There are two very famous quotes in investing circles:

1. You cannot time the market.
2. Time in the market > Timing the market.

Now I would also like to add third rule to the above list:

3. Time of the market matters.

In my opinion, time of the market is slightly different than timing the market and time in the market. By time of the market I mean the ability to see where the market is currently i.e bull market, top of the market, bubble, bear market, recession or “near” bottom. Being able to have this skill will play a very important role in deciding how long you can stay in the market and what your returns will be.

So although it is difficult to time the market but you want to be experienced enough to be able to see the time of the market especially if the prices have gone bonkers and if you are top of the pyramid or perhaps there is extreme fear in the market and things are trading at bargain prices. Any investor who experienced the dot-com crash should have been able to call out the Covid Stock / SPAC / Crypto madness.

Timing the market doesn’t necessarily mean finding the bottom. But you definitely don’t want to buy at the top of the bubble and then see your asset fall by 30-40% or even more than 50%. It is one thing to say that you are comfortable seeing your portfolio can experience 10-20-30% drawdown and it is altogether a different thing to experience it in reality. Same goes with the bubbles, bear market and recession. True lessons are learned not by reading about it but by experiencing it first hand.

In a bull market, prices usually go up but in a bubble burst, bear markets or recession it may take many years to recover and in some cases it may never recover. For e.g, it took almost 10 years for AMZN to get back to its dot-com price whereas some stocks like SUN (Sun Microsystems) were never able to recover the dot-com price. Thus it would have been impossible or extremely difficult for shareholders to hold either AMZN or SUN from 2001 to 2009 if they bought it at the top of the bubble.

And this was true even for S&P 500 where it took 7 years for it to go back to go back to dot-com price. It then fell back again during the 2007-2009 recession and then took another 5 years to go back to dot-com highs.

So if you were not able to see the time of the market (in this case bubble of the market) then your time in the market would not have mattered for almost 10+ years even if you were holding SPY.

Disclaimer: I am not a financial advisor and this is not investment advice.

I have made every possible mistake in the book when it comes to stock investing and in fact I still learn something new everytime I invest in a stock. So I thought I am creating my own set of rules purely for myself so that I can read, refine and repeat it from time to time as I learn new things. Most importantly, I want to have my own tried and tested framework for investing where my decisions are data/value driven and not out of emotion, speculation or FOMO.

My plan is to refer to these stock investing questions/rules aka cheat-sheet before any investment. Specifically, I want to call myself out if I am going against my own principles before any investment.

So let’s get down to business and here are some of the questions to ask before buying any stock according to me:

1. Do I understand what the company does?
2. Do I know if the Founder/CEO is a relentless executor?
3. Is the company solving a hard and a unique problem and does it add value to your life?
4. Do I use and love the product of the company or do I know others who are deeply and madly in love with its product?
5. How difficult is it for the incumbents to buy/replace this company/product? This answer depends a lot upon the founder/CEOs execution and long-term vision.
6. Will the company be still there after 10 years?
7. Is it already or can it become a monopoly in 10 years?
8. Can I hold the stock of this company for the next 10 years and ignore all the charts/volatility?
9. How difficult is it to get hired by this company? In my case this is applicable because I am a Software Engineer and I mostly invest in tech stocks. And the best way to find this is to go and interview with the company.
10. In these 10 years, can the company grow by 10x aka can they create a completely new market to dominate? For e.g, can a 100B dollar company become a Trillion dollar company in market cap or can a trillion dollar company become a two trillion dollar company?
11. Am I buying at the peak of the market?
12. Am I buying at an all-time high of this stock?
13. If the stock has already fallen significantly from it’s all-time high then how low can it go?
14. What is the true value of the stock and at what price am I willing to buy?
15. Have I set up the LIMIT trigger for the price I am willing to pay? In other words I don’t want to manually buy the stock out of the blue or emotion/FOMO but instead use the machine to find and catch the dip at which I am willing to invest.

Regardless of whether you agree with my principles or not, I just want to say don’t get greedy or blind in FOMO, read some books on how to value companies/stocks, invest if you understand what you are buying and at what price you are buying, invest only the money you own and what you can afford to lose.