By Nigam Arora
In the wake of the novel coronavirus, many investors are looking for prudent strategies to buy stocks. Let’s explore this with the help of a chart.
Please click here for a chart of Dow Jones Industrial ETF /zigman2/quotes/208954582/composite DIA +0.04% , which represents popular stock index Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA -0.07% .
Note the following:
• The chart compares five stocks with the Dow Jones Industrial Average.
• Investors should consider diversifying by strategy in addition to diversifying by sector, market capitalization, geography, time frame and other characteristics. At The Arora Report we use over 50 strategies for stock selection. Different strategies are appropriate for different times.
• One strategy that is highly applicable now on the stock-market drop due to the coronavirus pandemic is to look at blue-chip stocks that have outperformed the stock market.
• Blue-chips have the advantage of solid balance sheets and well-run, established businesses that aren’t going anywhere soon.
• The chart shows that Microsoft /zigman2/quotes/207732364/composite MSFT +1.02% has done the best among the five stocks and is barely down for the year.
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When and how to buy
The best way to buy is on pullbacks into buy zones. For example, Microsoft recently fell to $132.52 in the Arora buy zone and has now moved up to $160. Our very long-term target for Microsoft is a range of $210 to $220.
What if you do not have the patience and self-discipline to wait for dips into the buy zones? Consider slowly scaling in using small tranches but only if the “buy now” rating of a stock is “yes.”
It is important to be nimble and differentiate between strategic buying and tactical buying. Always buy in the context of the big picture of the stock market, especially support zones. The “mother of support zones” has an 80% probability of holding. For this reason, if the stock market dips in this zone, it will provide an excellent opportunity to buy for the long term. Please click here to see the support zones.
Even though the stock market has rallied, there has been no all-clear signal. As we have previously written, the sharpest rallies occur in bear markets. Rallies of about 20% are to be expected. In this coronavirus stock market, it is important that investors protect themselves. It is important to have an objective framework of protection bands before buying stocks. For details, please see “Stock market investors are asking ‘should I buy or sell?’ Here’s how to decide.”
Answers to your questions
Answers to some of your questions are in my previous writings. You can access them here.
Disclosure: Subscribers to The Arora Report may have positions in the securities mentioned in this article or may take positions at any time. <INTERNAL-PAGE URL="/author/nigam-arora">Nigam Arora</INTERNAL-PAGE> is an investor, engineer and nuclear physicist by background who has founded two Inc. 500 fastest-growing companies. He is the founder of The Arora Report, which publishes four newsletters. Nigam can be reached at Nigam@TheAroraReport.com.