"Some people say you should buy stocks when prices are going up, while others say you should buy when prices are falling. So, which is the right approach?"
That was the question asked by someone I had just met at an event. He was genuinely interested in investing in the stock market, but this question had been bothering him for a long time and had caused him to postpone his investment plans.
It is an excellent question, and I would like to share the explanation here.
Whether you buy stocks when prices are rising or when they are falling depends on your investment objectives and your tolerance for risk.
Do you want faster returns and are you willing to accept higher risk?
If your answer is yes, then you may consider buying stocks while their prices are rising and selling them at a higher price. This approach is known as the Momentum Strategy.
To apply this strategy successfully, you must have strong discipline. Greed should be avoided at all costs.
A solid understanding of technical analysis is essential for momentum investing. This includes learning how to read price charts, interpret technical indicators, and understand which indicators are most suitable for this strategy.
Are you a patient investor who does not expect quick profits and prefers lower risk?
If your answer is yes, then you should consider buying stocks when their prices have fallen—especially when they are near their lowest levels—and selling them when prices begin to rise. This approach is known as the Contrarian Strategy.
A contrarian investor does the opposite of the crowd: buying when most investors are selling (which causes prices to decline) and selling when most investors are buying (which pushes prices higher).
For this strategy, fundamental analysis is extremely important. Combining it with technical analysis can make your investment decisions even stronger.
The contrarian strategy generally carries lower risk (although it is never risk-free) and has been practiced by some of the world's most successful investors, including Warren Buffett and John Templeton.
For example, following the September 11 terrorist attacks in the United States, John Templeton purchased shares of seven U.S. airline companies after their stock prices had plunged. Just one week later, the U.S. government announced financial assistance for those airlines, causing their share prices to rebound sharply. As a result, Templeton reportedly earned billions of dollars from the recovery.
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| John Templeton, a great investor |
In short, know yourself and define your investment objectives clearly. Once you understand your goals, you can choose the investment strategy that best suits your personality, risk tolerance, and financial objectives.
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