Steadfast FinancesWhy it's Important to Buy during the Doom & Gloom News

Why it’s Important to Buy during the Doom & Gloom News

Filed in Buy on the Dips , Index Funds , Investing 101 10 comments

On March 9, 2009, the stock market closed at it’s lowest level in over a decade. The doom and gloom news factories were pumping out negativity as loudly as it could because that was what “people wanted to hear.”

You couldn’t pick up a newspaper, click to highly trafficked website, or flip on the 6 o’clock news without hearing how terrible the U.S. economy was. Business pundits and money managers were saying the U.S. Dollar wasn’t going to worth the paper it was printed on and was about to collapse. Even a few outlandish perma-bears were spewing nonsense about a stock market going to zero.

And look where we are today…

From the close one year ago today, the S&P 500 is up around 68%.

I say this not to rub their face in the dirt, but to illustrate that to be a successful investor, you much think counterintuitively. Meaning, that if you’re a long term investor and you want to generate above average returns in the stock market, you can’t follow the herd and sell when the news is at it’s worst, only to buy back your shares when the financial news turns decidedly positive and says we’re back to happy days again.

Instead, you should consider adopting a counterintuitive approach (e.g. be greedy when others are fearful and fearful when others are greedy) by dollar cost averaging into a Plain Jane index fund or your favorite individual stocks when the news cycle is at its worst. Guys like Warren Buffett and Wilber Ross didn’t become household names because they bought Cisco at the height of the tech bubble. They bought large stakes in troubled companies during times of fairly high despair at substantial bargains (a buy on the dips methodology).

Be Greedy When Others are Fearful

Hindsight is always 20-20, and picking the exact market bottom, while possible, is much like picking the winner number at the roulette table. However, for the sake of lessons learned, let’s take a hypothetical look back at how our portfolio would look had we bought, or perhaps dollar cost averaged into, some widely held buy and hold forever stocks at or around March 2009 when the news was at its most dire.

Apple

Apple is one of the most well known and widely held tech stocks in the world. Having hit a new all time high just days ago, Apple’s ROI would be ~150% having bought at or around the time of the stock market crash of 2009.

Bank of America

The rumors around BofA’s demise due to threat of nationalization was one of the most sensationalized stories of the 2009 stock market crash. Not surprisingly, these negative rumors pumped by mainstream media erased 25 years of stock appreciation and pushed BofA’s stock into low single digits.

However, the buy signal was sounded when Ken Lewis (Bank of America’s CEO at that time) bought several million dollars worth of BofA stock in a fantastic example of buy on the dips investing. Insiders know their company’s future better than anyone, so perhaps, it’s an indicator worth monitoring from time to time.

Goldman Sachs

Love them or hate them, Goldman Sachs is widely regarded as the best investment bank on Wall Street. Some even consider owning GS stock the equivalent of a free actively managed mutual fund.

Google

If you travel in an investing savvy circle, you would be hard pressed not to find someone who doesn’t own the GOOG as a long term, buy and hold forever investment. Had you decided to add to your position at or around the March 2009 lows, your investment has nearly doubled in just a year’s time.

Proctor & Gamble

Good ol’ P&G certainly isn’t the most sexy of companies (considering they make toilet paper and laundry detergent), but it’s also one of the most widely held defensive stocks on the NYSE.

Interestingly, had you bought P&G at our around the March 2009 lows, you would have underperformed the S&P 500 index by around 25% (excluding dividend payouts). Which just goes to prove that even though you may fancy yourself an expert stock picker and a whiz at fundamental research, there is still a good chance that you will not outperform the S&P 500 index.

~ ~ ~

Disclosure: At the time of publishing, I do not hold any of the individual stocks mentioned in this post, but I do hold S&P index funds in my retirement account.

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Posted by CJ   @   9 March 2010 10 comments
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10 Comments

Comments
Mar 12, 2010
12:01 am

Nice way to make the point! How close were you able to buy to the low? I made a decent purchase around Feb. 23 or so – for the stock I bought, that was *its* all-time low… but looking back I wish I’d had more opportunity cash so I could have bought some others, too… (if I did, I probably would have).

Mar 14, 2010
1:44 pm

Matt, this is OUTSTANDING advice. I suppose what keeps most of us from carrying it out is that it requires nerves of steel, and most of us don’t have them! :-(

Of course, the limiting factor is that we’re reeling from losses on the way down to the bottom, so not only are our nerves shredded, but we also don’t have the cash!

Then there’s the bandwagon financial world clutter that we’re all immersed in, carrying the relentless message to BUY no matter what the market. A more coherent strategy might be one that advises getting out of the market and storing cash after a big run up, then jumping in with both feet–and a big wad of cash–after the market tanks. But when ever the market rises for a period of time, we get predictions of DOW 15,000 or DOW 20,000.

Unless you’re a real market guy, how do you make sense of that?

That being said, more than a few yellow lights should be flashing now that the market is up 68% in one year, would you agree?

Mar 14, 2010
3:27 pm
#3 Matt SF :

Thanks Kevin. Having cash to put to work is key, so if you invested all you had prior to the crash, then market timing definitely didn’t work for you. If you waited until Spring 2009, then it did. Just happens that way sometimes.

Then again, that’s where dollar cost averaging every month comes into play, if, you have the extra monthly cash flow to make it happen.

You’re exactly right in that many in mainstream financial media is constantly bullish (Larry Kudlow on CNBC comes to mind). I think it’s wrong from an ethics viewpoint, and you have to know how to weed out the ideologically bullish no matter what versus those folks who are fighting in the trenches. In that sense, it’s much like a General who is claiming to win the war to save face versus the sergeants on the ground who know better. If you were a green soldier trying not to get killed, which would rather believe!

Personally, I never listen to anyone who won’t recommend taking profits into good news, to avoid a stock/sector entirely, or maybe even go bearish and short something. That way, at least you know the door swings both ways. I think bad news reporting is 10x more valuable than good news bandwagon news.

And I would certainly agree that we’re on “yellow alert” considering we’ve run so far so fast. I honestly didn’t think we’d be at 1150 on the S&P by March 2010, but that just goes to show how little value short to medium term projections can be. That’s why I like the concept of those “buy and hold forever” stocks, if you’re brave enough to wade into them.

Mar 15, 2010
6:33 pm
#4 tinyhands :

Dollar-cost averaging is an excellent way to leave money on the table. If you have reason to believe that an asset is going to appreciate in value, why wouldn’t you go all in? If you don’t think it is going to appreciate, why would you invest in it? If you’re not sure what it’s going to do, do your homework and start over. (Included in ‘do homework’ is to read “Random Walk”)

Mar 15, 2010
9:33 pm
#5 HT :

Terribly basic advice.

Dollar cost averaging (DCA) is a wonderful way to go broke.

If by some chance you got lucky and were able to DCA into a winner … consider yourself fortunate. But don’t confuse luck with aptitude or intelligence.

What would have happened if i had DCA’ed into Bear Sterns or Lehman? How about Fannie or Freddie? How about GM … how about WorldCom, Enron, etc etc.

The reality is portfolio management is lot more complicated than a buzzword and a cliche.

Buy and hold is dead … we’re now in a trading environment.

Rule #1 … Never Add to Losers.
Rule #2 … If you choose to ignore Rule #1, have an exit strategy and defined stop/mental stop loss.

Mar 15, 2010
10:13 pm
#6 Matt SF :

Buy and hold is dead … we’re now in a trading environment.

You obviously haven’t grasped the basic fact that 99% of most people have no idea how to trade, how to set stop loss orders, much less, how to ignore the emotional swings of trading. That said, why would you encourage them, unless you’re a broker or you’re in the minority of fund managers who outperformed the S&P (or didn’t but still cold calling for clients), to pursue active trading when most of them will get turned into fish bait.

Mar 16, 2010
9:31 am
#7 tinyhands :

@HT: Total non-sequitur to go from “don’t dollar-cost average” to “don’t buy & hold” and spoken like a true b-school dropout. Ibbotson is preemptively spinning in his grave.

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