Now or Later?

An investor typically has this question, "Should I buy this stock now or later?". For this discussion, let us assume the investor has done enough analysis on the fundamentals of the company and its future business prospects. Based on the analysis, the investor expects a good appreciation in the stock price and the return-on-investment could beat other investment oppurtunities that the investor knows. If he decides to buy now, he thinks that current price is the best price. If he decides to buy later, he hopes to get a better price later. This question is usually asked when the investor couldn't figure out the direction of broad market in the short-term or he fears that the broad market could come down significantly in the short-term due to some events or he is unclear about few important things of the company although the broad picture of the company looks good. In this situation, let us assume the investor has invested ALL the allocated money in that stock NOW simply because he is gung-ho about its future prospects. But what if the stock price comes down significantly after few days? This would definitely worry the investor because he took the 'buy' decision when faced with the dilemma. As the investor didn't anticipate this event earlier, he also invested all the allocated money into that stock and he won't be able to use more money which is committed for other purposes. Although this event may not affect his expected return-on-investment, the investor has definitely missed a better oppurtunity. Now, let us assume the investor has decided to invest in that stock later because he thinks he could get a better entry price. But what if the stocks price goes up significantly after few days? Again, this would worry the investor because he missed a better entry price and he has not invested even a single penny in that stock. Even this decision will affect his return-on-investment.

So, what shoud the investor do given this situation? First of all, the investor should understand the stock market always fluctuates. When fluctuation is name of the game, it is very difficult to predict the best entry price. If he has invested all the allocated money in a stock and he is sure of its future prospects, it is better to sit tight rather than worry about stock market fluctuations. But the investor here was faced with the dilemma "Now or Later?" before he wanted to invest. Given this situation, the best way is to invest in small chunks than all at once. I mean one can start with small investment in that stock and based on how things evolve, he can consider increasing or decreasing the investments in that stock. How will this strategy benefit the investor?

• If the stock price goes down, he will still have the money to buy it at lesser price which can bring down the average purchase price. This will help improve the RoI.
• If he is not clear about few important things about the company, he can find out how things evolve over a period of time. If he finds something wrong in those few important aspects, he can stop investing more or he can delay further investment until things are sorted out. This will help limit the possible loss and the unused money can be invested in other investment avenues.
• If he is an active investor and he is constantly on the look-out for better oppurtunities, he could invest the unused part of the money allocated to the earlier mentioned stock in a different company which has even more better prospects. Here, I've assumed that the investor finds the better oppurtunity at a later point in time.

One can say the investor would have lost the oppurtunity if the stock price goes up after few days. But if you're faced with a dilemma and not clear of few things, why should you invest all your money in a single stock? Apart from capital appreciation, one should also think about capital protection. Even if the RoI is affected when the stock price goes up because you didn't choose to buy earlier, the investor actually gets the time to get rid of the dilemma. Even when one is not faced with a dilemma while investing, this strategy helps in manier occasions.

Read this good quote by Warren Buffet - Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.