I remembered in 2015 when Tesla stock was $200 (pre-split: the way old foggies remember it or $40 for all the /r/wsb). I was excited about the potential of Tesla and Elon Musk, in no small part due to an interview with Cathy Wood of ARK (she was much less famous then).
The question was and is still the same: Is it too late to buy Tesla? Other institutional buyers like Panasonic and Toyota bought at prices between $10-$25 (in today’s price), furthermore, Tesla was bleeding money massively.
Of course, all of us who bought in 2015 and held it till today, would have made anything from 1000% to 2000%.
How then do we decide it a stock or a market is too late to buy in?
Step 1: Decide on the Market state
- Where are the general trend of stocks going?
- Are all sectors in the same direction, or are the sectors taking different paths?
Step 2: Define the stock value
- Have a clear way to measure the intrinsic value of your stock. It could be via Asset valuation, Growth potential, or Cashflow discount theory.
- For stocks with defined assets like property, it is usually valued based on assets.
- Internet/ Technology type stocks tend to be valued based on market growth potential. This can definitely lead to over generous or over conservative valuation.
- For matured stocks, like blue chip conglomerates, it is typically valued by the sum of their cashflow or dividend value. This works on the premise that the business does not go through any adverse change.
Step 3: Is the stock over-priced?
- Once you have your intrinsic stock price determined, you can start to decide if the current price is too far from it.
- This can be done with oscillators or price ratios.
Step 4: Pulling it all together
- Once you have determined if it is over bought or over sold based on Step 2 and 3, then you can decided whether to buy now.
- For long term or Regular Investment folks – When there is a great stock; It is always better to buy today, then to put it aside for another day. In the long run, the consistent purchasing would average out your price points.
- For the more engaged investors – you can set a price alert on the fair value level and buy in when it triggers.
- For the active short term traders, you can eke our minor daily moves to supplement your long term position, if it is a stock you have a strong conviction on (either up or down).
The Answer: It is never too late.
If a stock is a great stock, you could be late, so you have to wait for the next opportunity, but it is never too late (meaning that there is no more opportunity).
A great stock that has growth or cashflow predictability can always be bought whenever it pulls back. Look at Microsoft in the past decades!
The question is which is a great stock, and for that it depends alot on your personal conviction and training.
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