Hong Kong is a free economy, which means that the government does not influence stock prices. By law, only licensed brokers can buy and sell shares of listed companies on the Stock Exchange.
They must obey specific rules to prevent them from making false or misleading statements through public media, such as newspapers or magazines.
Positive Returns
The right time to buy should be when expected returns for holding stocks are positive after taking into account transaction costs and other risks involved.
For example, a large-cap stock that is expected to increase 11% a year on an annualized basis over the next ten years would be considered a good buy because you have more compelling opportunities elsewhere for 5%, and transaction costs can be 2%.
However, if you expect your local economy to grow at 7.5% or 8% per annum in real terms over the next ten years, it is not as attractive as other opportunities around the world where you could earn 12% or 13%.
In this case, there is no point buying it even if the expected return from holding the local stocks over ten years is positive.
Low Stock Prices
The Right Time to Sell should be when your stocks are trading at an unusually low price.
You may want to sell if the stock is trading below its intrinsic value – that is, you have better opportunities elsewhere with equally low risk.
But this rarely happens since everyone has the same information about the company’s performance over time.
The above statements parallel the efficient market hypothesis and mean that it is impossible to predict when individual stocks will be undervalued precisely. Therefore, active investing, as opposed to passive investing (also known as indexing), does not generate excess returns after accounting for transaction costs.
So, if you are an active investor who wants to trade actively with high transaction costs, you have a fair chance of making money at the expense of long-term investors.
When a company is undervalued, you can sell it immediately after two events:
- new information about the company becomes public and
- when other market participants discover that new information.
As long as new information is not made public, however, your basis for selling will be known only to you.
In this case, you cannot profit from trading on that basis because if anyone else finds out what you know, they would also start selling and drive down the price before you have sold your shares.
The right time to buy and sell depends on whether you are a “passive” or “active” investor.
Passive Investor
Passive investors include index fund managers and individual investors who invest for the long term. For example, with a retirement account, buying a portfolio of stocks includes all the large firms in one geographic location, such as Hong Kong, or all companies in a particular industrial sector.
Active Investor
In contrast, active investors try to make money from trading securities, including those that involve greater risk, because they can earn higher returns if successful.
So assuming you are not an index fund manager, everyone has their reasons why they want to trade active/actively, but here are some common ones:
- Making speculative bets on short term trends or the success of a particular company.
- Squeezing out some extra return from one of their holdings before they cash it in after years of ownership.
- Trying to time the market by locking in gains at higher prices while avoiding losses.
In Summary
The optimal amount to hold of any financial asset depends on your objectives and your time horizon over which you want to accumulate wealth.
Time Horizon is the period during which an investor holds onto his portfolio. It usually means how long you intend to invest your money into a particular activity or investment plan.
So how long you hold on to your shares depends on your risk aversion and the expected return from the stock market. The more risk-averse you are, the longer you should hold onto your portfolio because you want to minimize any losses.
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