Those are pretty big issues, given that how to know when to buy and sell stocks is the entirety of the investing process.<\/p>\n\n\n\n
The truth is, there\u2019s no way to know for sure when is the best time to buy stocks or when is the best time to sell stocks – investing is as much art as it is science.<\/p>\n\n\n\n
The good news is the more time you spend buying and selling stocks the better you\u2019ll become at knowing when you should.<\/p>\n\n\n\n
But if you’re starting out, there are some general rules of thumb. These aren\u2019t my own rules – I\u2019ve got them from reading every book I can get my hands on about legendary investors like Warren Buffett, Benjamin Graham, and Peter Lynch. If you like what I have to say, thank them, not me.<\/p>\n\n\n\n
When to Buy<\/span> Stocks<\/strong><\/h2>\n\n\n\nI\u2019ve already written an article on how to know what stocks to buy that covers the investment strategy I follow, value investing:<\/p>\n\n\n\n
Read more: <\/strong>How to Know What Stocks to Buy<\/a><\/p>\n\n\n\nThe long-and-short of when to invest in stocks is two-fold:<\/p>\n\n\n\n
- Buy great companies<\/li>
- For fair or better prices<\/li><\/ol><\/ol>\n\n\n\n
When companies meet those 2 criteria, that\u2019s the best time to buy stocks.<\/p>\n\n\n\n
The article linked above dives into the specifics and tactical-side of these points (and how WallStreetZen<\/a> can help you all along the way), but I\u2019ll add some additional context here.<\/p>\n\n\n\nIdentifying great companies at fair or better prices<\/strong><\/h4>\n\n\n\nWhat makes a company \u201cgreat\u201d? <\/p>\n\n\n\n
What makes a stock\u2019s price \u201cfair\u201d or \u201cbetter\u201d than fair?<\/p>\n\n\n\n
Here\u2019s an overview of the 3 categories I look at when evaluating potential investments:<\/p>\n\n\n\n
1. Current Valuation – How is the stock priced?<\/strong><\/h6>\n\n\n\nThe most common way to value stocks is by using relative valuation ratios, such as the P\/E, P\/S, P\/B, and PEG ratios:<\/p>\n\n\n
\n![\"\"](\"https:\/\/www.wallstreetzen.com\/blog\/wp-content\/uploads\/2022\/10\/Screen-Shot-2022-10-04-at-8.51.04-AM.png\")
<\/a><\/figure><\/div>\n\n\nIt should be noted: <\/strong>Valuation ratios alone don\u2019t necessarily signal when you should buy a stock or sell a stock. Instead, they indicate which companies are being valued either higher or lower than their peers based on the expectations of their future growth.<\/p>\n\n\n\nIf you see stock ABC has a P\/E of 15x, that doesn\u2019t tell you much.<\/p>\n\n\n\n
If, however, it has a P\/E of 15x and its revenue and earnings are expected to grow at 50% per year for several years and its peers are trading at P\/E ratios of 30x and are only expected to grow at 20% per year, ABC could increase more than threefold before it\u2019s correctly valued.<\/p>\n\n\n\n
In the context of its growth rate and peer valuations, the P\/E of 15x may indicate now is a great time to buy ABC.<\/p>\n\n\n\n
2. Future Outlook – What is the stock\u2019s potential?<\/strong><\/h6>\n\n\n\nA large part of any stock\u2019s current valuation is investors\u2019 expectations of its future growth.<\/p>\n\n\n\n
This is why Tesla (NASDAQ: TSLA<\/strong><\/a>) trades at a much higher valuation (88.5x P\/E) than Ford (NYSE: F<\/strong><\/a>) (4.2x P\/E).<\/p>\n\n\n\nThe higher a company\u2019s potential for growth and the greater its likelihood of achieving that growth, the higher the valuation the stock should trade at.<\/p>\n\n\n\n
If you think stock ABC\u2019s revenue will grow at 50% per year for the next 10 years and the market is projecting it to grow at just 15%, you will value ABC much higher and buy as many shares as you can.<\/p>\n\n\n\n
\ud83d\udca1 Note: WallStreetZen shows the analyst forecast data on each stock\u2019s \u2018Forecast\u2019 tab (here’s TSLA’s analyst forecast data<\/a>):<\/p>\n\n\n\n![\"\"](\"https:\/\/www.wallstreetzen.com\/blog\/wp-content\/uploads\/2022\/08\/Screen-Shot-2022-08-09-at-10.49.19-AM.png\")
<\/figure><\/div>\n\n\nIf you\u2019re really not sure what the future holds, you can rely on the analysis of Wall Street experts. Our Top Analysts<\/strong><\/a> feature allows you to see the latest recommendations from the best performing analysts on Wall Street.<\/p>\n\n\n\n3. Business Risks<\/strong><\/h6>\n\n\n\nAll businesses face some risks from competition within their industries, economic headwinds, poor management decisions, or unsustainable operations.<\/p>\n\n\n\n
In short, I want to buy financially durable companies with strong competitive advantages. To do this, I check:<\/p>\n\n\n\n
- If debt coverage is sustainable
- If short-term assets can cover long-term liabilities
- If operating cash flow is robust
- If profit margins are higher than the industry average<\/ul><\/ol>\n\n\n\n
\ud83d\udca1 Note: I know I blazed through these checks, but these are just a sampling of the 38 due diligence checks WallStreetZen\u2019s Zen Rating automatically analyzes, allowing you to find each stock\u2019s fundamental strengths and weaknesses in seconds (check out TSLA’s Zen Rating<\/a>):<\/p>\n\n\n\n![\"\"](\"https:\/\/www.wallstreetzen.com\/blog\/wp-content\/uploads\/2022\/07\/36db7965196708cb80d5646aa34316a0.gif\")
<\/a><\/figure><\/div>\n\n\nPutting them together<\/strong><\/h4>\n\n\n\nNow that we know what makes a great company and how to determine individual stocks\u2019 fair values, it\u2019s time to put them together so we know when is the best time to buy stocks.<\/p>\n\n\n\n
- When a company\u2019s value (in terms of its financial results, future outlook, and risks) is higher than its current valuation, we buy.<\/li>
- When a company\u2019s value is lower than its current valuation, we sell.<\/li><\/ul><\/ol>\n\n\n\n
Which leads me into my next section\u2026<\/p>\n\n\n\n
When to Sell<\/span> Stocks<\/strong><\/h2>\n\n\n\nHonestly, how to know when to sell stocks can be even more ambiguous than knowing when to buy them.<\/p>\n\n\n\n
It\u2019s almost inevitable: If I sell today, the price is sure to cruise even higher. If I plan on selling in a few weeks, the stock is bound to take a dive.<\/p>\n\n\n\n
I can\u2019t tell you how many times this happened to me – it was painful.<\/p>\n\n\n\n
But I\u2019m about to share something with you that will forever change how you think about when it\u2019s time to sell your stocks:<\/p>\n\n\n\n
The stock\u2019s price should have no influence in your decision to hold or sell.<\/strong><\/p>\n\n\n\nThere are only 2 reasons to sell a stock:<\/p>\n\n\n\n
1. Your reason for buying no longer exists<\/strong><\/h4>\n\n\n\nDo you remember your original reason for buying your stock?<\/p>\n\n\n\n
Hopefully, you bought it because it was a great company at a fair or better price.<\/p>\n\n\n\n
Since then, has its price risen beyond the company\u2019s real value? Is the stock valued higher than you believe it should be? If so, there\u2019s probably very little potential upside left, and holding on to stocks that increase in price beyond their intrinsic value because you think it will go even higher is speculating, not investing.<\/p>\n\n\n\n
From our example above, let\u2019s assume you bought stock ABC when it was trading at 15x P\/E. From there, its price went on to increase five-fold, meaning it is trading at a P\/E of 75x. In your opinion, ABC is now overvalued so you decide to sell for a tidy profit.<\/p>\n\n\n\n
On the flip side, any business\u2019 fundamentals could deteriorate at any time. If a company makes a series of bad decisions or the economy worsens and the stock price remains elevated above the company\u2019s real value, it may be time to sell. The stock\u2019s story has changed and you must reevaluate your investment.<\/p>\n\n\n\n
If you bought ABC and a competitor starts offering a better product, you may expect its growth to increase by just 5% per year. At a P\/E of 15x, ABC is overvalued in your opinion, so you sell.<\/p>\n\n\n\n
Here\u2019s a good rule of thumb:<\/strong> If you wouldn\u2019t buy more at this price, you should consider selling.<\/p>\n\n\n\nOn the other hand, if you wouldn\u2019t hesitate to buy more, keep holding.<\/p>\n\n\n\n
2. A better opportunity becomes available<\/strong><\/h4>\n\n\n\nWe want to put our money into investments where it will have the highest likelihood of returning the best possible return, based on our risk tolerance, investing style, and time horizon.<\/p>\n\n\n\n
If your money is currently invested in a mediocre business with lousy upside, it\u2019s time to sell your stock and invest your money in a more attractive company.<\/p>\n\n\n\n
<\/strong>And you should always be on the lookout for better opportunities.<\/p>\n\n\n\nSummary<\/strong><\/h2>\n\n\n\nAs I mentioned above, even with all of our models, metrics, analysis, and tools, nobody really knows for sure when the best time is to buy or sell a stock.<\/p>\n\n\n\n
After all, investors are humans which means the stock market is heavily influenced by human psychology – something that is anything but predictable.<\/p>\n\n\n\n
But, with a few general rules of thumb, we can each develop our own investing style which will guide our buying and selling decisions.<\/p>\n\n\n\n
If you\u2019re interested in investing based on quality, fundamental analysis, I highly recommend using WallStreetZen<\/a>.<\/p>\n\n\n\nWe built it specifically for people like you and me – serious investors who know the critical importance of proper research and analysis, but don\u2019t have countless hours to spend in Excel manipulating data.<\/p>\n\n\n\n
With our intuitive data visualizations and aggregated analysis, you can make better investing decisions in minutes, not hours.<\/p>\n\n\n\n
Plus, who doesn\u2019t love seeing what Wall Street\u2019s Top Analysts<\/strong><\/a> are recommending?<\/p>\n\n\n\n\nTry WallStreetZen Premium for 14 days<\/a><\/div>\n<\/div>\n\n\n\n<\/p>\n\n\n\n
Motley Fool Stock Advisor<\/h2>\n\n\n\n
If all this talk of fundamental analysis makes your eyes glaze over, consider subscribing to Motley Fool’s Stock Advisor.<\/p>\n\n\n\n
Stock Advisor is a stock-picking service that delivers 2 high-quality recommendations each month straight to your inbox. Since the service’s inception, the Motley Fool team has vastly outperformed the S&P 500:<\/p>\n\n\n\n![\"\"\/](\"https:\/\/g.foolcdn.com\/misc-assets\/wf-large-1-oct20.png)
<\/a><\/figure>\n\n\n\nPlus, we’ve got a special introductory offer to share: Get your first year of Stock Advisor for just $79!<\/p>\n\n\n\n
\n
The long-and-short of when to invest in stocks is two-fold:<\/p>\n\n\n\n
- Buy great companies<\/li>
- For fair or better prices<\/li><\/ol><\/ol>\n\n\n\n
When companies meet those 2 criteria, that\u2019s the best time to buy stocks.<\/p>\n\n\n\n
The article linked above dives into the specifics and tactical-side of these points (and how WallStreetZen<\/a> can help you all along the way), but I\u2019ll add some additional context here.<\/p>\n\n\n\n
Identifying great companies at fair or better prices<\/strong><\/h4>\n\n\n\n
What makes a company \u201cgreat\u201d? <\/p>\n\n\n\n
What makes a stock\u2019s price \u201cfair\u201d or \u201cbetter\u201d than fair?<\/p>\n\n\n\n
Here\u2019s an overview of the 3 categories I look at when evaluating potential investments:<\/p>\n\n\n\n
1. Current Valuation – How is the stock priced?<\/strong><\/h6>\n\n\n\n
The most common way to value stocks is by using relative valuation ratios, such as the P\/E, P\/S, P\/B, and PEG ratios:<\/p>\n\n\n
\n<\/a><\/figure><\/div>\n\n\nIt should be noted: <\/strong>Valuation ratios alone don\u2019t necessarily signal when you should buy a stock or sell a stock. Instead, they indicate which companies are being valued either higher or lower than their peers based on the expectations of their future growth.<\/p>\n\n\n\n
If you see stock ABC has a P\/E of 15x, that doesn\u2019t tell you much.<\/p>\n\n\n\n
If, however, it has a P\/E of 15x and its revenue and earnings are expected to grow at 50% per year for several years and its peers are trading at P\/E ratios of 30x and are only expected to grow at 20% per year, ABC could increase more than threefold before it\u2019s correctly valued.<\/p>\n\n\n\n
In the context of its growth rate and peer valuations, the P\/E of 15x may indicate now is a great time to buy ABC.<\/p>\n\n\n\n
2. Future Outlook – What is the stock\u2019s potential?<\/strong><\/h6>\n\n\n\n
A large part of any stock\u2019s current valuation is investors\u2019 expectations of its future growth.<\/p>\n\n\n\n
This is why Tesla (NASDAQ: TSLA<\/strong><\/a>) trades at a much higher valuation (88.5x P\/E) than Ford (NYSE: F<\/strong><\/a>) (4.2x P\/E).<\/p>\n\n\n\n
The higher a company\u2019s potential for growth and the greater its likelihood of achieving that growth, the higher the valuation the stock should trade at.<\/p>\n\n\n\n
If you think stock ABC\u2019s revenue will grow at 50% per year for the next 10 years and the market is projecting it to grow at just 15%, you will value ABC much higher and buy as many shares as you can.<\/p>\n\n\n\n
\ud83d\udca1 Note: WallStreetZen shows the analyst forecast data on each stock\u2019s \u2018Forecast\u2019 tab (here’s TSLA’s analyst forecast data<\/a>):<\/p>\n\n\n
\n<\/figure><\/div>\n\n\nIf you\u2019re really not sure what the future holds, you can rely on the analysis of Wall Street experts. Our Top Analysts<\/strong><\/a> feature allows you to see the latest recommendations from the best performing analysts on Wall Street.<\/p>\n\n\n\n
3. Business Risks<\/strong><\/h6>\n\n\n\n
All businesses face some risks from competition within their industries, economic headwinds, poor management decisions, or unsustainable operations.<\/p>\n\n\n\n
In short, I want to buy financially durable companies with strong competitive advantages. To do this, I check:<\/p>\n\n\n\n
- If debt coverage is sustainable
- If short-term assets can cover long-term liabilities
- If operating cash flow is robust
- If profit margins are higher than the industry average<\/ul><\/ol>\n\n\n\n
\ud83d\udca1 Note: I know I blazed through these checks, but these are just a sampling of the 38 due diligence checks WallStreetZen\u2019s Zen Rating automatically analyzes, allowing you to find each stock\u2019s fundamental strengths and weaknesses in seconds (check out TSLA’s Zen Rating<\/a>):<\/p>\n\n\n
\n<\/a><\/figure><\/div>\n\n\nPutting them together<\/strong><\/h4>\n\n\n\n
Now that we know what makes a great company and how to determine individual stocks\u2019 fair values, it\u2019s time to put them together so we know when is the best time to buy stocks.<\/p>\n\n\n\n
- When a company\u2019s value (in terms of its financial results, future outlook, and risks) is higher than its current valuation, we buy.<\/li>
- When a company\u2019s value is lower than its current valuation, we sell.<\/li><\/ul><\/ol>\n\n\n\n
Which leads me into my next section\u2026<\/p>\n\n\n\n
When to Sell<\/span> Stocks<\/strong><\/h2>\n\n\n\n
Honestly, how to know when to sell stocks can be even more ambiguous than knowing when to buy them.<\/p>\n\n\n\n
It\u2019s almost inevitable: If I sell today, the price is sure to cruise even higher. If I plan on selling in a few weeks, the stock is bound to take a dive.<\/p>\n\n\n\n
I can\u2019t tell you how many times this happened to me – it was painful.<\/p>\n\n\n\n
But I\u2019m about to share something with you that will forever change how you think about when it\u2019s time to sell your stocks:<\/p>\n\n\n\n
The stock\u2019s price should have no influence in your decision to hold or sell.<\/strong><\/p>\n\n\n\n
There are only 2 reasons to sell a stock:<\/p>\n\n\n\n
1. Your reason for buying no longer exists<\/strong><\/h4>\n\n\n\n
Do you remember your original reason for buying your stock?<\/p>\n\n\n\n
Hopefully, you bought it because it was a great company at a fair or better price.<\/p>\n\n\n\n
Since then, has its price risen beyond the company\u2019s real value? Is the stock valued higher than you believe it should be? If so, there\u2019s probably very little potential upside left, and holding on to stocks that increase in price beyond their intrinsic value because you think it will go even higher is speculating, not investing.<\/p>\n\n\n\n
From our example above, let\u2019s assume you bought stock ABC when it was trading at 15x P\/E. From there, its price went on to increase five-fold, meaning it is trading at a P\/E of 75x. In your opinion, ABC is now overvalued so you decide to sell for a tidy profit.<\/p>\n\n\n\n
On the flip side, any business\u2019 fundamentals could deteriorate at any time. If a company makes a series of bad decisions or the economy worsens and the stock price remains elevated above the company\u2019s real value, it may be time to sell. The stock\u2019s story has changed and you must reevaluate your investment.<\/p>\n\n\n\n
If you bought ABC and a competitor starts offering a better product, you may expect its growth to increase by just 5% per year. At a P\/E of 15x, ABC is overvalued in your opinion, so you sell.<\/p>\n\n\n\n
Here\u2019s a good rule of thumb:<\/strong> If you wouldn\u2019t buy more at this price, you should consider selling.<\/p>\n\n\n\n
On the other hand, if you wouldn\u2019t hesitate to buy more, keep holding.<\/p>\n\n\n\n
2. A better opportunity becomes available<\/strong><\/h4>\n\n\n\n
We want to put our money into investments where it will have the highest likelihood of returning the best possible return, based on our risk tolerance, investing style, and time horizon.<\/p>\n\n\n\n
If your money is currently invested in a mediocre business with lousy upside, it\u2019s time to sell your stock and invest your money in a more attractive company.<\/p>\n\n\n\n
<\/strong>And you should always be on the lookout for better opportunities.<\/p>\n\n\n\n
Summary<\/strong><\/h2>\n\n\n\n
As I mentioned above, even with all of our models, metrics, analysis, and tools, nobody really knows for sure when the best time is to buy or sell a stock.<\/p>\n\n\n\n
After all, investors are humans which means the stock market is heavily influenced by human psychology – something that is anything but predictable.<\/p>\n\n\n\n
But, with a few general rules of thumb, we can each develop our own investing style which will guide our buying and selling decisions.<\/p>\n\n\n\n
If you\u2019re interested in investing based on quality, fundamental analysis, I highly recommend using WallStreetZen<\/a>.<\/p>\n\n\n\n
We built it specifically for people like you and me – serious investors who know the critical importance of proper research and analysis, but don\u2019t have countless hours to spend in Excel manipulating data.<\/p>\n\n\n\n
With our intuitive data visualizations and aggregated analysis, you can make better investing decisions in minutes, not hours.<\/p>\n\n\n\n
Plus, who doesn\u2019t love seeing what Wall Street\u2019s Top Analysts<\/strong><\/a> are recommending?<\/p>\n\n\n\n
\nTry WallStreetZen Premium for 14 days<\/a><\/div>\n<\/div>\n\n\n\n<\/p>\n\n\n\n
Motley Fool Stock Advisor<\/h2>\n\n\n\n
If all this talk of fundamental analysis makes your eyes glaze over, consider subscribing to Motley Fool’s Stock Advisor.<\/p>\n\n\n\n
Stock Advisor is a stock-picking service that delivers 2 high-quality recommendations each month straight to your inbox. Since the service’s inception, the Motley Fool team has vastly outperformed the S&P 500:<\/p>\n\n\n\n
<\/a><\/figure>\n\n\n\nPlus, we’ve got a special introductory offer to share: Get your first year of Stock Advisor for just $79!<\/p>\n\n\n\n
\n