What Stock Should I Buy

Often, one of the first questions an investor asks is "What stock should I buy?" This question can involve a great deal of time and analysis. In many cases, the average investor will want to find out what the company does; review its financial statements; see if it pays a dividend, as well as how long that dividend has been paid and whether or not it will continue to be paid; discover whether the company's earnings are rising or falling; analyze its products; and so on. In other words, the investor does a great deal of fundamental research to find out if that stock is the one to purchase.

This analysis answers the question of what to buy. However, it says nothing of when to buy. The best stocks have periods when they perform worse than the market, just as the weakest stocks have times when they perform better than the market. If no one is going to buy the so-called best stocks, then they are not going to rise. On the other hand, if a large number of investors buy a fundamentally weak stock, then it is headed higher.

At DWA we use point and figure charts to determine when to buy stocks. By charting stocks with this method, we see the movement that determines whether supply or demand is in control of the stock. If it is supply, then the probability is high for that stock to decline. The odds favor a rise in the price if demand is winning the battle. You will also want to keep in mind that there are no dis-interested investors. Back in the 1920s, there was no Securities and Exchange Commission to regulate companies and when and what they reported. Rumors were rampant, and it was not surprising to see wealthy and knowledgeable investors pool their money to trade. These pools gave them a huge advantage over the individual investors.

Today the Internet creates stock movement. There are chat rooms everywhere and practically anyone can offer ideas. Remember that the person who is wildly promoting or recommending a particular stock more than likely already owns it. You will also want to keep in mind that the investor who is badmouthing a stock has probably just sold that stock or has sold it short, hoping to buy it back at a lower price.

In this environment, you need something that will help you sort through the morass of opinions out there to determine whether demand or supply is in control. We recommend using technical analysis, preferably the point and figure methodology. Let the fundamental analyst help determine what you buy. But let the technical analyst determine when you buy that particular stock. When the market is topping, typically the news stories are all good, and that is not when you want to buy.