The wheel is spinning.. where to put our chips?
The Dilemma
We know that buy-low-sell-high is the accepted way to profit. So why are we so afraid when “low” occurs?
Most of the time, some stocks are hitting highs, and some are bouncing around their lows. At any one time, there is usually always a mix of opportunities when is comes to looking at the universe of stocks.
Do we want to buy the hottest firecracker, or the quietest plodder? Does P/E really matter or should I follow momentum? Does bad news mean bad returns?
Down but Not Out
I tend to think that buying low is, as said, an opportunity. So I get interested when a solid company that I have previously invested in is near its 52-week lows.
It has been said that stocks decline for a reason, and therefore it is not always a given that a low now means a high later. Sometimes a stock will decline and that is the end of the story.
But low also means the possibility of gain. Especially when we are talking of several factors that are essential to acknowledge. A company may be in an industry where innovation waxes and wanes. Where a decline today does not mean there are no further advances on the horizon.
As an example, I sometimes turn to the pharmaceutical industry. It is often simple to see companies with a big ‘blockbuster’ product that generates high sales volumes later decline because product goes off patent. It is usually only a matter of time for a new product to come along, and the decline is erased. Cyclicality seems to be the name of the game. As a result, if I do not suspect a systemic failure, I sometimes will invest additional funds in a large pharmaceutical company that has declined. As long as dividends are sustained, the decline in the stock price is a chance to bolster my dividend income and net worth.
So the label “out of favor” is a wake-up call that something may have financial potential. This is a view contrary to the normal “follow the crowd” behavior that is so common in investing.
Risk
It goes without saying that investing is a risk. Investing in a company whose stock has decline is a bigger risk. And yet we need to acknowledge that without risk there is no reward.
In investing, I have committed funds for the future. If the stock never increases but the dividends are maintained and even increased, I can and will come out ahead. I come out successful because I invest for income, not capital gains. An investor who invests in the hope the price will go up wants the price to increase after they buy the stock. As a result, they must be alert to all sorts of factors.
News, financial conditions, labor relations, geopolitical status, expectations of products, and so one, become significant when one buys for capital gains. For an income investor all those are interesting, but IMHO it is the sustainability and potential future growth of the dividend that matters most.
Which is why immediate bad news is not a deal breaker for me. The focus on income means I allow myself a long horizon. As a result, a robust company whose stock has declined is not necessarily needs to be shunned. It could be that opportunity that I seek.
Do you see it as glass half full or half empty? Let me know here.
The illustration shown is a print from 1622 by Giovanni Battista Costantini, highlighting a goldsmith’s designs in blackwork. Blackwork is an early form of printmaking using available materials. Courtesy Metropolitan Museum of Art.
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