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NBA Coaches, Real Estate, and Stocks: Life Is All About The Entry Point

12 May 2008 4 Comments

For all you sports fans, specifically basketball fans, a couple of high profile coaches have been searching for new jobs in the NBA recently. Mike D’Antoni, after getting canned by the Suns, was being pursued by both the Chicago Bulls and the New York Knicks. The Bulls are well positioned for success in the near future; the Knicks? Well, not so much. However, D’Antoni is headed towards the Knicks. In addition to more money, D’Antoni is essentially “buying” the Knicks low.

What does “buying” an NBA team low look like? It means more wiggle room, more forgiveness, more time to right the ship. In New York, the most impatient city in the world, such patience for a new coach is rare.

When looking at investing, both in real estate and stocks, the same principles are crucial. The entry point can make all the difference between losing money and hitting a home run. Let’s look at some examples and then at some strategies to increase the number of home runs we hit.

Real Estate

Too many people are experiencing the pain of buying real estate at the wrong time. For example, John Doe bought a piece of property for $500,000 in 2006 at the height of the real estate bubble. Not long after, a sharp correction in real estate prices has John Doe trying to sell the same house for $400,000 without much luck. If John would have waited a couple years, he could have gotten the same house for $100,000 or more less.

Now, real estate is a unique investment because it serves as your place of residence. If you are only focused on finding a place to live, don’t worry about timing the market. Find the house you like and want to be in for a long period of time and buy it. You’ll be fine in that case.

Stocks however do not serve as anything more than an investment. Therefore, the entry points are even more crucial.

Everyone Agrees with “Buy Low, Sell High” But Nobody Does It

Consider the following scenario… You are an investor, desperately trying to find the right investments and wanting to make a nice return on your money. You turn on CNBC and find everyone talking about the “hot sector” or the hot group of stocks. First of all, these stocks aren’t considering “hot” on CNBC until they have already recorded significant gains. Frustrated that you missed out on the action, and not wanting to miss out on more gains, you buy in on the “hot” stock.

Because the stock was overpriced, it naturally correction down and you are now in the red. As the price keeps going down, you pay no attention to the actual company, but instead are dialed into the declining share price. Now panicking, you sell you shares to avoid any additional losses.

Well, in this example, the investor did just about everything wrong. However, if you asked him if he sought to “buy low, and sell high” he would enthusiastically agree. His actions reveal just the opposite though.

Let’s look at a specific example of my favorite volatile stock, Apple (APPL). Apple, in 2007, ran from under $100 a share to over $200 a share. Soon after the new year it was back down to under $120. If you were to interview an investor who bought Apple at say $190 when the hype was at its greatest, he would undoubtedly tell you the reasons for investing in Apple were fundamentally-based. For example, he liked Apple’s long term strategy, multiple product lines, and innovative management. However, most of these investors when the stock tanked 40% either sold their positions or merely sat on them.

If they liked the stock at $190 because of the fundamentals, they should have LOVED the stock at $120 for the same fundamentals. Those investors who were undeterred in Apple’s long term potential were buying as much stock as they could at those low price levels.  The stock is rewarded the consistent investors, and is now trading at over $180. I recently wrote a detailed self analysis on my Apple trades.

Strategies For Finding Entry Points and Making The Most Of Them

  • When a stock that you own declines, do everything you can to stay calm. Ask yourself, “Do the reasons I bought the company in the first place, still exist today?” If so, you should be buying more at a lower price.
  • Move in and out of your positions in thirds. By never completely selling or buying a position, you will spread your buying (and selling) points across multiple price levels. This could help you avoid putting all your money in a stock at its highest point.
  • Change your attitude towards market declines. If you’re a young investor, you should love when the market goes down. A few years of ugly returns or average returns equate to a few years of excellent buying opportunities. All the stocks you buy “on sale” now will reap large returns in the future. Remember, the majority of you investing career is ahead of you.

We hit on it every day on this blog. The key to outperforming the market is finding great buying opportunities. Keep your emotions in check, and maximize every time your favorite stocks decline in share price.

4 Comments »

  • Eric Hundin said:

    I found your blog on MSN Search. Nice writing. I will check back to read more.

    Eric Hundin