

I’ll also show you how you can avoid making this mistake. There are a few tactics that have served me well over the years. I think these will help you decide exactly when is the best time to get into a share…

Human nature demands logic and reason

Every day, stock prices yo-yo up and down for reasons that are simply unfathomable. Yet our Western, scientific minds demand a logical explanation. We assume there must be a logical reason why a stock is going up… maybe a takeover bid is in the offing? Maybe some great sales data is on the way?

But, more often than not, there’s no discernable reason for a stock’s move. Mostly it’s all random. It comes down to the number of buyers and sellers on any given day.

When I worked in the City, on occasion we’d win a new account (maybe a mandate to run a pension fund). When the account was moved over from the previous fund manager, it would be checked over. If there were stocks we didn’t like, or simply didn’t understand, they’d get dumped.

Would that mean ‘E-Book Technologies PLC’ was intrinsically worth less on the day we decided to dump? No: it just meant we didn’t know or understand it. We were sellers on that day. What’s more, we could remain sellers for months if it was an awkward position to unwind.

Most portfolios are run by City institutions. There are all manner of reasons why they are buyers, or sellers on any given day.

And if a few fund managers hit the same stock on the same day, it can have a dramatic effect on its price. Bear in mind, a price move is often amplified by technical traders (the guys that follow a chart, rather than fundamental analysis).

There’s no way of predicting who’s in the market and for what reason. But we do know one thing – you’re better off buying when it’s cheap. I recently showed you IG index, and it makes the point perfectly…

IG stock price over the last year

IG stock price chart over the last year

As you can see, IG’s price has moved around a fair bit since I first looked at it about a year and a half ago. Let’s say the bottom has been around £4 and the top around £5. Well you don’t need to be Sherlock Holmes to figure out when you ought to be buying – stay in the green, and out of the red.

Of course hindsight comes in glorious technicolour. It’s never this easy. And there’s a considerable patch of time (and price) that lies outside my two boxes.

In fact when I wrote my recent piece on IG index, the price was about £4.60. But by the time it was published, the price had moved up and into the red box. Buyer beware!

There’s nothing I can do about that. But I have some advice that may help. It’s a strategy I apply when I’m buying anything – and that is wait for a discount.

What discount do I want? Well, anywhere between 5% and 25% generally. It kind of depends on what I’m buying. A pair of shoes, maybe up to 50%. A bond, probably nearer 5% (or less). And when it comes to a volatile stock, I may not have to wait long for a 25% discount.

And I’m happy to wait. It may even take six months before you get your moment to pounce.

Of course, you need to be sure that nothing material has happened to the business in the meantime. If the stock hits your target because it’s just announced a collapse in sales, then clearly you need to reassess.

The only downside to this strategy is I may miss the boat. If the stock flies off into the stratosphere, then I’m frozen out of the deal. But it’s rare that I’m not given a chance to get in on the cheap. It’s easy to put a limit order with your stockbroker (an order to deal the stock once it hits your target price) and there are loads of free-online tools that’ll send you an alert the minute your stock falls to your target price.

And while you’re waiting you get a free gift…

All the while the stock is on your watch list, you get to understand it better. It’s effectively: ‘Try before you buy.’

Watch the company announcements; get to understand the business model, the directors, and how the stock reacts to economic events.

This background can be invaluable. After all, if the stock started as a tip it’s probably best that you get to know the stock yourself before you commit. It may help you from making an expensive mistake… after all, the tip could have been a bad one!

It also helps if you’ve got a great investment strategy. And that can be the beauty of a good investment newsletter.

I mean if you are following the advice of an expert – a hardened individual who has worked on his strategy for years. And if there is a small number of investors following this strategy, it can mean you pick up great stocks well before the rest of the market wakes up to its potential.

There are a few hardened individuals like this that I follow. Stephen Bland has a great strategy – just buy big high-yielding companies and sit on them. It’s simple and it seems to work.

And I also really enjoy reading Dr Mike Tubbs. He focuses on picking companies that invest heavily in Research & Development. And he has years of advising top-level companies and politicians to back it up. So far the strategy seems to be working a treat – he’s actually managed to outperform Warren Buffett three years running!

Now you can never guarantee the success of a strategy. But if you haven’t already, this is one that’s well worth checking out.

To buy or not to buy

All too often a stock-tip ends up in a binary decision. To buy or not to buy.

But there is another way. Hold back and maybe buy later. Or, if you need to satisfy an urge, why not put on a small amount? Maybe a third of your normal trade size. With online commissions quite reasonable these days, it won’t cost you much more to phase your way into a stock.

My best advice: Hold that urge and wait for the sales.

• This article is taken from the free investment email The Right side. Sign up to The Right Side here.

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