How to Time the Stock Market and Never Lose Money

by Chris Parsons

Today is Part IV of the four part series on stock investing. For parts I, II, and III click the roman numerals.

In part III I told you the top 10 mistakes that investors make. Today, we will go over strategies to avoid those common mistakes.

Most people buy “hot” stocks or into “it” industries… then there are those that use technical analysis or some other “secret metric” to try and quickly make money… Doing what everyone else does will get you the same result as them. In order to outperform, you have to do things differently.

“Timing the market” simply means buying low and selling high. This is the exact opposite of what most people do when trying to time the market. Most people buy high, hoping it goes even higher – and sell low, afraid the market will go even lower.

IGNORE EVERYONE ELSE.

I know that this is tough. Everyone around you is talking about the money that they’ve made investing in gold. Everyone is telling you that the housing market will never come back – and all of the reports on the news still seem bad. Still, for your best shot at financial success, you MUST ignore them.

How to be a Contrarian Investor:

There are several indicators out there that are supposed to track/predict investors confidence and sentiment, which can be used to attempt to gauge whether valuations are high or low. However, I find it simpler to just ask a few friends what their thoughts are. If they are extreme (in any way), then I know that it’s likely a good time to do the opposite of them.

Every asset (except gold/silver, etc) has some measure of value. For stocks, the simple measurement is P/E Ratio. For houses, the rent-potential. When any asset becomes OVER-VALUED compared to it’s historical norm, it’s time to consider SELLING. When it becomes UNDER-VALUED compared to it’s historical norm, it’s time to consider BUYING.

Don’t worry if you are selling at the very, very top – or buying at the very, very bottom of a market. What matters is that you buy at low valuations and sell at high valuations. Sure, it’s nice to try and get a few extra % points, but trying to time the market too specifically will lead to more losses than gains.

How to Never Lose Money:

The main detriment to financial success is not necessarily in missing out on big gains, but in losing money. As an investor, your goal should be to never lose money (there are exceptions to this – like in the Venture Capital game).

Always require a margin of safety, or in other words – only pay the price that you would if conditions were worse than they are now. If buying a rental property for instance, ensure that the purchase price not only gives you a note lower than expected rent, but also low enough to pay for repairs and improvements as well – even low enough that you could reduce rent to ensure occupancy.

Analyze the businesses from every angle. Are the business’ customers strongly committed to the business or are they looking for alternatives? Does the management show a strong ability to create value over time? Is there any potential government regulations that could impact this business? Would world-wide events would affect this business?

This is where it is important to expect the unexpected. Nobody thought that the entire US real estate market could go down all at once – because it had never happened before. Whether an event has happened before or not does not have any bearing on whether it will happen in the future.

However, even a good margin of safety will not ensure that you never lose money. Therefor, you should never over-leverage yourself. Debt is a tool that can create amazing wealth when used appropriately. However, it can also quickly destroy wealth if abused. I would never suggest using debt to buy stock.

The final key to never losing money is to HOLD the investment. Don’t sell it just because it goes down in value. If you hold your investments for as long as your original thesis holds, you will not lose money.