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Do You Have the Guts to Buy?

by: Tyler McKinna July 29, 2008 | about stocks: DIA / QQQQ / SPY    
Tyler McKinna

Tyler McKinna

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A recent article in the Wall Street Journal serves as a great reminder to us long-term investors that when stocks are down, it is a good time to buy, hold, and diversify.

The Time Is Now

How do I know that now is a good time to buy stocks?  Well, I don’t know that the stock market will not go down further, but I do know that the DOW was about 600 points higher in early 2000 than it is today.  Therefore, historically speaking, stocks appear to be on sale.  Maybe a quote by the ever astute Warren Buffett will help to encourage us to put our cash to work in this market:

“If a stock [I own] goes down 50%, I’d look forward to it. In fact, I would offer you a significant sum of money if you could give me the opportunity for all of my stocks to go down 50% over the next month.”

Of course, that thought process only works when you have cash available to invest and you are confident in the long-term prospects of the businesses that you are invested in.

What is Your Time Horizon

Welcoming a bear market with open arms is easy if you have the two following things on your side:

1.) Cash

2.) Time

If you have excess cash available to put to work for at least 7-10 years, then loading up on high quality dividend growth stocks and low-cost ETF’s should be a no-brainer at the equity prices that we see today.

Even if you are fearful of investing in certain companies whose share prices have been beaten down badly over the past year, dumping money into a low-cost broad based index fund is likely to produce some nice positive returns over a longer time period.

Why Does It have to Be Hard?

Investing doesn’t have to be hard, but then again there are “talking heads” all over the news spreading the latest doomsday quote of the week and spouting off data that probably doesn’t affect your investments in any meaningful way over the long haul - yet it influences our decisions.

Wouldn’t it be excellent if we could develop a systematic way of investing in high quality dividend paying stocks that raise their dividends over time and continue to buy more shares when prices are lower and buy fewer shares when the prices were high?

Of course, the news outlets will try their best to make you sway from your strategy as they spin every market correction into the next great depression and every recovery into the next gold rush…but then again they are out to sell papers and not to invest in stocks.

It is always easier said than done, but in order to gather wealth we have to do four things:

1.) Shut off the media

2.) Develop your investment plan

3.) Implement your investment plan

4.) Don’t quit

It may sound too simple, but over the course of 7-10 years it is amazing how little the daily blips in the market really affect a sound investment strategy.

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This article has 12 comments:

  •  
    Jul 29 11:03 AM
    H O P E is a four letter word.
    Reply
  •  
    Jul 29 11:08 AM
    Very good post.
    Reply
  •  
    Jul 29 11:28 AM
    Solid advice.
    Reply
  •  
    Jul 29 11:51 AM
    "Of course, that thought process only works when you have cash available to invest and you are confident in the long-term prospects of the businesses that you are invested in."

    It only works if it works, in other words. Sound advice.
    Reply
  •  
    Jul 29 01:27 PM
    "How do I know that now is a good time to buy stocks? Well, I don’t know that the stock market will not go down further, but I do know that the DOW was about 600 points higher in early 2000 than it is today" Juxtapose that with: "It may sound too simple, but over the course of 7-10 years it is amazing how little the daily blips in the market really affect a sound investment strategy". Very little reasoning going on here. I recommend NOT turning off the TV, and implementing a SOLID investment plan.
    Reply
  •  
    Jul 29 05:11 PM
    "Of course, that thought process only works when you have cash available to invest and you are confident in the long-term prospects of the businesses that you are invested in."

    So if you were fully invested before, confident in the long term prospects of your investments, now you are screwed!
    Reply
  •  
    Jul 30 01:18 AM
    Yeah, dude...think a little harder. This is oversimplification...y... sound like a crooked broker.
    Reply
  •  
    Jul 30 09:57 AM
    A friend of mine sold all of his oil stocks a couple of weeks ago. I didn't. I have lost around $150,000 in paper profits because I didn't sell too. I am confident my stocks will come back, but am not so sure I will live to see them do so as I will turn 72 in August. And, then, of course if that Communist Obama gets elected, I expect to see the market, as well as our whole economy, tank anyway!

    Perhaps gold is the answer but you can't eat it, it doesn't keep you warm at night, and you can't make love to it! What's a poor guy to do?
    Reply
  •  
    Jul 30 02:47 PM
    Thank you all for your comments! The long-term, buy-and-hold value approach is very different from the buy-and-do-homework style of Jim Cramer. And it is completely opposite to the day-trading approach that works well in bull markets.

    How do you know when which approach is best? You do by trying all of them in your investing and learn by trial and error. If you do not make error sometimes (losing money), and do it right another time (making money), you will not know these methods well enough to be able to select the right one for the right occasion.

    Right now when most stocks are down a lot, the buy-and-do-homework AND wait for the best time to sell them and reap the profit is the best. That's my opinion.
    Reply
  •  
    Jul 30 03:02 PM
    mixter, sorry, but Obama is a great American, just as is McCain. They both want to do what's right for Americans, so give the guy a break. The market does very well with Democratic presidents.
    Reply
  •  
    Aug 01 11:51 AM
    great advice! great article
    Reply
  •  
    Aug 02 02:42 PM
    Let's see if people here think this is still great advice if the market tanks another 20%, at which point it will take, on average, 7 years just to break even.

    "Stocks appear to be on sale".

    Everything is relative. Houses appear to be on sale too, yet they're still 80% more expensive than five years ago in many locations. Oil appears to be on sale these past few weeks too, but it's five times what it was years ago.

    And stocks, being "on sale" are still at high P/Es historically speaking.

    I agree it's better to buy in bear markets than in bull markets, but this article is making gross oversimplifications.
    Reply
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