I read somewhere that Ed Lampart is adding to his stake in auto parts retailer Autozone and buying shares heavily. For those who don’t know him, he is a billionaire hedge fund manager. A couple of weeks ago, Warren Buffett said in a leading US paper that it was time to buy. Does the fact that these 2 people are buying mean that it’s time for everyone to buy? In my point of view the answer is no. Don’t misunderstand what I’m trying to say. I’m not saying that these guys are wrong in their thinking. I’m not even qualified to say so as I have not made a fraction of the money they have made on the stock market. However, they have a peculiar style of investment and if you are going to follow their advice then you need to make sure that your style is similar to theirs.
Since Buffett made his announcement, the Dow index has fallen over 1000 points, some shares have fallen more than 20%. This is a big drop for a trader or investor that is only willing to hold onto a share provided it doesn’t drop more than 10 – 20 % from his entry point. This type of trade won’t be suitable for a short term investor.
You also have to think about risk management. Depending on the school of thought (or should I say risk) that you belong to, it’s been suggested that to survive as an trader (or even investor) you should not risk more than 5% of your capital on one single stock. Ed Lampart and Warren Buffett have billions at their disposal and can afford to buy shares now and hold onto them till the whole turbulence is over. They are concerned about a company’s fundamentals and won’t be moved by a 20 or 30% drop in the value of a share price. They know that share prices are heavily discounted at the moment and they are willing to hold onto the shares for as long as it takes. Just consider the following 2 quotes by Warren Buffett
“Our favourite holding period is forever.”
“I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.”
To round up, if you are not happy to hold onto the shares for a long time, don’t buy yet. If you are a technical analyst, wait for your charts to give you the signal. That might be tomorrow, next week or next month. Nobody know when.
Happy trading
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6 years ago
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