Is There Blood Yet?

“Buy when there’s blood in the streets, even if the blood is your own.” –Baron Nathan Mayer Rothschild

Where To?
When prices decline, uncertainty reigns. Will prices decline further or has the bottom been reached? Since it is impossible to know, when I invest in a bear market, I usually hedge my bets by being moderately cautious. Then, in the ensuing days and weeks, I follow carefully. Will there be further declines or are things on the upswing? If a price had hit my (admittedly subjective) target, then I might allow myself to buy a large stake. Otherwise, even if prices are reportedly “low”, but not close enough to my target, I might add a modest amount to my holdings.

Dilemma
Are prices low enough? We are all familiar with stock charts from many periods of market history, recent or not so recent, that show major declines, some stabilization and even some gains, followed by large more substantial losses. No one wants to buy and then have prices collapse shortly thereafter. But I believe my perspective offers a different view.

The Goal
Since I am buying for dividend income, then while the price of a stock matters, there are other considerations as well. How is the dividend? Is the dividend sustainable? Is the company’s revenue sufficient to support the dividend despite its stock decline? How likely is a potential dividend cut? Is the price reflective of the company’s prospects or is a general economic malaise overtaking rational thought? And so on.

Within the context of price declines, I look to weigh the factors that affect the company’s prospects.

In fact, it was simple to realize that a low stock price in a good dividend-paying company allows greater accumulation of stock with less outlay. Dividend reinvestment accelerates that accumulation.

Giving Up
When is there blood? When prices decline to such an extent that it is assumed that those that did not sell will not sell. Namely, the mass of investors in a market or a security sold in hopes of stemming losses. In investing, this condition is called Capitulation.

“Capitulation typically follows significant downturns in price, which can take place even as many investors remain bullish. As the downturn accelerates, it reaches a point where the selling by the investors unwilling to suffer further losses snowballs, leading to a dramatic plunge in price.” 

Factors
All of this aggregates to say that I am much more actively following stocks and their prices when prices decline than when they advance. Yes, of course, a bull market is fun, but in my view, bargains and the basics for substantial gains are not found in a bull market. They are found in a bear market. The greater the bear market, the greater are the opportunities.

“I had never experienced a depression before. But even then I began to grasp dimly that the period of emergence from a depression provides rare opportunities for financial profit.” –Bernard Baruch. He was referring to the “Long Depression”, lasting from 1873 to 1879/1896 (dates depend on which metrics are used).

In 1939, John Templeton, hearing that Germany invaded Poland (Sept. 1), causing the outbreak of World War II, instructed his broker to purchase 100 shares of each NYSE-listed company which was then selling for less than $1 a share, later making many times the money back when US industry picked up as a result of the war effort.

Are you waiting for declines, or advances? Let me know here.

The illustration is from the “Shores of the Polar Sea”, published in 1878, from a British expedition to the Arctic in 1875-6, by Edward Moss, ship’s surgeon. Courtesy Boston Public Library.

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