Forum: money.stackexchange.com
Tags: <stocks><trading><stock-markets><technical-analysis><trend-trading>
Title: Paradox - When to buy & when to sell a share?
Question: Warren Buffet says buy when everyone is selling and sell when everyone is buying. Taking into consideration the support and resistance levels, everyone is selling near the resistance level and everyone is buying near the support levels. If we follow Buffet's advice, aren't we going to incur loss in every trade?

Answers:
sents: text: It's worth noting that Warren Buffet is a value investor, not a trader.
text: As such, it doesn't tell you much about technical analysis or trend following.
text: Instead, he's implying that when the market gets overly excited (overvalued) or panics (undervalued), there are opportunities for long-term profits, assuming you do your due diligence and have an opinion of what the fair value should be.
text: Note that it's difficult, if not impossible, to consistently time and beat the market and that the costs incurred by frequent trading eat away at your profits.
answer_details: author: money.stackexchange.com/users/50601/0xFEE1DEAD
score: 58
sents: text: I believe you are confused by the vague language.
text: Trading is a process where smart money and institutions take money from the public.
text: Consider the concept of "market cycle".
text: Institutions start a trend, buying in at the bottom, and only then it gets the public's attention and they start buying in higher, chasing the price.
text: When the public is at peak euphoria, feeling so smart, institutions start "distributing" their position to this panic-buying and soon to be bagholding public.
text: This is the market cycle phase known as distribution.
text: After institutions dump their position on the public the market starts contracting as the public sells lower and lower than they bought in.
text: When the public is at peak panic, the "accumulation" phase happens where institutions buy positions from the public at the bottom.
text: Warren Buffet says to buy when "everyone" is selling, and sell when "everyone" is buying.
text: When he says "everyone" he is talking about the public, Joe Sixpack.
text: To rephrase, what he means is "Be like institutions, accumulate during peak public panic and distribute during peak public euphoria".
text: Being a long term value investor, he is speaking in terms of timing trades with the broad market cycles.
text: This is not daytrading advice.
text: Don't get confused and think this should be applied to every technical signal, blindly doing the opposite of what they say.
text: It does not mean to buy when moving averages cross down, or to sell when macd cross up.
text: It certainly does not mean to sell above support and buy below resistance.
answer_details: author: money.stackexchange.com/users/66859/user1169420
score: 10
sents: text: Not at all.
text: The time period where everyone is selling a stock and when everyone is buying a stock may be years apart.
text: The exact dynamics of what's happening precisely when you buy and precisely when you sell won't significantly affect the profit or loss you take on a trade.
text: What will, however, is whether you bought or traded the right stock, and that's what Buffet's advice is intended to help you do.
text: If everyone is buying a stock, that likely means its price is higher than its value.
text: That's makes it a good stock to sell.
text: If everyone is selling a stock, that pushes its price below its value.
text: That makes it a good stock to buy.
answer_details: author: money.stackexchange.com/users/4548/David Schwartz
score: 5
sents: text: Like others have said, Warren is a value investor.
text: He is not really interested in technical analysis or trend spotting.
text: He buys a company that he has determined is undervalued, and waits for it to be overvalued.
text: He has a quick way of checking the fundamentals and presumably puts the company through a model that in a few minutes, will tell him whether the firm is undervalued.
text: Here is what I wrote for another question similar in nature: Value investing involves looking at a firm's fundamentals and coming up with an "intrinsic value" per share.
text: From there, you determine if the stock is under or over valued relative to market share price.
text: A disciplined value investor will sell when their models say that the stock is no longer undervalued.
text: Any interest in that company after that is not value investing and is simply betting on the stock.
text: Of course an investor will update models and change them appropriately throughout the investment period to make sure their models reflect current conditions.
text: There is no average or expected time it takes for an undervalued stock to appreciate.
text: The idea with value investing is that the market will correct "mistakes" made in undervaluing a company.
text: It could also be that the firm's fundamentals point towards a strong outlook (typically 10 years) and the market has yet to realize this.
text: Hope
text: this helps you make sense of things!
answer_details: author: money.stackexchange.com/users/66200/Michael Hartmann
score: 1
sents: text: The theory couldn't be more straightforward.
text: You sell when you find better things to do with your money.
text: Either sitting on your current account or other investments.
text: It follows that that's the same reason to buy, ie because your money will be more productive allocated in an investment.
text: In the meantime -most of the time-
text: the investment is left alone either compounding or generating cash via dividends which you have to allocate in turn or, in some cases (pure value investing), eventually realizing its fair value.
text: Allocating capital is simply done after an estimation of future returns of all the universe of possible investments at any given time for a somewhat arbitrary long period into the future.
text: Support and resistance levels is just witchcraft lingo.
answer_details: author: money.stackexchange.com/users/10967/DPM
score: 1
sents: text: Investors and traders have different perspectives on markets.
text: If a security's price falls further from an initial buy, a trader may have a stop loss or just sell because the trend is downward, while a long-term investor would view that price fall as a buying opportunity.
text: A value investor's time frame is typically much longer than a trader's time frame (years vs. months), so you can't really compare what Buffett says to a short time frame.
text: When Buffett says to buy low, sell high, buy in panic, sell in optimism, his price to buy is with respect to his evaluation of intrinsic value, not to technical patterns.
text: Usually, short-term price movements are of no concern to value investors, unless a price move reflects new information that has a big impact on the investors' appraisal of value.
answer_details: author: money.stackexchange.com/users/67288/LanceSanity
score: 1

Summary of the answers:
What he means is to buy up stocks cheaply during a panic and sell off at a high price when things calm down. His price to buy is with respect to his evaluation of intrinsic value.
When Buffett says to buy low, sell high, buy in panic, sell in optimism, this relates to his own evaluation of intrinsic value, rather than technical patterns. He means act like institutions, accumulate during peak public panic and distribute during peak public euphoria. Investors and traders have different perspectives on markets. Also, the time periods where everyone is selling or buying a stock may be years apart. You should probably sell when you find better things to do with your money. When everyone is buying a stock, that probably means its price is higher than its value.