I believe that if you are risk-adverse, you try to buy a company that you expect to have three times as much potential upside as downside within a one year period.
For example, if Teva could go to $45 and it could drop to $30, you would want it to be priced at $33.75 ($11.25 upside / $3.75 downside). You'd not be willing to buy it for more than $33.75 per share. If it's trading at $34, you put your limit order at $33.32 (2% below fair-value). If it's trading for $35, you put it on your watch list and hope it goes lower. If it goes above $36, you try to find another stock.
A risk-neutral investor might invest in a stock that has a 1.5 times upside to downside potential. This investor would have bought TEVA at $36 per share. There's $9 upside for $6 downside. Also, this type of investor might really like TXN at it's current price.
A trend risk investor might invest in a stock that has .2-.5 times upside to downside potential. This investor would buy TEVA in between $40 per share and $42.50 per share. This investor might not have invested at $33 per share, at $34 per share, at $35 per share, may have pulled the trigger at $36 per share (and would be beaming to the bank), and would probably like it at $38 per share. I'm not that type of investor; that's not my strategy. I don't like to follow herds; my philosophy is to take the path that is the least traveled (Henry David Thoreau). I like a stock with great fundamentals that has two or fewer analysts' coverage.
To evaluate potential upside and downside, you need to know how the market has reacted to news (and the company's financials along the way). A great stock is a company, like TEVA, that dropped 20% in value (due to a sector problem) and whose financials were excellent. You want the market to believe the stock is in misery even though it is flushed with cash and it is bringing in enough cash to finance its expansion. It has a cash ratio of 97.8% (that's cash and short-term investments/short-term liabilities). I tend to look more closely at companies with a cash + short-term investments/AP ratio of 0.9.
When should you invest in a stock whereby its price is higher? When nothing else in the industry will do. This is why JCP is such a great potential stock. It's a momentum play (as a retailer!!!!).
There are so many schools of thought since there are so many investments out there. I'll start with shorting because that is when you sell a stock with the hope of buying it back later for a lower price.
If you short a stock, you are interested in getting as much decline as possible. Because increases cause greater losses than decreases result in earnings, it is important to get the best bang for your buck. It will not matter much to a short if a stock falls 10% and then falls another 88% or falls 89.2%; the investor gives up a mere 1.2% for having been late on the short. For example, if Choice Hotels is purchased and the company goes bankrupt (or each investor gets a nickel per share for a chapter 11 bankruptcy), you would have effectively doubled your money regardless of where you bought it. It's so essential to have a stop-limit order on a short due to short-squeezes. There's no guarantee that your broker will allow you to buy it back at that price, but it should provide some protection in most cases. For example, if the Dow is up 400 points, you may not see your short position covered resulting in a much higher loss than the stop-limit order specified.
In regards to mutual funds or ETFs, sell it when the market (or sector) is at its highest point. If you have more than $10,000 in assets, be sure to sell in increments such that you get as close to the top as possible. Don't sell it when it's in the dumps (unless it appears the sector will never rebound!). The market will 90% of the time rebound in a timely manner.
In regards to individual stocks, you have to be more careful than market risk. For a stock, you may want to sell it if it drops to a certain point via a stop order (8%) or a trailing stop order (10%). You might want to sell it if the catalyst (an earnings report) resulted in either success or failure. You may want to sell it because the company (CHH) becomes insolvent (total assets is less than total liabilities) or it lacks liquidity (its cash/AP ratio drops below 0.9) and thus it is at risk of not having its inventory delivered.
Lastly, you want to sell if you've had a lot of upside. Ring the register in small (10%) to medium-sized (25%) increments depending on the amount of upside and the amount of your investment holdings. Selling all of your assets is advisable if your position in the stock is $500 or less. It's not good to be a hog; bears make money (through puts, shorts, and bonds), bulls make money (through a long position, calls, and mutual funds), and hogs get slaughtered (like in the 2000 tech craze).
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