One can never predict the market. That is one fact that we know about the stock market. Not one individual knows what the price will close on for any given day, for any given stock. I read an article the other day and it made me smirk – there has never been one person to buy a stock at it’s absolute lowest point only to sell it at it’s absolute highest point. This is why I don’t try to time or predict the market.
Why I don’t try to time the market
This post is really about why I don’t try to time the market. I have had countless friends, co-workers, individuals in the community and other fellow bloggers asking if I am selling a stock because the “market” is so high. Yes, yes it is very high, however – I just updated my portfolio and my portfolio has a 17 P/E, based on the weighted average of stocks in my portfolio. This is compared to the 24-25 P/E that the overall market has. It’s a difficult decision for some, everyday, to debate on whether to sell, hold or buy a stock, especially at market highs, I definitely understand that – as I am facing the same stock market as everyone else is! The stock market opening and close amount is the same for everyone. I’m going to break down what I see, as I’m not going to say a decision to hold, sell or buy is wrong. I’m just going to state the position I take and why.
As far as it relates to valuation in relative terms to Price to Earnings, yes, some stocks I have are in the mid-to-upper 20’s and even beyond that, but I also have stocks that are in the low-to-mid teens. Does that mean I sell everything? No, no it does not. However, does it mean that I am going to buy the stock that is trading at a forward P/E of 22 or some of the lower P/E? Heck no to that as well. Am I holding? Yes, yes I am holding right now. Here is a brief example – I had a few co-workers ask me if I’m going to sell a stock because the yield went from 3.60% to 3.00%. I asked – do you think they’ll increase their dividend come the 4th quarter as they usually do? They said – Probably. Then why would I sell a stock? Are their earnings growing? Yes. Is the payout ratio alarming? No. Is the P/E higher than it was? Sure. However, these are all moving targets. Even for those with low P/E valuations, I still want to understand fundamentally where they are going and if anything has changed about how the business is being run. My strategy has not changed and I never added a “sale” position in my strategy, as I think this falls more towards the “trading” and “timing the market”. *I will add – if tax rates changed on dividends or owning a stock in an unrealized gain position, this may cause me to re-think the strategy* haha
I am not a trader. I buy assets that I find valuable that produces me a source of income. I do not know where earnings will truly lie in the future, but that is why we buy stocks that aren’t fundamentally difficult to understand, at least we try not to. Here is a funny but very, very true example (I am sure the majority of individuals can attest to this situation, right here!), Is Target (TGT) still open for business and still selling Starbucks (SBUX) coffee inside? Am I still swishing around my scope mouthwash that is produced by Procter & Gamble (PG)? Did I just fill up my gas at Shell (RDS) and buy a 0 calorie Gatorade on my roadtrip that is produced by Pepsi (PEP). while using my credit card produced by Visa (V) through JPMorgan Chase (JPM)? You better fricken believe it. These business are just that – still in big business! For the record – I own Target, Shell, Pepsi and Visa.
However, just because businesses are still in operation and are being used more frequent then ever before, does not provide me a sure enough reason to buy the stock. I look at valuations that are within our diplomat stock screener. If the P/E is above 20, I more than likely am not going to consider it. What am I willing to buy? The August stock watch list I came out with is more of my fair assessment of stocks that show signs of slight undervaluation. I know I ask myself, why do I hold the stock if it’s so high? I like the companies I own, if they pay a consistently increasing dividend with fundamentally sound metrics, then I will typically hold.
Building Up the Ammo
As I am still doing the research, analyzing stocks, looking at 5-year dividend yields vs. their current yield and reviewing the payout and price to earnings ratios, I am building up my ammo. As I am reviewing their share buy back strategies and earnings directions of the companies I own or want to own, cash is slowly building in my account. What I’m very fortunate about this, is that when I do find the right value – I will be more than ready for a purchase, no doubt about it. In fact, I am looking forward to it. I can, at this point, luckily make 2-3 very solid purchases and be standing in-line to make a 4th purchase. Am I in a rush? No, no, no real rush, even with my 2016 goals out there, I just need to focus on valuation metrics, our stock screener and purchase when it is priced right.
And in the meantime – due to the three strategies I am employing, dividends are being reinvested still from my portfolio throughout the months and essentially – activity is still occurring. One thing I won’t be doing is timing any of the markets, selling my positions and worrying. I will be doing the same thing as I’ve always done – buy when the stock is priced right! Am I crazy? Please let me know, I would love to hear your thoughts. I know I have seen a few out there selling, I still see buying opportunities out there with purchase articles and of course – we posted an awesome month worth of dividend collections for July. What is your position in the market and have you changed your strategy? Pop it on below!
-Lanny
Awesome post, many investors are wondering where things are headed. The truth is no one knows for sure. I’m holding on to my positions and keeping an eye out for opportunities to add at a reasonable price. Look forward to seeing your August dividend income post.
Niche,
Thank YOU for the comment! I agree, of course, no idea where it’s headed and one should considering sticking to original strategy, research metrics and buying when the price is right for what that criteria may be. Looking forward to both of our monthly incomes : )
-Lanny
Yes you are crazy! Haha, no you’re not crazy, you’re being realistically prudent. You clearly are building up your ammo for when there IS a dip, but not going to much the other way by selling everything. if I were in your shoes I’d be doing exactly the same Lanny.
If you thought any of your holdings earnings & dividends were on a permanent downwards trajectory, then maybe they’d be worth a sell, otherwise, keep on course!
Tristan
DDU,
Exactly. If all of a sudden Starbucks coffee was actually diesel fuel and the company will no longer be around, then a sell is going to happen. However – building up ammo and being prudent with your investment criteria is not a bad strategy to deploy, and hey – if I were interested in Target (TGT) stock right now – doesn’t look too bad, even with updated guidance (how they truly can predict a 2018 EPS guidance and be even remotely close is beyond me), still is a very intriguing opportunity right now. Keep the eyes open, keep your gut in check and follow your strategy unemotionally!
-Lanny
I won’t sell unless the business is broken. Some sectors have more concern than others but right now I see no reason to sell my holdings other than taking the profits to pay for some bills like a down payment on my apartment’s rent. I will keep raking in the dividends and have some cash on the side while I wait for the opportunity to arise, just like yourself. Stock market is just one big waiting game!
Stefan,
Similar to what DDU said – if the business model and what they were doing was extremely flawed – then we are talking a completely different story. You can sell if there is another opportunity, but if you are selling to see where the “bottom” may come, then you are trying to do what no one has done. But if there’s a better opportunity/use of your capital, and your capital is more effectively used, then so be it. The market is a game, it’s a fool’s game because we try to time so much! Instead, we should just be consistently dollar-cast averaging our way to financial freedom. It’s hard, though, for sure at times!
-Lann
You not crazy Lanny. I actually hate selling stocks and feel a bit down if I sell. I think Buffett said that if you owned the local McDonald’s or an apartment block, you would not be checking every day to see what the market price is. This would also prevent you selling good assets because you are worried the price is too high.
The only reason I ever sell a stock these days is to buy something I think is really a bargain, but even this is probably a mistake. Having cash, like you are building up, is the best solution to this problem. It is better to add some new dividend machines when you are ready to, rather than getting rid of any.
Tycoon,
Yep – you are essentially stating that there is a quite a few more stress points and difficulties in being a trader. If you have good assets – you have to be confident that your assets either (a) aren’t good any more or that by (b) selling your “good assets” that there is a “better” asset there instead. Right? Aka – rolling the dice just a little bit.
Adding more nuts and bolts to the dividend machine is the game I’ll be playing – because it has worked. Thanks Tycoon, appreciate the stop by.
-Lanny
Trying to time the market has bit me just about every time. That’s why I’m mostly autoinvesting at this time. Once I feel comfortable, I will build up cash to make larger investments. Right now I just don’t trust myself to sit on a pile of cash =/. Thanks for sharing!
-TDM
Mogul,
Same with me. I can’t think of how many times I have said to myself – a stock price was too high or that oh, there’s further price depreciation to occur – only for it to sky rocket and get out of grasp. Obviously, there are other stocks out there and you are at least building up the cash position, but yes – everytime I have tried to “time” my entrance it has punched me in the gut.
-Lanny
More and more I’m hearing people say that the markets are getting expensive – but like you, I have no idea when (or if) it will pull back. Worse than that, I’m pretty sure no one will tell me when its time to get back in either! I’d rather just keep chipping away and get the average rather than risk getting one (or two) decisions wrong and setting me back.
The other thing that seems to scare people are charts showing markets at highs. The problem is that markets are always at new highs or falling… so if its not expensive then people are worrying if it will keep falling! An alternative perspective: The right hand side of the chart currently will eventually be the left hand side of the chart in the future!
ADI,
GREAT POINT OF VIEW! The right side chart being the left side at some point, never thought of it that way and I like it. If we buy individual stocks, we should be only focusing on valuations on that stock and not pay attention to the overall market if that’s not the strategy. Very interesting. Dollar-cost averaging your way to freedom.
-Lanny
Agree completely. Timing the market is just so hard to do because there are so many people trading a particular asset at any given moment in time. If there were a few players with very little volatility then MAYBE (and that’s a huge maybe) it would be possible to time the market but that can’t exist.
A sure-fire way to get returns would be to ride the averages over the long-term which is what I believe that you are great at doing. Getting those nice dividend paychecks sound nice!
David,
Riding the waves of cost averaging has been the way to do it. You have the ability to capture potential acquisitions, mergers, dividend increases, reinvestment and heck – if the market keeps churning – you have appreciation too. Consistency I think has been key recently and sticking to your strategy that you have done in the past. Let’s keep the same hat on and not switch teams!
-Lanny
I too am still cautiously buying – but when companies like TGT and TROW start casting stones to deflect attention for their own missteps I have to wonder if this bull has finally had his day.
Charlie,
Agreed. The bull may be looking down at the hooves and think – crap I’m tired. I think I see earnings being difficult. Most companies have effectively managed their bottom line, but the top line needs to grow too. Cautiously buying, sticking to your strategy, invest when appropriate and keep going. We can do this Charlie!!
-Lanny
I think and it’s just my personal opinion that it might be a long time before we see a bear market. We will have some downturns but I think stocks are only going to get more expensive.
Income surfer has a good article on the central banks buying stocks. Also I’ve read 2 other articles that corporations are buying a lot of stocks.
The last article I read on the street website said Tokyo city government was a huge buyer of US equities for their retirement plans.
Now imagine I don’t think many other countries are yet but imagine if some countries like Saudi or Kuwait started doing that? I think it would push the price of stocks of major corporations to where the average investor is forced to look at smaller stocks which have more risks.
Just my opinion if the stock market crashes on Monday don’t say I gave bad advice lol
Having a strategy and sticking to it makes the most sense. I think it matters that you are a buy and hold person. You want a quality business at a good price. This makes the most sense to me.
ZJ,
On the money. The strategy I’ve used for 6 years shall not change!! Haha. Stick to the guns.
-Lanny