1	ASK JULIE Financial columnist Julie Stav tells us why when it comes to buying stocks, timing is everything. read more...

QUEST

ASK JULIE

timing matters

Dear Julie, I have been listening to your radio show from your website and I don’t quite understand why it is important to buy a stock when the institutions also begin to buy it. Could you explain that again?

By Julie Stav

Timing is essential when buying stocks. You could have discovered the best company in the world, but if you buy it at the wrong time, the results could be disastrous! Sounds confusing? Let me show you how it works.
If you did you homework and narrowed down the list of potential investments to a handful of stocks, one-third of your work is done—you now have a list of companies that merit further study. The next step is to time your purchase in a way that will increase the chances of making money, and for that, your stock must be attractive, not just to you, but also to the big spenders—the hippos. Hippos? You say. Yes, hippos.
Let’s assume that you have a bathtub with water. The tub represents the company and the water level the price of its stock. If an ant comes along and falls into the water, would the level change? Probably not. That is the effect that a small investor has on the price of a stock. There are so many shares in circulation that a small purchase—even hundreds of shares at a time, make a very small dent in the price of the share. But, what if a hippo went into the tub? Would the water rise? You bet!
Who are the hippos? Mutual funds, pension plans, insurance companies, investment companies and any large investor that buys shares millions of dollars at a time—which translates into tens if not hundreds of thousands of shares. When this happens, the price of the shares goes up.
When the hippos dive in, two good things happen: First, because they buy in such huge quantities, they don’t do it all at once, so when the institutions buy once, chances are they will continue to buy, sometimes for weeks at a time. And the second bit of good news is that they cannot buy a stock without it reflecting in the activity bar (volume) of that company. Take a look at the following graph of Ceco Environmental (CECE), which manufactures industrial ventilation and air pollution control products.

Follow the Hippos

The top part of the graph indicates the share price range for each day during the last two months. The bottom part reflects the trading volume of the company.
If the vertical bar is taller on a particular day, it means that there is more buying and selling of the stock on that trading day. Notice that when the bar shoots upward, the price of the stock increased. That means that the hippos are going into the tub—the institutions are buying. The correct buy point of this company has been on each of the days indicated by the arrows because the institutions supported the stock by buying it. As you can see, if you had bought CECE in January 2007, when the price was approximately $10 per share, you would be looking at about a 65 percent gain on your purchase by February 23rd. Not bad for an investment of less than two months. Such is the power of the hippos.