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I've been studying investing and finance for about a year now, trying to get ready to start allocating my money, and one thing that's come to mind during my studies is the maxim buy low and sell high. That is the idea that a component of any given stock being a good deal is dependent on its selling price.

With that in mind, given one's job is secure, a recession seems to me like a good time to invest. With a company like say, 3M, dropping to a very low price per share, it would seem like a great opportunity to put a sizable chunk of money toward such a strong company, and then hold onto the shares until the market stabilized again.

I've read a lot of advice against speculating like this, but if there was ever a time to do it, when everyone else is selling seems like an ideal time to do so.

So this brings me to a few questions:

  • What are the risks here that I'm not seeing?
  • Is this a common practice? And if so, how would one identify a good company to invest in?
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    Risk-wise, your job is never as uncertain as in a recession. You have a liquidity risk with regards to the length of time until the share gains back its value. Are you financially able to wait 3-6-12-18-24-36 months ? You run the market risk of actually losing out on your investment (maybe 3M goes belly up). All in all, I wouldn't discourage from it but you should know the risks and take the necessary measures (use another strategy, diversify, hedge your risk, etc). – ApplePie Jan 4 '18 at 0:44
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    Opcaraw: Other people can also read and write. Remember that most people are not smarter than average - and other people are also thinking about this; so why would everyone not use this strategy to gain wealth? There are no guarantees that the stock will ever regain its value after a huge decline - there is a reason the prices is low to begin with, because investors have lost faith - if they dont regain this faith, the value will stay low. – ssn Jan 4 '18 at 8:55
  • @ssn Correct. It is important to keep in mind an imporant distinction: The stock price is primarily a function of the selling-price expectations investors have. The value of the company, on the other hand, is only one factor in the calculation of those expectations! – Alexander Kosubek Jan 4 '18 at 12:18
  • @AlexanderKosubek Yes - but I guess that will come down to why each investor is investing. If majority of the investors are purely speculating, then probably your statement is true; however if most investors are long-term oriented, I guess the statement becomes less true. – ssn Jan 4 '18 at 13:34
  • @ssn: Re "most people are not smarter than average", remember that that includes the people who a) don't invest (or save, FTM), and b) panic sell in any market crash. – jamesqf Jan 4 '18 at 17:48
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Buying when everyone else is selling is a strategy followed by many top investors like Buffett. For example, during the 2008 recession he invested in firms like Goldman Sachs, Bank of America, etc. Especially, Goldman Sachs is said to have given him huge returns after 2010.

At a very broad level, you have to make sure that these two conditions are met.

  1. The company has the ability to rebound. (Capable management with robust future plans, competitiveness of the products/services, good fundamentals, market share leadership, etc.)
  2. The company shares are underpriced during recession.

The above two questions require an indepth analysis of every single financial report you can access.

Investing during recession requires both bravery and intelligence.

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    Good points here, but I think another key item to remember is that there is definitely risk associated with this course of action. Warren Buffet and those of his wealth bracket can afford to take on high-risk high-reward investments because (a) they are well diversified, and can take advantage of average gains even if some investments lose; and (b) they are not gambling the shirt off their back, they are investing amounts that they can afford to lose. Not every financial institution which struggled in 2008 is still alive today... – Grade 'Eh' Bacon Jan 4 '18 at 14:26
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You don't identify a company.

Instead, you identify multiple companies in a large portfolio. Even as few as 20 companies may be enough if you take into account international diversification, sector diversification and rebalance your portfolio often.

Putting all of your money into one company is an extremely bad idea, no matter whether it's a recession or not. The same is true about putting all of your money into a single sector or into a single country.

Instead of buy low, sell high I would recommend another approach: buy low, don't sell. However, you may want to rebalance your portfolio occasionally if it's grossly imbalanced, but then you're not genuinely selling, you're just switching your investments from one stock to another.

As a general rule, I would prefer regular monthly saving, and continuing with the plan when it's recession. Trying to time the market is a bad idea. One form of timing the market is avoiding buying stocks with all of your money so that you could purchase more later at a cheaper price. That later day may however never come.

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As someone who followed that strategy, and profited from it, in the last couple of crashes, it's something that makes perfect sense. What I did was cut all discretionary spending to the minimum, and invested the rest. Now that the market is up, I spend on other things, like home remodelling.

That said, I would NOT invest in a single company, but in index or sector funds.

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"I've read a lot of advice against speculating like this, but if there was ever a time to do it, when everyone else is selling seems like an ideal time to do so."

Sorry, but there is never a time to do it. i.e. It is a bad idea at any time. The only "free lunch" that exists is broad diversification. Don't pass that up.

You know how they say, if it seems to good to be true, it probably is? Well, there are literally thousands of people whose entire job is buying stocks. All those people could be buying that same stock that you're thinking about, for the same price as you. But they're not (because if they were, the price would have already gone up due to their purchase). You think it's possible to make money by being smarter than people whose full-time job it is to make money at this. Doesn't that sound too good to be true?

protected by Chris W. Rea Feb 15 '18 at 11:59

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