IN practical terms, unless you build or repair something, we are all involved in the buy and sell business. There are exceptions like dentists, attorneys and newspaper columnists who sell a service. Often, value is added to a product like a restaurant that takes raw meat and turns it into a burger meal.
The buy/sell business basically operates exactly the same no matter the product. A product is purchased with the expectation that at some point in the future it can be sold for a profit to another individual. That is simple enough.
Yet the statistics for small business start-ups show that more than 80 percent of them fail and of the ones that do not fail, less than 50 percent only manage to “break-even.” Of course, not all are in the buy/sell game and chocolate covered insects are unlikely to ever be a winner.
But studies have shown that the major reason that small businesses fail is that although people have the technical skills to run the business, they do not have the business skills to be successful. Just because your fried chicken is the best in the world does not guarantee success. You have to know how to run a restaurant, and that is much more than cooking chicken.
There are four general rules to the buy/sell business.
You must buy quality products that other people want to buy. Those products should be in constant high or at least consistent demand. The selling price should be as high as possible but not too high as to decrease demand. Items not selling should be put on sale to free cash to buy other products even if there is no profit at that price.
Stock-market investing is a buy/sell business. You buy shares with the expectation that at some point in the future you can sell for a profit to another individual. And the rules are the same.
Buy financially sound companies that have good earnings and good earnings growth. On the Philippine Stock Exchange, about 60 percent of all companies are to some degree “good.” Thirty percent are reasonably “acceptable” and about 10 percent are financially basura. Look at three to five years of net profit with consistent growth regardless of changes in the core business. In the current economic climate, a company should show about a 10-percent annual net profit increase.
Then buy companies whose stock price is trending higher, particularly in the short to medium term. That shows that there is buying interest that may increase depending on market conditions. Once a stock is bought, you must identify when the price is high enough to take a profit. This is done by looking at the resistance level when, in the past, a price was reached when buyers stopped buying.
Last, you must identify when the price is not going higher but going down, and then cut the position. There are various ways to determine this but here again, the trend is the key. Investors talk about “falling in love” with a stock and they cannot seem to sell. But sometimes, falling out of love is critical.
Has the reason why you first bought the stock changed? You bought that company because they own a property that a major developer wanted to buy. If the developer backed out of the deal, your reason for buying has changed. If you bought during an uptrend and now the price is trending lower, why are you still in? Stock-market investing is a buy/sell business. You need to use the same business model that has made every other business a success, otherwise, you will fail.
E-mail me at mangun@gmail.com. Visit my web site at www.mangunonmarkets.com. Follow me on Twitter @mangunonmarkets. PSE stock-market information and technical analysis tools provided by the COL Financial Group Inc.