Recently, I have been getting quite a number of emails seeking my inputs on the “best price” they should purchase shares of a company.
For the benefit of everyone, I would like to share with you my personal opinion on this question in my post today – from the perspective of both a short-term swing trader and a long-term investor.
To begin, in my personal opinion, there is no such thing as a “best price” you should buy shares of a particular company. Everyone (whether you are a short-term trader or a long-term investor) have their own preferred prices to buy/sell a company’s shares based on their own analyses – which explains why, at any price point, there are buy and sell transactions (because at any buy price, there will be people who feel comfortable to buy, and at the same time, there will also be people who are looking to sell – hence a transaction takes place between the buyer and seller.)
Now, you may be wondering how I determine my “best price” to buy/sell shares of the company both as a short-term swing trader as well as a long-term investor. Allow me to share with you what I usually do in the next two sections (I’ll first be talking about how I identify my buy/sell prices when I do short-term swing trading, followed by how I identify my buy price when I do long-term investing):
Short-Term Swing Trading:
I make use of the various technical analysis tools (including technical indicators, candlestick patterns, along with identifying support and resistance lines) to help me identify the best possible price points to buy and sell for a profit.
When it comes to using technical indicators, I tend to use a couple of them, as each have their strengths and weaknesses. The technical indicators I use include Moving Average Convergence Divergence (MACD), Relative Strength Index (RSI), Moving Average (MA), and Bollinger Bands (BB).
On top of that, I also analyse candlestick patterns, along with their accompanying volume, to help me identify a few price points – my buy price, my profit target price, along with my stop-loss price before I execute each and every short-term trade.
After I have identified those price points, I will make sure I stick to them very closely (and it is highly recommended you stick to the price points you’ve identified very closely as well whenever you conduct any short-term trades and not to succumb to greed – where you refuse to sell even when the share price hits your profit target thinking that you will earn more, or fear of loss – where you refuse to sell even when the share price hits your stop-loss target and harbouring false hopes that the share price will bounce back.)
When it comes to long-term investing, the share price of the company is not the only thing I look at. I focus more on the business fundamentals of the company – if the company is a fundamentally sound one (i.e. it has recorded an increase in its revenue and net profit over the years, more often than not, its share price will also go up over the years.)
However, you can be sure that in the short-term, the share price movement is volatile – and as long-term investors, we should not panic even when the share price of our investment drops after we’ve invested in it, especially if the company’s business fundamentals remain sound.
Allow me to explain this with a personal investment of mine – Ascendas REIT (SGX:A17U), which I invested at S$2.93 back in mid-November 2019. Now, let us take a look at what happened to its unit price movement after I’ve invested in the REIT:
Take a look at how wildly the unit price of the REIT have moved between mid-November 2019 (when I invested in the REIT) to the time of writing – the unit price movement is anything but smooth sailing. Particularly, its unit price hit a high of S$3.48 in early-March 2020 before plunging all the way down two weeks after, to a low of S$2.22 (down by 36.2% from the high of S$3.48), and climbing back up again thereafter, with the unit price at S$3.20 at the time of writing (an unrealised capital gain of 9.2% from my buy price at S$2.93.)
In case you’re wondering, I did not panic even though its unit price fell to a low of S$2.22 in mid-March 2020, simply because of all the homework I had done, where I studied the REIT’s historical financial performance, portfolio occupancy and debt profile, along with the managements’ directions for the REIT over the years – and came to a conclusion that I’m confident of its growth in the years ahead, before I made the decision to invest in it for the long-term. As a long-term investor, I am not the least bothered about the near-term share price volatility, for I know that in the long-run, its share price will move in one direction – and that direction is up.
The only time I will consider to sell a long-term holding is when there is better investment opportunity available (and that’s when I will sell off my current shareholding of a company and “recycle” my capital into another company, which offers me a better return on investment), or if the business of the company I’m invested in is deteriorating (one example will be if the revenue and net profit of the company has been falling for consecutive years, because the business has lost its market share.)
Finally, if you’re wondering how I determine the best possible price point to invest in each and every company in my long-term investment portfolio (you can check out my entire long-term portfolio here), I personally make use of technical analysis (where my buy price is usually at a major support point – one with a history where the share price tend to bounce back up whenever it hits this price point.) Apart from that, I also look at the company’s valuations such as their current price-to-earnings (P/E) ratio, price-to-book (P/B) ratio, as well as its dividend yield, and compare these ratios against its historical valuations to find out whether it currently below its historical valuations (preferred) or above.
Whether you are a short-term swing trader or a long-term investor, everyone trades or invests differently and as such, all of us have different price points to buy a company’s shares.
As such, instead of actively seeking and blindly following price points of other traders/investors, I strongly recommend that you identify your own by first identifying your time horizon (whether you’re buying the company’s shares for short-term trading or for long-term investing), and then, work on identifying your own “best price” you feel comfortable with buying shares of the company – that way, you will find yourself having a much better return on investment from your trades and investments.
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