When to Buy Stocks: 3 Ways to Take Calculated Risks

1. Temperature

Place the overall stock market in context.

Quantify it. Calculate market cap as a percentage of GNP. It tells you where valuations stand.

When it is 70%-80%, buy stocks. When it goes to 200%, be scared.1Fortune magazine, 2001, Dec, 10, Warren Buffett on the Stock Market

2. Strike Zone

A. Arbitrage

Warren Buffett suggests we maintain high standards for long-term investments. If you feel tempted to relax them, cool down by going after arbitrage situations.2Berkshire shareholder letter, 1988

3. Perfect Storm

Don’t look at just one signal. Look at multiple ones:3Joel Greenblatt, You Can Be a Stock Market Genius, 1999 ed., Ch 5

  • 1. Relatively cheap
  • 2. Limited downside
  • 3. Undiscovered
  • 4. Insiders are incentivized
  • 5. You can understand
  • 6. You have an edge
  • 7. No one else wants it

References

References
1Fortune magazine, 2001, Dec, 10, Warren Buffett on the Stock Market
2Berkshire shareholder letter, 1988
3Joel Greenblatt, You Can Be a Stock Market Genius, 1999 ed., Ch 5
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