Your Roth IRA Retirement Plan
return to homepage

When To Buy A Stock

95% of investors love to point out that the key to stock market success is to "buy high and sell low," but they rarely, if ever, engage in the practice themselves.


Part of the problem these investors face is they simply don't know when to buy and when to sell.

So far, you've learned what to look for in a stock - a great company selling at a great price.

You've even learned how to calculate a stock's intrinsic value and what constitutes "a great price."

But how do you know when to buy and when to sell?

Good question...

When To Buy A Stock

If you've followed our lessons so far, then making a buy decision on a stock is quite simple.

Buy a stock when, and only when, it meets the following three criteria...

  1. The company meets most, if not all, of our benchmarks for greatness
  2. The market price of the stock is trading below its intrinsic value
  3. A better alternative investment is not available

Criteria #1: Benchmarks for Greatness

Before buying stock in any company, you need to measure the worth of the business. Can you be confident profitability will continue in the near and intermediate future? Can you be sure the company can weather the storms of a possible recession or technological breakthrough? Ask every question you can think of.

Ask, ask, ask...

In addition to answering those questions, make sure you've checked "yes" for most, if not all, of the following benchmarks for greatness...

  • A strong competitive advantage
  • Consistent and increasing earnings
  • Consistent and high returns on equity
  • A low debt to equity ratio
  • Consistently high free cash flow
  • Consistent and increasing dividend payouts

Criteria #2: The Stock Sells for Less Than Its Intrinsic Value

Check the stock's current price relative to its intrinsic value. Only buy if the stock is selling at a discount to its intrinsic value.

How do you know if that's the case?

Use my customized Intrinsic Value Spreadsheet.

Plug in the numbers for the stock you're considering.

If the Multiple (Line 29) is greater than 5.00, then your passes Criteria #2. It's a good buy.

Criteria #3: A Better Alternative Investment Is Not Available

Perform intrinsic value calculations on all the companies on your Stock Watch List that pass Criteria #1.

If any of those companies has a Multiple greater than the one you're currently considering, then a better alternative investment is available!

For example, let's say you have two great companies you've been watching - Johnson & Johnson (JNJ) and Proctor & Gamble (PG)...

You've investigated every aspect of each company's business operations. You've answered every question we've covered. Each company meets and exceeds the characteristics we outlined for a great company.

You plug the numbers for both companies into the Intrinsic Value Spreadsheet, and a get a Multiple for each one...

5.51 for Johnson & Johnson (JNJ)


6.12 for Proctor & Gamble (PG)

According to our rules, both companies are selling at a price that's less than intrinsic value...!

So which one do you buy?

Following Criteria #3, Proctor & Gamble (PG) is the better investment. So buy P&G.

Nevertheless, in certain situations, you might want to consider buying both as part of a diversified portfolio... After all, you have two great companies both selling at great prices. That's a good problem to have!

However, whatever you do - never, ever, ever...

Pass up the opportunity to buy a great company at a great price in order to buy a great company at a bad price...

Buy That Stock Now!

If you're lucky enough to find a stock which meets or exceeds all of the above criteria, then don't hesitate a minute longer... Buy that stock now!

Ignore the Stock Market

Once you've purchased your stock, continue to track the status of the company's business operations. Make sure it maintains its competitive advantage. Keep yourself up-to-date in regard to new product introductions and services developments.

However, whatever you do, do NOT:

  • Watch the company's stock price ticker minute-by-minute, day-by-day
  • Let a stock price increase make you think your investment was good
  • Let a stock price decrease make you think your investment was bad

The minute-to-minute and day-to-day gyrations of the stock market have nothing to do with your company's present or future business prospects. So ignore the ups and downs of the market!

What "the market" does on any given day is irrelevant to your company's profitability.

So when you buy a stock, make a long-term commitment. If you purchase a great company at a great price, the market will reward you for a great decision - eventually. In the meantime, it might take years for the market to accurately value a company...

So don't worry if you buy a stock, and it plunges in price the very next day. Even though the stock market averages about 10% per year over the long-term, you'll never have a portfolio that gains exactly 10% year after year.

Your portfolio is going to experience some volatility. At times, it will be extreme.

But if you've purchased a great company at a great price, you can weather these storms in full confidence that you'll be a winner in the end.

The $1 Million Question

Remember our million dollar question from "The Road to Roth IRA Retirement Riches"?

The basic idea is that you shouldn't invest in anything unless you're willing to your whole net worth on the line.

If you're not comfortable linking your entire life fortune with the financial fortunes of a company, then why bother linking part of your life fortune with that company?

So before buying any stock, make sure it passes the million dollar test...

If you're willing to invest your entire net worth in the company's stock and commit to holding that stock for at least 10 years, then don't hesitate to buy if the stock passes the three criteria we addressed earlier.

If you're that comfortable, there must be a reason.


If you're NOT willing to link your entire financial life to the stock in question and commit to holding it for ten years, then...

Why own it for a single minute?

Asking this question of a potential stock purchase helps you to take a step back and gain some perspective on your actual confidence in any investment.

Buying Stock

So, to summarize...

Buy a stock when, and only when, it meets the following three criteria:

  • The company meets most, if not all, of our benchmarks for greatness
  • The market price of the stock is trading below its intrinsic value
  • A better alternative investment is not available

So, let's say you've found the perfect stock. It's passed every one of our filters so far. Congratulations!

Now, we need to answer one more question...

When do you sell?

Learn When To Sell A Stock >>>


Return to the top of When To Buy A Stock

Return to Trading Stocks In A Roth IRA

Return to the Your Roth IRA Website Homepage

What's New?

Read 5 Reasons Why I Love My Roth IRA, our part in the Good Financial Cents Roth IRA Movement!

Start planning ahead for next year by checking out 2017 Roth IRA contribution limits, and stay alert to this year's changes to the 2016 Roth IRA contribution limits.

Our family fully funds our Roth IRA with this website. Learn how you can do it too.

Are you confused or frustrated by the stock market? Learn how to build real wealth selecting individual stocks for your Roth IRA...

Read more about what's new on the Roth IRA blog.

Hi, I'm Britt, and this is my wife, Jen. Welcome to our Roth IRA information website!

This is our humble attempt to turn a passion for personal finance into the Web's #1 resource for Roth IRA information. But, believe it or not, this site is more than just a hobby. It's a real business that provides a stable and steady stream of income for our family. In fact, because of this site, Jen is able to be a full-time stay-at-home mom and spend more time with our daughter, Samantha.

But you want to know the best part? ...You can do the same thing! Anyone with a hobby or a passion (even with no previous experience building a website) can create a profitable site that generates extra income.

If you're tired of solely depending on your job(s) for family income, click here now and learn why our income is increasing despite the financial crisis and how we're making our dreams come true.

Search This Site

Roth IRA Basics

2016 Roth IRA Limits 2015 Roth IRA Limits 2014 Roth IRA Limits Roth IRA Rules Roth IRA Benefits Roth IRA Eligibility Roth IRA Income Limits Roth IRA Withdrawals Roth IRA Contribution Limits Open A Roth IRA

Roth IRA Calculators

More About Roth IRAs

Roth IRA Limits Roth IRA Comparisons Roth IRA Penalties Roth IRA Accounts Roth IRA Taxes Roth IRA Contributions Roth IRA Distributions Roth IRA Investing Roth IRA Rollover Rules Roth IRA Conversions

Roth IRA Resources

Best Roth IRA Brokers Roth IRA Calculators Roth IRA Interviews Investing Books Investment Research Site Build It!

About Your Roth IRA

About Us Our Roth IRA

Like Us On Facebook

Follow Us On Twitter


[?] Subscribe To
This Site

Add to Google
Add to My Yahoo!
Add to My MSN
Add to Newsgator
Subscribe with Bloglines


The information contained in Your Roth IRA is for general information purposes only and does not constitute professional financial advice. Please contact an independent financial professional when seeking advice regarding your specific financial situation.

For more information, please consult our full Disclaimer Policy as well as our Privacy Policy.

Thank You

Our family started this site as a labor of love in February 2009, a few months after our daughter was born.

Thank you for helping it become one of the most visited Roth IRA information sites.

Thank you, too, to the "SBI!" software that made it all possible.

We hope you find what you're looking for and wish you much continued success in your retirement planning!

Copyright© 2009-2015 Britt Gillette.